Full opinion text
NOEL, District Judge. MEMORANDUM OPINION: This ease began as a suit for refund of payroll taxes. Over $89,000 in such taxes for 1963 and 1964 were assessed. Plaintiff paid a portion and sued for refund. The Government filed liens and counterclaimed for the balance. On the day set for trial, the case became more than a refund suit. When called, Government counsel announced that the parties had agreed to settle the case, and requested leave to amend the Government’s answer and counterclaim to so allege. The motion was unopposed and granted. The Government then moved for judgment on an asserted contract of settlement. Plaintiff admitted negotiations for settlement were had, but denied that á contract of settlement had been achieved. The Government’s motion was carried with the case. Trial was had, on both the refund and contract issues. After considering the record carefully, the Court determined that plaintiff should recover on his claim for refund. The Court also determined that the Government’s motion to enforce the claimed contract probably should be denied but that the administration of justice would be best served by a severance of the refund issue from the contract issue. The latter conclusion was reached primarily because preparation of findings of fact and conclusions of law on the contract issue would require a tedious and lengthy examination of the procedure for processing tax returns, and the felt probability that after an adverse determination of the refund issue, the Department of Justice would review the record, perceive the weakness of its contract claim, and recede from the latter out of court. The merits of the refund claim were fully examined in a Memorandum and Order constituting findings of fact and conclusions of law with respect to all issues other than the contract issue, D.C., 281 F.Supp. 252 (1968). A final judgment was entered as to such issues pursuant to Rule 54(b), Fed.R.Civ.P., in which plaintiff’s claim for refund was granted and the Government’s counterclaim dismissed insofar as it was based on the assessments for 1963 and 1964. No appeal was taken and such judgment became final. This transformed the posture of the pleadings left in the case from a suit by plaintiff for a tax refund, to a suit by the Government on an asserted contract. Soon after the judgment became final, it became apparent that the Government would not dismiss but continue to press its claim of contract and seek recovery of the amount which it claimed plaintiff had agreed to pay in settlement. The settlement issue remained on the docket. The tax liens outstanding against plaintiff were not released or reduced, notwithstanding the Court had determined in its Memorandum and Order that plaintiff was not liable for any 1963 or 1964 tax and that the liens based on the assessments for those years were null and void. Though judgment on the tax aspect of the case had become final, the lien records in Harris County, Texas, continued to reflect that plaintiff owed the Government over $89,000 in 1963 and 1964 taxes. Although requested by plaintiff to do so, the Government refused to release or reduce its liens until plaintiff paid the full amount claimed under the settlement. Eventually, to obtain release of the liens, plaintiff found it expedient to pay such amount. He then amended his pleadings and now sues for refund a second time, seeking to recover all that he has paid the Government, both in taxes and in satisfaction of the alleged contract. The Government has not responded to plaintiff’s amended complaint, but its prior pleadings manifest its position that it is entitled to all sums plaintiff has paid. The Government’s trial amendment which added the Government’s claim of settlement had engrafted a cluster of new issues on the original refund suit. As the evidence developed at trial, it became clear that the parties’ attempts to settle were frustrated by processing errors in the automatic data processing system of the Internal Revenue Service (IRS) which released ripples and waves of governmental action and inaction, human and mechanical. These errors ultimately caused a misapplication of payments made by plaintiff. The system was incapable of promptly finding and correcting its errors. When the mistakes were finally discovered, the Government failed promptly to admit them. The resulting snarl is now before the Court for resolution. As anticipated, the Court has concluded that no contract of settlement resulted from the negotiations between plaintiff’s and Government counsel. Why this is so— why the words which passed between counsel failed to create a contract — while apparent from the testimony, is best understood from an application of the law of contracts to the pertinent events surrounding the negotiations and ultimate discovery by the Government of its mistake. Agreements comprising tax litigation are, of course, contracts. As such they are subject to the rules applicable to contracts generally, United States v. Lane, 303 F.2d 1, 4 (5th Cir. 1962), unless tax policy requires some other result, as it did for example in United States v. Feinberg, 372 F.2d 352 (3d Cir. 1965), aff’d on rehearing en banc, 372 F.2d 352, 359 (1967). Before applying any of the general contract rules pertinent here, the Court in each instance has determined whether that rule is consistent with tax policy. All conflicts and potential conflicts are raised and considered herein. Under general contract law, in considering whether a contract has been formed a court must place itself as nearly as possible in the position of the parties at the time of their negotiations, a process which requires analysis of all pertinent events. Local 787, IUE v. Collins Radio Co., 317 F.2d 214, 220 (5th Cir. 1963). See generally, 3 A. Corbin, Contracts §§ 538, 543A-B (1960 ed. & Supp.1964) [hereinafter cited as 3 Corbin]. Accordingly, the bulk of this memorandum opinion consists of a detailed statement and analysis of the complex facts. I. BACKGROUND The withholding tax provisions of the Internal Revenue Code of 1954 (hereinafter called “the Code”) and the Federal Insurance Contributions Act (FICA) require every employer to deduct and withhold taxes upon the wages he pays his employees. 26 U.S.C. §§ 3101-02, 3402. Additionally, the FICA and the Federal Unemployment Tax Act (FUTA) impose taxes upon employers computed as a percentage of wages. 26 U.S.C. §§ 3111, 3301. By regulation, employers liable for withholding and FICA taxes are required to return such taxes quarterly on a prescribed form (hereinafter sometimes called a “941 return”). Treas. Reg. §§ 31.6011(a)-1, -4. FUTA taxes are required to be returned annually on a Form 940. Treas.Reg. § 31.6011(a)-3. Employers who fail without reasonable cause to file such returns are subject to penalty. 26 U.S.C. § 6651. If an employer’s liability for withholding and FICA taxes exceeds $100 for either of the first two months of a calendar quarter, he is required to deposit the tax for that month in a Federal Reserve Bank or authorized commercial bank. Treas.Reg. § 31.-6302(c)-1; see 26 U.S.C. § 6302. During the period relevant here, he then could elect whether to deposit the remainder of his quarterly tax liability in the manner provided for monthly payments, or to enclose payment with his return. A penalty is prescribed for failure without reasonable cause to make required deposits. 26 U.S.C. § 6656. An employer required to make deposits for a taxable period in 1967 or earlier was also required to prepare a Federal Depositary Receipt for each deposit for validation by a Federal Reserve Bank. The validated depositary receipts and the remittance of any balance due were then attached to the 941 return for the period with respect to which the deposits were made. Treas.Reg. § 31.6302(c) — 1(a)(3)(H). The 941 return provided space not only for a summary computation of the employer’s tax liability (the total taxable wages paid during the quarter, the amount of income tax withheld, the total FICA taxes due, the total of the enclosed depositary receipts, and the balance due), but also for identification of the depositary receipts by serial number, date, and amount. The depositary receipts thus served to substantiate the amount of tax deposited by the employer, entitling him to a credit on his 941 return for the quarter. An employer submitting a 941 return is required to substantiate the total wages he reports as subject to FICA tax by itemizing the taxable wages paid each employee during the quarter. Such amounts are entered in a schedule provided on the return and on continuation sheets furnished by the IRS for that purpose. Similar sheets are available from the IRS to correct wage information supplied for previous quarters. By completing such sheets and attaching an adjustment computation, an employer can correct a tax liability previously reported. [¡As a contractor in the construction industry during 1963, 1964, and 1965, plaintiff subcontracted drywall construction from house and apartment builders. During 1963 and 1964, plaintiff would bid on projects and if his bid was accepted, would arrange with others to perform the services necessary to carry out the jobs. He did not consider the persons with whom he contracted to do the work to be his employees. Rather, he treated them as self-employed independent contractors, and did not withhold any taxes from the amounts he paid them. He filed no 940 or 941 returns, and paid no withholding, FICA, or FUTA taxes. Since January 1965, plaintiff has employed workers on an hourly basis to do the work required by his contracts with builders. Since then he has withheld payroll taxes. He has filed returns regularly and remitted withholding, FUTA, and FICA taxes to the Government. During the fourth quarter of 1965, acting pursuant to a policy decision within the IRS to make a test case on a drywall contractor, an agent from the Houston IRS office reviewed plaintiff’s books. The agent’s report to his superiors contained three findings pertinent to plaintiff’s liability for payroll taxes: a determination that plaintiff’s payments for the services required by his drywall subcontracts in 1963 and 1964 were “wages” paid “employees”; a computation of the withholding, FUTA, and FICA taxes based on such payments; and, a determination that because plaintiff had failed without reasonable cause to file returns or make monthly deposits, plaintiff was liable for additions to such taxes and for penalties in certain amounts. In a letter dated December 29, 1965, the District Director advised plaintiff of the taxes and penalties claimed to be due, proposed adjustments to plaintiff’s tax liability for the appropriate periods, and informed plaintiff of his right to administrative review within the IRS. A copy of the agent’s report was enclosed. Plaintiff protested the agent’s findings and requested a hearing, which was held before the Appellate Division of the Regional Commissioner’s Office at Houston on March 15, 1966. Plaintiff offered evidence and argument of counsel, but the protest was denied. Thereafter, in June and July of 1966, the proposed taxes were assessed against plaintiff. An “assessment” is a technical procedure required by § 6201 of the Code. At trial, both plaintiff and Government counsel acted under the assumption that the requisite procedure was followed, and plaintiff offered evidence that assessments were in fact made. The assessment caused liabilities for payroll taxes to be recorded in the IRS computer’s memory bank in the summer of 1966, and thereby created deficiencies and apparent delinquencies in plaintiff’s accounts for all four quarters in and for each of the years 1963 and 1964. These accounts were assigned to a revenue officer in the Houston office of the Delinquent Accounts and Returns Branch of the Collection Division of the Office of the District Director. Officers in that branch are commonly referred to as collection officers and are responsible for filing notices of tax liens, serving levies, seizing and selling real and personal property, and recommending “civil actions to secure payment, suits to enforce penalty for failure to honor levies, and penalty assessments as a means of collection or as a method of obtaining compliance with existing laws and regulations.” 35 Fed.Reg. 2417, 2453 (1970) (§ 1118.524 of a statement on IRS organization and functions, a prior version of which is printed in 9 J. Mertens, Federal Income Taxation § 49.75, at 119 (1965 rev.) [hereinafter cited as 9 Mertens]). Mrs. Maida R. Jennings, the collection officer in the Houston office who had been assigned plaintiff’s apparently delinquent accounts, contacted plaintiff’s counsel during the summer of 1966 to inform him that she proposed to commence the seizure of assets and other collection procedures. Counsel promptly contacted plaintiff and his accountant, who prepared and filed claims for abatement of the assessed taxes. Thereafter, plaintiff’s counsel persuaded Mrs. Jennings and her superior to suspend all collection efforts except the filing of tax liens, pending resolution of the claims for abatement. A notice of lien for the full amount of the unpaid assessment was prepared by Mrs. Jennings and caused to be filed in the Federal Lien Records in Harris County, Texas, on August 8, 1966. Plaintiff’s claims for abatement were supported by a number of statements given by persons alleged to have been his employees in 1963 and 1964. By statute, 26 U.S.C. § 3402(d), and regulation, Treas.Reg. §§ 31.-3402(d)-l, .3403-1, an employer may obtain credit against his liability for withholding taxes by proving that his employees have paid their income taxes. The IRS has promulgated a Form 727 to assist employers in making such proof. An employee completing the form declares “under the penalties of perjury” that he filed an income tax return, reported the wages received from the employer as income, did not report any amount of tax as withheld by that employer, and paid his tax. Plaintiff testified at trial that he and his wife obtained the Forms 727 over a period of months by working late in the evenings and on weekends. Many of the alleged employees had moved out of state and were difficult to locate. Even so, plaintiff and his wife had succeeded in obtaining a number of the statements prior to the hearing before the Appellate Division in March 1966, and obtained others later. The statements obtained prior to the appellate hearing were offered in evidence by plaintiff’s counsel, but failed to persuade the Appellate Division that the proposed assessment was excessive. After suit was filed, plaintiff, through his accountant and counsel, asked the Government to furnish the 1963 and 1964 income tax returns of all persons alleged to have been his employees during those years. After the Government failed to furnish all such returns voluntarily, plaintiff’s counsel sought them through discovery procedures, serving Government counsel with requests for admissions and interrogatories, and serving a subpoena duces tecum on an IRS agent who would be a witness at trial. The Government neither opposed nor complied with plaintiff’s repeated attempts to discover the missing income tax returns, but simply ignored plaintiff’s repeated demands. It would appear that plaintiff proceeded to trial without seeking sanctions from the Court to compel such discovery, and its attendant delay, because of the economic compulsion created by what this Court determined to be invalid tax assessments and liens. But in the manner now to be described, the Government’s failure to discover such returns substantially increased plaintiff’s burden of preparing his case for trial and making proof. A taxpayer suing for a refund has the burden of proving his claim against the Government because he is plaintiff. In this regard, such a suit is akin to a suit against a private defendant for money had and received. Zeeman v. United States, 395 F.2d 861, 865 (2d Cir. 1968); Ehlers v. Vinal, 382 F.2d 58, 65-66 (8th Cir. 1967); Larchfield Corp. v. United States, 373 F.2d 159, 164 (2d Cir. 1966); Gibson v. United States, 360 F.2d 457 (5th Cir. 1966); Young & Rubicam, Inc. v. United States, 410 F.2d 1233, 187 Ct.Cl. 635 (1969). By virtue of the penultimate sentence of § 7422(e) of the Code, the taxpayer has an identical burden with respect to issues raised by a Government counterclaim. See Zeeman v. United States, supra, at 866. At trial Government counsel was well aware of plaintiff’s burden on the refund issue. Indeed, relying only on the rule giving plaintiff the burden, counsel elected not to present any evidence on the refund issue, nor to cross-examine the witnesses called by plaintiff or answer plaintiff’s counsel in oral argument. Only on the contract issue did Government counsel offer any evidence (the documents which the Government contends establish the contract of settlement), cross-examine plaintiff’s witnesses, or offer oral argument. Counsel for the Government had the right to pursue this strategy, but not to the extent that he would violate this Court’s order with respect to discovery and pretrial preparation, which provided in part as follows: Each attorney who attends [the pretrial conference] will familiarize himself with the pre-trial rules and practices of this Court and will be prepared to accomplish the purposes of Federal Rule of Civil Procedure 16; ie, simplifying the issues; expediting the trial; and avoiding unnecessary expenditure of time and money to the litigants. “The Government as a litigant is, of course, subject to the rules of discovery.” United States v. Proctor & Gamble Co., 356 U.S. 677, 681, 78 S.Ct. 983, 986, 2 L.Ed.2d 1077 (1958); Campbell v. Eastland, 307 F.2d 478, 485 (5th Cir. 1962), cert. denied, 371 U.S. 955, 83 S.Ct. 502, 9 L.Ed.2d 502 (1963). The Government therefore had no right to ignore plaintiff’s discovery demands. Moreover, as representatives of the Government, all personnel connected with the litigation, including counsel, had an obligation “to be frank and fair and disclose all the facts.” Campbell v. Eastland, supra, at 485; accord, United States v. San Antonio Portland Cement Co., 33 F.R.D. 513 (W.D. Tex.1963). The Government’s failure to furnish the returns in response to plaintiff’s request and this Court’s pretrial procedures had an immediate practical effect on the trial. As already indicated, income tax paid by employees may be offset against an employer’s assessed liability for withholding tax and thus entitle him to an abatement of the withholding tax assessment. Moreover, plaintiff established at trial, through the testimony of Government personnel, that self-employment tax paid by alleged employees may be offset against one-half of the alleged employer’s assessed liability for FICA taxes. Thus by establishing that the persons alleged to have been his employees had declared and paid income and self-employment tax, plaintiff could have satisfied his burden of showing the assessment against him to be excessive. The returns sought by plaintiff from the Government were material and relevant because they were the best evidence of the facts on which this issue turned. They were immediately accessible to all participating IRS and Justice Department personnel, any of whom could have determined their location by computer search in the regional Service Center or the National Computer Center and obtained them by oral request. See Treas.Reg. §§ 301.6103(a)-1(e), -1(h). They were sought by plaintiff through duly ordered, established, and well understood discovery procedures. Nevertheless, they were not furnished and this increased plaintiff’s burden of proving his case beyond that contemplated by the Congress and the courts. In effect, plaintiff was deprived the opportunity of satisfying his burden of proof on an important part of his case. Although many of the returns sought by plaintiff were not furnished by the Government, many others were. An examination of the latter by plaintiff’s accountant and the IRS agent whose investigation had led to the refund suit culminated in a stipulation between the parties filed April 24, 1967, which reduced plaintiff’s maximum potential liability for the 1963 and 1964 taxes assessed against him to $25,629.48. The Government abated the remainder of the assessed taxes because the returns examined indicated that many of the alleged employees had reported and paid the corresponding income and self-employment tax. Plaintiff’s accountant testified at trial that had the Government produced the returns corresponding to all the statements under oath which had been obtained by plaintiff, the assessment against plaintiff would have been further reduced by more than $6,000 in withholding taxes, leaving less than $20,-000 in dispute. And the record permits the clear inference that had all the returns requested been produced, both the withholding and FICA assessments against plaintiff would have been abated several thousand dollars more. At trial plaintiff’s counsel Mr. White testified that after the stipulation was entered into, he reviewed the evidence then available and reached the conclusion that he would recommend to plaintiff that the case be disposed of by compromise or settlement with an offer to pay the Government between $3,000 and $5,000, taking into account primarily the amount it would cost to try the case. In late July or early August of 1967, White was informed by the collection officer Mrs. Jennings that on June 2, 1967, plaintiff had received a credit of $8,159.42 to his 1963-1964 tax liability. The credit had been computed as follows: Date of Credit Amount April 13, 1966 ? 25.92 February 7, 1966 506.77 December 22, 1965 4,049.45 November 22, 1965 $3,386.27 June 2, 1967 13.88 June 2, 1967 177.13 June 2, 1967 $8,159.42 Mrs. Jennings told White that she did not know the source of the payments or credits. At trial she testified she did not know their source because she was handling only the 1963 and 1964 accounts, and the credits were produced from other years. At that time plaintiff had not been informed that the IRS considered anything amiss in his account for the fourth quarter of 1965, the period — according to date of credit — in which the bulk of the transferred credit was received by the Government. Nor had his account for that quarter been assigned to any revenue officer for collection. However, something was amiss in plaintiff’s account for the fourth quarter of 1965. A 941 return filed by plaintiff for that quarter had not been processed. This fact was not known to plaintiff, to Mrs. Jennings, or to the IRS computer memory bank, no entry in which reflected the filing of the return. Here, at the first reference to the IRS computer, some precision in terminology is desirable. Technically, a computer is a machine. In the dictionary it is defined as “an automatic electronic machine for performing simple and complex calculations.” Merriam-Webster New International Dictionary 468 (3d ed. 1961). On the other hand, an automatic data processing system as employed by the IRS includes people as well as machines of various types, including computers. In common parlance “the computer” is often used in a loose or generic sense to embrace the people involved in the automatic data processing system as well as the machines, and it was so used by witnesses from the IRS. However, the term will be used here in its restricted sense of a machine only, unless otherwise indicated. The ramifications of the processing errors which prevented processing of the return eventually kept the prospective settlement of the refund suit from reaching fruition. For this reason, although it substantially lengthens this opinion, their source and causes will be traced. During the fourth quarter of 1965 and for some prior quarters, plaintiff did business under two trade names, “B. R. Kurio Sheetrock Contractor” (hereinafter called “Sheetrock”) and “Drywall Specialties and Supplies” (hereinafter called “Drywall”). Most of plaintiff’s employees were not members of a trade union. Such employees were designated and paid as employees of Sheetrock. On the occasions when union workers were employed, they were designated and paid as employees of Drywall. Plaintiff’s only purpose for the separate designation and payment of employees was for internal control, namely to distinguish between wages paid union and non-union employees. He filed separate 941 returns showing taxes due by him under each trade name. During the fourth quarter of 1965 plaintiff made no deposits under the Drywall trade name, but did make two deposits in an authorized depositary under the Sheetrock trade name: $3,918.38 on November 22, 1965, for the month of October, and $4,049.45 on December 22, 1965, for the month of November, a total of $7,967.83. Plaintiff obtained a validated Federal Depositary Receipt for each deposit. Early in 1966 plaintiff caused two 941 returns to be prepared for the quarter ending December 31,1965. Each showed “Bernard Roy Kurio” as employer and owner, and each bore plaintiff’s employer identification number. One was prepared for Drywall, the other for Sheetrock. For convenience I will sometimes refer to them as the Drywall and Sheetrock returns, respectively- The Drywall return was filed on Form 941, revised July 1965. In the appropriate spaces, plaintiff’s name, identification number, and Drywall trade name were properly filled in. The other return was filed on a preaddressed Form 941, revised October 1965. The address label correctly indicated plaintiff’s name, identification number, and trade name of Sheetrock. Since no deposits had been made during the fourth quarter of 1965 under the Drywall trade name, that return was accompanied only by an itemized list of the wages paid each employee under the trade name during the quarter and a check for $506.77, the full amount of the taxes shown due under the Drywall trade name for the quarter. The Sheetrock return was not so simple. It was- accompanied for purposes of substantiation, not only by an itemized list of wages paid each employee under the Sheetrock trade name during the quarter and a check for $2,967.51 (the balance shown due under the Sheetrock trade name for the quarter), but also by the two validated Federal Depositary Receipts evidencing the deposits made during the quarter and a tabulation correcting wage information submitted for prior quarters in substantiation of an adjustment of plaintiff’s payroll tax liability. On the back of the printed form of return, on a schedule provided for that purpose, the serial number, date of deposit, and amount of each depositary receipt, as well as the total amount deposited, were specified. In appropriate spaces on the front of the return, the net adjustment and “Total of enclosed depositary receipts (From Schedule B, other side)” were entered. Save for an immaterial arithmetic error in transcribing the information from the back to the front of the return, it was perfectly prepared. The Drywall and Sheetrock returns, with their enclosures, were received promptly at the Office of the District Director in Austin, Texas. There the routine of IRS processing commenced. Although a few courts have had occasion to touch on the IRS system for processing tax returns, I have found no reported case describing the system since the advent of automatic data processing and the substitution of the computer for traditional books of account. The system is complex, and any description, to be meaningful, must be detailed. An appreciation of the system and the halting journey through it of the Drywall and Sheetrock returns is necessary to a thorough understanding and disposition of the settlement issue. Therefore, even though such detailed description substantially lengthens this memorandum opinion, it is included as part of the background of the settlement negotiations. For the past twenty years or more the IRS has gradually been. developing a system to utilize computers and other technological innovations to speed the processing of the many millions of tax returns it receives annually. Various stages in the development of this system, which is constantly undergoing modification to render it faster, more efficient and less costly, are described in the literature. Many aspects of its operation from early 1966 until late 1967 were also developed in the record of this case through testimony by government personnel at trial. Until November 2, 1966, with few exceptions all returns were filed by the taxpayer with the appropriate district director. There, envelopes were opened, a notation made on the return to indicate whether payment accompanied it, payment checks removed and deposited, changes in name and address noted, and sometimes other clerical tasks performed. The returns were then shipped to the regional computer Service Center, likewise in Austin, for recordation through automatic data processing. At the Service Center, each return is assigned a document locator number for identification. The returns are then sorted into blocks (small groups of returns with similar characteristics, e. g., income tax returns with refund claims), and the blocks are assembled into batches. Use of document locator numbers, blocks, and batches is intended to minimize the risks of losing or misplacing returns. The next step is an examination of each return by an employee in the Document Analysis Branch, referred to in the literature as a “specialist.” The specialist determines whether the return contains all required information, detects errors and omissions which would render the return unsuitable for keypunching, and identifies the information on the return which will be fed into the computer. Returns which the specialist deems deficient are diverted to other personnel responsible for contacting the taxpayer to rectify the error or supply the omission. After the return has been rendered suitable for further processing, it is reintroduced into the flow of returns found acceptable to the computer by the specialist in the first instance. The specialist’s identification of the data to be fed into the computer permits other, lower-graded personnel to punch input cards routinely. After the cards have been punched and the punching verified, the cards for each block are run through the Service Center computer. The computer tests the cards for faulty punching and order and mathematically verifies the information taken from the returns. Errors it detects are printed out in error registers. By comparing the error registers and punched cards with the original returns, personnel in the Error Resolution Branch detect IRS generated errors and identify taxpayer generated errors. The former are corrected and the computer run repeated. Taxpayer generated errors which cannot be resolved are noted and this information placed with- the output magnetic tapes containing the data taken from returns which the specialist has determined for the computer that it will accept. The output tapes generated by the computer at the Service Center are shipped to the IRS National Computer Center near Washington, D.C. This facility contains the Service’s master file modules, its tax information for all years for all taxpayers. The magnetic tapes from the Service Center are fed into the computers there to update the master file modules. The computers are programmed to analyze the information in the master files and detect “ostensibly improper deviations from the tax laws.” They generate output magnetic tapes indicating rights to refund, certain kinds of delinquencies, and returns with unusual characteristics. The refund tapes are forwarded to the Treasury Department, where they cause refund checks to be printed and mailed. The other magnetic tapes are sent back to the Service Center, where they generate appropriate action by personnel there or in the office of the District Director. Returning now to the journey of plaintiff’s returns through the system just described, plaintiff’s Drywall return for the fourth quarter of 1965, on its receipt February 7, 1966 in the office of the District Director at Austin, Texas, was stamped “Rec’d With Remittance.” On the 42d day of 1966 (February 11) it was given a document locator number, checked by processing clerks for mathematical accuracy, completeness, and the presence of any necessary exhibits, and found to be suitable for entry into the computer. A keypunch operator then entered the information contained in the return onto computer cards. This information, after transfer to magnetic tape and verification in the Service Center, was forwarded to the National Computer Center for entry in plaintiff’s master file module for the fourth quarter of 1965. A printout or transcript of plaintiff’s master file module for the fourth quarter of 1965 was introduced in evidence. It is valuable evidence of how plaintiff’s returns for that quarter were processed, for its entries correspond to all entries made for that quarter in the module. However, the record reflects that such a printout will never be furnished by the IRS to a taxpayer, even on request. Thus even had plaintiff suspected that the IRS had made a mistake in processing his returns, he would have been denied the opportunity to help discover the mistake and assist in its correction. The printout which was introduced in evidence reveals that the information on the Drywall return caused two transactions to be recorded in plaintiff’s master file module for the fourth quarter of 1965: the filing of the return (which appears as an “assessment” or debit on the transcript), and the receipt of payment (which appears as a “credit”). Since full payment accompanied the return, after these transactions the module continued to indicate a zero balance in plaintiff’s account for the fourth quarter of 1965. Only one other group of transactions attributable to the filing of the Drywall return is reflected in the printout. This was the assessment of a penalty and interest for late filing (the return was one day late), and a subsequent payment of the penalty and interest. The date of receipt of Sheetrock’s fourth quarter return for 1965 was not stamped on the return, nor does the record otherwise reflect when that return reached either the office of the District Director or the Service Center. However, it was received somewhere within the IRS on or before the 40th day of 1966 (February 9), for on that date a document locator number was stamped on the return and on the check which accompanied it, and the latter was deposited by the Government. The check which accompanied the return was dated January 31,1966 and drawn on the “Kurio Drywall Company” account, Gulfgate State Bank, Houston, Texas. It was signed by “Mrs. B. R. Kurio” but bore plaintiff’s identification number and the legend “4th Qtr 941.” It was paid by the bank February 11. The Government conceded at trial that the two Federal Depositary Receipts totaling $7,967.83 which plaintiff had purchased during the fourth quarter of 1965 were enclosed with the Sheetrock return. However, during the interval between the receipt of the return by the IRS and the inspection of the return by one of several processing clerks, the enclosed depositary receipts for the quarter were mislaid or misplaced. Since the return was not stamped “Rec’d With Remittance,” like the Drywall return, it is possible that the depositary receipts became separated in the mail room prior to inspection of the return by one of the mail handlers. But wherever it occurred, the depositary receipts were misplaced, and this simple, routine clerical mistake by IRS personnel, unknown and uncommunicated to plaintiff, compounded his problems with the IRS, which had their genesis in the test case initiated by the IRS. Some processing clerk, upon finding that the depositary receipts were not present, made a notation on the return to indicate that no depositary receipts had been enclosed, which was contrary to evidence on the back of the return and the true facts. That clerk or some other made another notation elsewhere on the return to indicate that the claimed adjustment had not been substantiated. Eventually, when processing of the Sheetrock return for the fourth quarter of 1965 was completed in September 1967 (eighteen or nineteen months after receipt), credit for the claimed adjustment was allowed. At trial one of the government officials speculated that this was due to a mathematical error or to an administrative decision to waive substantiation. On the whole record the more reasonable explanation is that the tabulation substantiating the claimed adjustment was detached from the remainder of the return at the same time as the depositary receipts, and later located within the Service Center and reaffixed to the return; and, I so find. Once it had been discovered that no depositary receipts or substantiation of the claimed adjustment was attached to the return, some clerk, presumably a specialist, determined that the absence of those documents rendered the return unsuitable for further processing (unacceptable to the computer), specifically for processing by the keypunch operators. This clerk marked the return with a “Reject” stamp during the 11th week (the middle of March) of 1966, and diverted it as an “imperfect” return to the Error Resolution Branch. What transpired there will be explained in due course. The Government’s first attempt to contact plaintiff with regard to his Sheetrock return was dated April 6, 1967, fourteen months after receipt of the return, together with two Federal Depositary Receipts and other substantiation at the Service Center. Apparently the depositary receipts had been located when the letter was written, since it identified them by serial number, date, and amount, and stated that additional information was needed to process them. The letter also identified the Sheetrock return for the fourth quarter of 1965, and correctly stated the total tax shown due .thereon as $10,935.34. The sum of the depositary receipts was deducted from the total tax shown due, leaving a difference of $2,967.51. The letter asked plaintiff how the difference had been paid. It was signed, “Chief, Correspondence Unit.” Plaintiff immediately responded that the difference had been paid by check, and enclosed a copy of the check. The printout or transcript of the master file module for plaintiff’s account for the fourth quarter of 1965 reflects that on some date between May 8 and June 2, 1967, the deposits evidenced by the two depositary receipts were credited as payments for that quarter. The two transactions concerning the two depositary receipts reflected in the transcript are identified in the transcript by document locator numbers which reveal their date as May 8, but the record does not reflect the nature of the transactions. However, because the amount shown due on the Sheetrock return was not entered in his master file module as a debit on that date, it is clear that the transactions of May 8 were not the completion of processing of that return. Such completion was not to come for four months more. Prior to the entry of the depositary receipt credits in plaintiff’s master file module on May 8, the only entries there concerned plaintiff’s Drywall return. Had the processing of the Sheetrock return been completed, the tax reported by plaintiff on that return would have been reflected in the module as a debit entry. Had the check which accompanied the Sheetrock return also been processed, its entry would have been reflected in the module as a credit, a partial satisfaction of the tax liability declared by plaintiff in his return. But neither of these entries had been made. Therefore, on May 7 the module reflected a zero balance, not an unpaid assessment for the fourth quarter of 1965 equal to the amount of the misplaced depositary receipts. Because on May 7 the tax declared by plaintiff on the Sheetrock return to be due for the fourth quarter of 1965 had not been entered in his master file module, entry of the transactions of May 8 in the module created a credit balance in his account (an apparent overpayment), not a reduction in the debit balance (an apparent partial satisfaction of a tax liability). From there, the automatic processes as programmed in the computer took over and the incompleteness of plaintiffs accounting record as reflected in the module was automatically converted into erroneous statements of plaintiff’s account, as will next be explained. IRS policy requires that overpayments be credited to accounts showing deficiencies before being refunded, and that net over-payments (i. e., overpayment credits exceeding the total of all deficiencies for that taxpayer) be refunded promptly. Acting, as programmed, to implement this policy, the computer on June 2,1967, automatically transferred the apparent overpayment in plaintiff’s account for the fourth quarter of 1965 to another account reflecting a deficiency, plaintiff’s account for the first quarter of 1964. This produced the unexplained credit in that account brought to White’s attention by Mrs. Jennings late in the summer of 1967. Plaintiff was never notified by the IRS of this apparent overpayment, that is of the reason for the transfer of credits to his 1964 account. He was never notified of the fact of the transfer except by Mrs. Jennings, who was unable to give a reason. All that either plaintiff or White knew in August 1967 was that approximately $8,000 had been credited to one of the accounts in suit. And this is all that Mrs. Jennings knew. Moreover, while it is apparent that the computer “knew” the source of the credits in the sense that the master file module for the fourth quarter of 1965 reflected the transfer out of that account, there is no evidence in the record that any person within the IRS (as distinguished from the master file module stored near Washington, D.C.) had even that much knowledge. Certainly no responsible person knew all the facts at that time, for no action was taken to correct the mistake which is manifest from a comparison of the Sheetrock return with the computer transactions in the 1965 account as reflected by the master file printout or transcript. On August 18, 1967 — after talking to Mrs. Jennings, but, according to White’s testimony, before learning that the 1965 deposits had been misapplied by the computer — White wrote a letter to Government counsel, offering to compromise the 1963-1964 assessment against plaintiff for a total of $2,368.84, representing $1,257.95 in taxes and $1,110.89 in interest. In the letter White stated that plaintiff “has made payments and/or has received credits with respect to the taxes involved” in the amount of $8,188.41, the total being computed from the information (dates and amounts) furnished by Mrs. Jennings a few days prior to the date of the letter. Plaintiff proposed in the letter to concede liability for a portion of the taxes assessed against him and dismiss his suit with prejudice. The Government would apply the $8,188.41 already in his account and the $2,368.84 he proposed to pay to liquidate the conceded liability and would dismiss its counterclaim with prejudice, thereby disposing of the litigation. The offer was to expire automatically unless plaintiff received notice of acceptance on or before October 20, 1967. On August 26, at Government trial counsel’s request, White addressed another letter to him denominated an “amendment to [plaintiff’s] offer to compromise,” in which he extended the duration of the offer to November 15, and made one other change not material here. White consented to the extension but made it clear that plaintiff was eager to dispose of the case, if not by compromise prior to November 15 then by trial on the previously set date of December 4. During all this period of time, from March 1966 through August 1967, the rejected Sheetrock return rested in the Error Resolution Branch in the Service Center. Under IRS procedures, the purpose of diverting “unsuitable” returns to the Error Resolution Branch is to correct errors made during processing and to request the taxpayer to correct errors, omissions, and discrepancies detected during processing. Notations made on the Sheetrock return by a specialist before it reached the Error Resolution Branch reflected that payment of the indicated balance due had accompanied the return, but that the depositary receipts and tabulations substantiating the claimed adjustments were missing. Thus the IRS procedures then in effect required personnel in the Error Resolution Branch, upon receipt of the “rejected” Sheetrock return, to search for the missing depositary receipts (the existence and transmittal of which were clearly shown in the space provided on the return) and adjustment substantiation, and if unable to locate them, to notify the taxpayer of their absence and request an explanation. Testimony at trial indicated that IRS procedure requires Error Resolution Branch personnel to mail a notice to the taxpayer requesting any missing substantiation. If there is no reply, the request is furnished to personnel in the Tax Assister section in the Houston IRS office, who make two attempts to contact the taxpayer. If the local personnel are unsuccessful, they notify the Service Center, which resolves the ambiguity against the taxpayer and adjusts his tax liability accordingly. At trial the IRS official who described such procedure referred during his testimony to an internal IRS memorandum apparently reflecting that attempts to contact plaintiff had been unsuccessful. The memorandum was not offered in evidence. The record does not reflect that the taxpayer plaintiff was ever contacted. It reflects only that the return was not perfected, and that it was again marked with a “Reject” stamp by some clerk somewhere within the Service Center during the 32d week (early August) of 1966. Although the back of the return identified the missing depositary receipts by serial number, date, and amount, there is no evidence that anyone ever attempted to obtain substantiation of the deposit credits claimed by plaintiff, either from the Federal Reserve System or from plaintiff himself. Nor is there any evidence that anyone ever attempted to obtain substantiation of the claimed adjustments from plaintiff. Proof that something never happened is difficult to make. However, I am convinced from my examination of the rejected Sheetrock return, the other internal IRS documents introduced in evidence at trial, and the internal procedure of the IRS to record each such action, that any effort to substantiate the claimed deposits or adjustments would have been reflected by an appropriate notation on the return. On the whole record, plaintiff’s prompt response whenever requests for information were addressed to him, White’s long acquaintance with many of the Houston IRS personnel and their knowledge that he represented plaintiff, and the absence of any affirmative indication on the Sheetrock return or elsewhere in the record that any notification was ever sent, I find that the IRS never sought plaintiff’s help in its effort to process his Sheetrock return. This failure of the IRS to contact plaintiff and promptly resolve the error referred to the Error Resolution Branch had a disastrous effect on plaintiffs posture before the IRS. It was the immediate cause of the incomplete recordation in the computer both in the Austin Service Center and the National Computer Center of what had transpired, the transfer of the credits out of the 1965 account, significant subsequent transactions, and other consequences adverse to plaintiff which were not of his making. Apparently as a result of the memorandum just referred to, personnel in the Service Center in Austin caused the computer there to prepare a form of deficiency (Treasury Dept. Form 4188) dated September 1, 1967, indicating that plaintiffs withholding and FICA tax for the fourth quarter of 1965 had been adjusted to leave a balance due in the amount of $8,243.06. Plaintiff received the notice a few days later. White testified at trial that after studying the information printed on the form, he sensed that somehow the credit for the two depositary receipts purchased during the fourth quarter of 1965 had been misapplied to the first quarter of 1964 and was the source of the credits in the 1964 account. Although the form was so obscure that White could not confirm his intuition, he immediately became concerned that this circumstance might jeopardize the settlement. On September 5, a few days after the deficiency Form 4188 was prepared in Austin, plaintiff’s account for the fourth quarter of 1965 was assigned for collection to Franklin A. Heath, another collection officer in the Houston IRS office. Between September 14 and October 16, after talking with Mrs. Jennings, Heath contacted White to inform him that he had received plaintiff’s account for the fourth quarter of 1965. White told Heath that plaintiff had paid the taxes for the quarter and asked Heath to run a check on the account. Heath agreed to do so, but advised White that a tax lien for the amount claimed for the fourth quarter of 1965 would be filed forthwith. This was accomplished on September 25. On September 14, 1967, before his conversation with Heath, White had sent a letter to the District Director in Austin stating that plaintiff had paid his payroll taxes for the fourth quarter of 1965 in full, and suggesting that some mistake must have been made in the preparation of the deficiency Form 4188. Thereafter, but prior to October 16, Heath informed White that the deposits for the fourth quarter of 1965 had indeed been misapplied to the first quarter of 1964. This fact should have been known months earlier to personnel in the Error Resolution Branch, through which the facts were readily ascertainable from plaintiff taxpayer. When so ascertained, they could and should have been recorded in the computer immediately. However, insofar as the record reflects, Heath was the first person in IRS who appreciated just what had occurred and how IRS had incorrectly applied said payments and thereby misstated plaintiff’s account in the notice dated September 1, 1967. To correct the misapplication Heath requested that a reversing entry be made in the records. His request for adjustment was addressed to his superior in Austin, and read as follows: Two forms 941 were filed for the fourth quarter of 1965. Both returns were paid in full and included depositary receipts, purchased during that quarter. A transfer of credit, in the amount of $8159.42, was made from this quarter to the first quarter of 1964. Please reverse this transfer and abate any assessed interest. This is necessary because there is a court case that is pending and involves the years 1963 and 1964, and payments made by the taxpayer and intended for 1965 should not be allowed as a credit for a prior year. I am recharging the 12-31-65 941 return to the Chief, Taxpayers Service Branch, and it is attached to this request. Also during the middle of October Government trial counsel telephoned White to say that he was ready to process the August 18 offer, but that due to a mathematical error in White’s computation, the indicated tax liability was incorrect and the amount to be paid would have to be increased to $4,200. The record is unclear as to whether Government counsel had prior notice of Heath’s discovery of the misapplication of plaintiff’s payments. However, White testified that he advised Government counsel of the misapplication of the 1965 payments to the 1964 liability and of his fear that the settlement might break down. White testified that he decided to abandon his earlier offers of settlement. The letter he wrote in consequence was dated October 16. By its terms, it “contained] Plaintiff’s amended offer,” although it did not expressly withdraw the prior ones. (Nor is there any other evidence of any express withdrawal.) The letter stated that plaintiff “hereby offers to compromise all of the taxes” assessed for 1963 and 1964 by paying the Government the sum of $4,200. It made no reference to any of the credits in plaintiff’s accounts for the periods in suit. Nor did it contain an offer to concede liability for any of the assessed taxes. “[T]he offer contained in this letter” was to expire unless notice of acceptance was received by November 15. On October 18, after White had notified Government trial counsel of the misapplication of payments by the IRS, the latter’s superior in the Fort Worth office acknowledged receipt of plaintiff’s “offer dated August 18, 1967, and the letters amending such offer” and stated the Government’s “interpretation” of plaintiff’s “proposal.” With one exception, the “interpretation” is a precise paraphrase of the offer “contained” in the October 16 letter. That exception, when read with the language already quoted, suggests that the Government may not have considered the October 16 letter to have entirely superseded the prior letters. It is nevertheless certain that the Government understood the importance plaintiff attached to the November 15 cutoff date. On November 15, the day plaintiff’s offer was to expire, an official in the Tax Division of the Department of Justice in Washington initiated a Government teletype reading “Offer accepted. Letters follow.” However, this message was not relayed to the Government’s teletype facility in Houston until 7:51 a. m. the next day. Personnel in the Houston office notified White’s office at 8:20 a. m. by telephone. Later that morning White sent a telegram to the Tax Division advising the Government of his efforts to obtain a transfer of the funds erroneously credited to plaintiff’s account for the first quarter of 1964, and asking if in view of this development the Department wished “to withdraw [its] acceptance.” When White received no response to his telegram, he wrote Government trial counsel on November 20, confirming the prior telephoned advice to him of the erroneous credit and advising him of the exchange of telegrams. On November 22 White wrote Government counsel again, describing with some detail “what we conceive to be the mixup,” and again inquiring whether the Government wished to withdraw its acceptance. On November 27, White telephoned Government counsel and was advised that the Justice Department considered the case settled. At the conclusion of their conversation, White wrote Government counsel that plaintiff remained willing and prepared to settle the case by paying $4,200, but would not pay $7,400 (the approximate amount of the credit from the fourth quarter of 1965 which was then known by all concerned to have been misapplied by the computer) in addition to the $4,200. White further stated in the letter that he had been notified by the District Director’s office that day that the misapplied $7,400 had been transferred back to the fourth quarter of 1965. On plaintiff’s behalf he made an urgent request for an immediate reply. The “letter” which was to have “followed” finally reached White the next day. Under date of November 27, the “Chief, Review Section” of the Tax Division of the Department of Justice in Washington announced that plaintiff’s offer had been accepted by telegram and that the Government declined to withdraw the acceptance. The letter added that the Government construed plaintiff’s offer as conceding that he owed the Government a total of $12,388.41 —the credits and payments itemized in the August 18 letter plus the additional $4,200 offered in the October 16 letter. White responded November 30. His letter stated that the October 16 “amended offer” had superseded and replaced the August 18 offer, and that the acceptance as construed by the Government was unacceptable to plaintiff. On a date apparently preceding the Government’s letter of November 27, 1967, the Tax Division of the Department of Justice, acting through its trial counsel in this case, contacted the District Director’s Office in Austin and requested that the credits not be retransferred to the fourth quarter of 1965. The request was complied with, and the deposit receipt credits remain to this day incorrectly recorded in plaintiff’s account for the first quarter of 1964, rather than the fourth quarter of 1965. Before the Tax Division countermanded Heath’s request for correction, the misstatement of plaintiff’s accounts was apparently a bona fide mistake. On the other hand, when it countermanded Heath’s requested correction of the misapplication, the Tax Division acted with knowledge of Heath’s analysis and request. Knowing that plaintiff had paid all taxes due for the fourth quarter of 1965, the Tax Division nevertheless perpetuated the mistake as recorded in the computer that plaintiff owed over $8,000 for such quarter. The Tax Division sought to force application of the payments remitted by plaintiff in satisfaction of the 1965 liability (to which liability plaintiff was entitled to have them applied), to the claimed 1964 tax liability. Apparently the Tax Division was attempting to settle the refund suit for $4,200 plus the 1965 payments misapplied to the 1964 account, and thereby empower the Government to collect the 1965 taxes a second time. Its conduct has little in common with the errors which brought about misapplication of the payments tendered by plaintiff for the fourth quarter of 1965. The foregoing is the background of the alleged settlement and the basis for the Government’s motion for judgment. II. THE ALLEGED CONTRACT In its motion for judgment, the Government asserts that a contract exists and that it should be enforced in accordance with the terms of its November 27 letter. Plaintiff responds that that letter does not state the terms of his “amended offer.” In opposition to the Government’s motion for judgment and to its construction of the contract, plaintiff levels three attacks. For two reasons, he contends that there was no contract: first, because the acceptance was untimely, and second, because the acceptance was not responsive to his offer. Alternatively and consistent with his construction of his amended offer, plaintiff argues that if there is a contract it should be construed to terminate the litigation upon payment of $4,200, leaving him free to require the Government to apply the deposit receipt credits in satisfaction of his liability for the fourth quarter of 1965. Contracts settling or purporting to settle tax litigation have been before many courts, but invariably the controversy has been presented in subsequent litigation. I have encountered no other reported case in which a court was asked, within the confines of the suit purportedly settled, to construe and enforce an alleged settlement. However, on the facts here, it is clear that I have jurisdiction. In the first place, besides filing the motion for judgment, the Government amended its counterclaim to allege the settlement as an alternate ground for recovery. 28 U.S.C. § 1346(c) expressly grants this Court jurisdiction of any Government counterclaim. Belgard v. United States, 232 F.Supp. 265 (W.D.La.1964); cf. Cherry Cotton Mills, Inc. v. United States, 327 U.S. 536, 66 S.Ct. 729, 90 L.Ed. 835 (1946) (construing the corresponding jurisdictional grant to the Tax Court). Second, even if the counterclaim had not been amended, this Court would have had jurisdiction over a claim by plaintiff that the misapplied credits be transferred to his account for the fourth quarter of 1965. Such a claim would be one in recoupment and is permissible under the authorities. Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 (1935). Thus it is unnecessary to determine whether the principles of pendent jurisdiction also apply here. A. Timeliness of the Governmen