612 F.2d 166 (5th Cir. 1980), 78-1066, Finley v. United States

Docket Nº:78-1066.
Citation:612 F.2d 166
Party Name:John F. FINLEY, Executor of the Estate of Mildred B. Whitlock, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
Case Date:February 20, 1980
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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612 F.2d 166 (5th Cir. 1980)

John F. FINLEY, Executor of the Estate of Mildred B.

Whitlock, Plaintiff-Appellee,


UNITED STATES of America, Defendant-Appellant.

No. 78-1066.

United States Court of Appeals, Fifth Circuit

February 20, 1980

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[Copyrighted Material Omitted]

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M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Act. Chief, App. Section, Richard Farber, James A. Riedy, Attys., Tax Div., U. S. Dept. of Justice, Washington, D. C., for defendant-appellant.

George H. DeCarion, South Miami, Fla., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before MORGAN, REAVLEY and HATCHETT, Circuit Judges.

REAVLEY, Circuit Judge:

This appeal arises from a refund suit in which the district court determined that the value of a trust, over which taxpayer's decedent held a general testamentary power of appointment, could not be included under I.R.C. § 2041(a), (b)(1) in decedent's taxable estate since she had been mentally incompetent and therefore legally incapable of exercising that power throughout her possession of it. We decide, however, that under I.R.C. § 7422(e) 1 the district court lost jurisdiction

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over the issue when taxpayer filed a petition in the Tax Court for redetermination of an additional disputed deficiency in the estate's tax payment.

Appellee taxpayer, executor of the estate of Mildred B. Whitlock, timely filed a federal estate tax return showing a tax liability of $116,020 on a gross estate of $653,147. The inclusion of a trust valued at $395,342 accounted for well over half of the gross estate and most of the resultant tax liability. The Internal Revenue Service had included the trust in decedent's estate under I.R.C. § 2041(a)(2) because it had been subject to her general testamentary power of appointment. Taxpayer disputed the inclusion of the trust, however, on the ground that decedent had been legally incapable of using her power since she had been mentally incompetent, lacking testamentary capacity, for as long as she had held the power. Thus, appellee argued, that power had been neither legally nor actually "exercisable" by the decedent and, therefore, was not within the definition of a "general power of appointment" includible in her federal taxable estate. I.R.C. § 2041(b)(1).

After the Internal Revenue Service rejected his request for a refund based on this argument, taxpayer filed this refund action on June 6, 1975. On September 30, 1975, prior to any hearing in the suit, the government mailed to the taxpayer a notice of deficiency based on taxpayer's having claimed in the estate tax return a $14,983 credit for state death tax without having actually paid that tax as required by I.R.C. § 2011(a). Under I.R.C. § 7422(e) proceedings in the district court should then have been stayed for the ninety-day period during which the taxpayer could file for a redetermination of the deficiency in the Tax Court and for sixty days thereafter. No one, however, informed the district court of the mailing of the deficiency notice. In fact, even the attorney representing the government apparently was not made aware of the deficiency notice for several months. Therefore, on November 6, 1975, the parties submitted the case for decision based on written stipulations, and on December 2, 1975, the district court unaware of its duty to stay proceedings pending action on the deficiency notice handed down a judgment for taxpayer, entering a "final summary judgment" on December 15, 1975.

Taxpayer then petitioned the Tax Court on December 29, 1975, for a redetermination of the credit deficiency, asserting that since the decision of the district court had finally fixed the size of the federal estate, and therefore the maximum allowable credit for state taxes under section 2011(b) as well, the state tax, which was based on these amounts, See Fla.Stat.Ann. § 198.02 (West Supp.1979), could and would be paid. Now aware of the deficiency notice and of taxpayer's petition in the Tax Court, the government on June 24, 1976, moved the district court to vacate its judgment based on its having lost jurisdiction under section 7422(e). The district court denied the motion to vacate and, following submission by the parties of the amount computed to be due taxpayer in refund, entered an amended final judgment on November 7, 1977. We reverse.


Section 7422(e) of the Internal Revenue Code requires that, when prior to the hearing of his refund suit in the district court the Internal Revenue Service mails to a taxpayer a deficiency notice "in respect of the tax which is the subject matter" of the refund suit, if the taxpayer petitions the

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Tax Court for redetermination of this deficiency, the district court "shall lose jurisdiction of taxpayer's suit to whatever extent jurisdiction is acquired by the Tax Court of the subject matter of taxpayer's suit for refund." The extent of Tax Court acquisition of jurisdiction over the "subject matter"...

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