Schuster v. CIR

Decision Date26 November 1962
Docket Number16825.,No. 16774,16774
Citation312 F.2d 311
PartiesMelba SCHUSTER, formerly Melba D. Baker, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Melba SCHUSTER, formerly Melba D. Baker, Respondent. UNITED CALIFORNIA BANK, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. UNITED CALIFORNIA BANK, Respondent.
CourtU.S. Court of Appeals — Ninth Circuit

Chickering & Gregory, Walter C. Fox, Jr., Burleigh Pattee, and Bruce M. Casey, Jr., San Francisco, Cal., for petitioner Melba Schuster.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Meyer Rothwacks, A. F. Prescott, Sharon L. King, and Helen A. Buckley, Attys., Dept. of Justice, Washington, D. C., for Comr. of Internal Revenue.

Orrick, Dahlquist, Herrington & Sutcliffe, Orville A. Rohlf, Christopher M. Jenks, and William D. McKee, San Francisco, Cal., for United California Bank.

Before STEPHENS, JERTBERG and KOELSCH, Circuit Judges.

KOELSCH, Circuit Judge.

These are actions combined in this court to review two decisions of the Tax Court sustaining the Commissioner's determination that the petitioners are liable as transferees for unpaid estate taxes, pursuant to sections 827(b) and 900 of the Internal Revenue Code of 1939. (26 U.S.C. §§ 827(b), 900 (1952 ed.)).1 The Tax Court's opinions appear in 32 T.C. 998 (1959), 32 T.C. 1017 (1959).

Upon the death of William P. Baker in 1951, his will was duly admitted to probate in California, the state of his residence, and his widow, Melba Baker (now Schuster), was appointed executrix. On October 7, 1952, Schuster filed an estate tax return to which she attached a copy of a trust agreement, executed between the decedent and the petitioner Bank. This agreement, dated September 12, 1941, designated Baker's daughter, Patricia Baker Englert, as beneficiary, and provided that the trust was to terminate and the property to be distributed to her on June 28, 1955, when she reached 30 years of age. It also contained the provision, which Baker had not invoked, permitting him to revoke the trust during his lifetime. The executrix reported the trust for disclosure purposes only, as she did not deem the corpus to be part of the decedent's estate. The then Commissioner, T. Coleman Andrews, concurred with the executrix but determined certain deficiencies in estate tax, which she paid out of the estate.

Shortly before the trust terminated, the beneficiary's husband advised the Bank that all gift taxes applicable to the trust and all estate taxes had been paid. Thereupon, the Bank distributed all the trust property and closed its file.

Andrews was succeeded as Commissioner by Russell C. Harrington. He decided the trust corpus constituted an asset of the decedent's estate for tax purposes, and that a deficiency accordingly existed. But although the estate was not finally distributed, and had assets in excess of the claimed deficiency, proceedings against it for collection was barred by the three-year statute of limitations provided by section 874(a). (26 U.S.C. § 874(a) (1952 ed.)).

However, section 827(b) provides that if an estate tax is not paid when due, then the "spouse, transferee, trustee, surviving tenant * * * or beneficiary," among others, who receives or has on the date of decedent's death property "included in the gross estate" is "personally liable" for its payment. And section 900 provides that the Commissioner might proceed against a "transferee" to collect the tax in the same way he might proceed against the estate. The section also allows a proposed assessment against a "transferee * * * within one year after the expiration of the period of limitation for assessment against the executor," or four years after the filing of the return. Finally, the section defines "transferee" as "a person who, under section 827(b), is personally liable for any part of the tax."

Acting pursuant to these sections, the Commissioner, on September 6, 1956, mailed deficiency notices to the Bank, as trustee, to Schuster, as surviving tenant, and to Englert, as transferee. Each of them thereupon petitioned the Tax Court to review the Commissioner's determinations.

The Tax Court held that Englert was not liable,2 but it sustained the Commissioner's determinations of deficiency against Schuster and the Bank, and they have brought the matters here. The Commissioner has not sought a review of the adverse decision in the case against Englert, but he has filed cross-petitions assigning as error the Tax Court's failure to include interest on the deficiencies found due from Schuster and the Bank. The Bank concedes that the trust corpus was properly includable in the gross estate, as required by section 827(b), and Schuster makes the same concession regarding the property held by her in joint tenancy with decedent during his lifetime. They also concede that the Commissioner sent the deficiency notices within four years after the filing of the estate tax return, as required by section 900. But they raise several issues of law in an effort to secure reversals of the Tax Court's decision. Petitioners' contentions will be considered seriatim.

It is petitioners' position that their substantive liability for the estate tax deficiency depends on state law, and that they are not liable under the law of the appropriate state, California. Their basic premise is that there is no federal law which establishes their substantive liability. They assert that section 900, under which the Commissioner is permitted to assess and collect deficiencies from transferees, does not establish the transferee's liability, but is merely a procedural statute which enables the Commissioner to proceed against the transferee as he might against the estate. According to the Conference Committee which reported this statute,

"Proceedings against the transferee are ordinarily had in equity, though if the taxpayer is still in existence, an unsatisfied return of execution must be had against him and a creditor\'s bill brought to satisfy the judgment. * * * Without in any way changing the extent of such liability of the transferee under existing law, the amendment enforces such liability * * * in the same manner as liability for a tax deficiency is enforced; that is, notice by the Commissioner to the transferee and opportunity either to pay and sue for refund or else to proceed before the Board of Tax Appeals, with review by the courts."

(Conference Committee Report, H.R. Rep.No.356, 69th Cong., 1st Sess., 1939-1 Cum.Bull. (Part 2) 371). The petitioners point out that a provision similar to section 900 governs the Commissioner's right to enforce the liability of transferees for the transferor's deficiency in income taxes. (26 U.S.C. § 311 (1952 ed.)). In Commissioner of Internal Revenue v. Stern, 357 U.S. 39, 78 S.Ct. 1047, 2 L.Ed.2d 1126 (1958), the Supreme Court held that this provision does not impose substantive liability on transferees, but merely refers this question to the law of the appropriate state. See also Phillips v. Commissioner, 283 U.S. 589, 51 S.Ct. 608, 75 L.Ed. 1289 (1931); 6 Mertens, Fed. Gift & Estate Taxation § 47.04 (1958 ed.); 1 Paul, Fed. Estate & Gift Taxation § 13.46 (1942). The petitioners argue that the rule of the Stern decision should be applied in determining a transferee's liability for a deficiency in estate taxes, and thus that their liability depends on the application of state law. In California, the general rule is that a transferee's liability for the debts of the transferor is secondary, not primary. That is, his liability is conditioned on the creditor's remedies against the transferor, and may not be enforced if the transferor has been relieved from his obligation (Lord v. Morris, 18 Cal. 482 (1861)), or if the transferor is able to pay his obligation (Sherman v. S.K.D. Oil Co., 185 Cal. 534, 197 P. 799 (1921)). The Commissioner has conceded that the estate is relieved from liability because of the expiration of the limitations period, and that the estate is sufficiently solvent to pay the deficiency.

We disagree with the petitioners' major premise that there is no federal law which establishes their substantive liability. It is true, as the petitioners argue, that section 900 is merely a procedural statute which authorizes the enforcement of a liability which is created elsewhere. But it does not follow that this liability is created by the authority of state rather than federal law. To the contrary, section 827(b) makes transferees "personally liable" for an estate tax deficiency due from an estate. This statute has consistently been regarded as the source of such a transferee's substantive liability, and the courts have developed a uniform body of federal law defining the nature and effects of this liability. See Sharpe v. Commissioner, 107 F.2d 13 (3d Cir. 1939); cf. Mississippi Valley Trust Co. v. Commissioner, 147 F.2d 186, 187 (8th Cir. 1945); Baur v. Commissioner, 145 F.2d 338 (3d Cir. 1944); Fletcher Trust Co. v. Commissioner, 141 F.2d 36 (7th Cir.), cert. denied 323 U.S. 711, 65 S.Ct. 36, 89 L.Ed. 572 (1944); LaFortune v. Commissioner, 263 F.2d 186, 187 (10th Cir. 1958); Moore v. Commissioner, 146 F.2d 824 (2d Cir. 1945); Equitable Trust Co. v. Commissioner, 13 T.C. 731 (1949);3 6 Mertens, supra at § 43.15. The line of authority which arrives at a different result respecting the transferee's liability for income tax deficiencies is inapposite, for there is no statute similar to section 827(b) which makes transferees personally liable for the transferor's deficiency in income taxes. As the Court noted in the Stern decision, this was the reason that it was compelled to resort to state law to determine the transferee's liability. (357 U.S. at 43 n. 3, 78 S.Ct. at 1049). Accord, Rowen v. Commissioner, 215 F.2d 641 (2d Cir. 1954). Thus, the source of a transferee's substantive liability for a...

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