Bank of New York v. United States

• Decision Date: 29 May 1956
• Parties: BANK OF NEW YORK and Margaret T. Seckel, as Executors of the Will of Josiah C. Thaw, Deceased, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of New York

141 F. Supp. 364

BANK OF NEW YORK and Margaret T. Seckel, as Executors of the Will of Josiah C. Thaw, Deceased, Plaintiffs, v. UNITED STATES of America, Defendant.

United States District Court S. D. New York.

May 29, 1956.

Morris & McVeigh, New York City, for plaintiffs (Francis J. Rogers, New York City, of counsel).

Paul W. Williams, U. S. Atty. for Southern Dist. of New York, New York City, for defendant (Milton E. Lacina, New York City, of counsel).

THOMAS F. MURPHY, District Judge.

This is an action by the executors of the estate of Josiah C. Thaw for a refund of an estate tax deficiency.

The decedent died March 15, 1944, and thereafter an estate tax of $420,309.17 was duly paid. After an audit of the return plaintiffs received a thirty-day letter on October 23, 1946, wherein they were advised that the Treasury was asserting a deficiency based upon, among other items, the full value of a trust created by the decedent on December 30, 1935. This amount was "included under the provisions of § 811(c) of the Internal Revenue Code" of 1939, 53 Stat. 121, 26 U.S.C.A. § 811(c). The executors thereupon filed a protest objecting inter alia to the inclusion of any part of this trust in the gross estate, and more particularly to the refusal to deduct the value of the life estate. Thereafter plaintiffs participated in a series of conferences with the Technical Staff. On July 11, 1947, plaintiffs, by their attorney, wrote to Mr. Kluttz of the Technical Staff proposing that the issues be compromised by including the remainder value of the trust in the gross estate. On September 26, 1947, plaintiffs signed the following waiver which was accepted by Mr. Kluttz on December 8, 1947.

"C-TS:NYD JPM "Offer of Waiver of Restrictions against Immediate Assessment and Collection of Deficiency in Estate Tax "Accepted Dec. 8-1947 _____________ "(Sgd) W. A. Kluttz ______________________

"Head of Division

"District of — Third New York

"Pursuant to the provisions of Section 871(d) of the Internal Revenue Code 26 U.S.C.A. § 871(d), the undersigned Executors of the Estate of Josiah C. Thaw offer to waive the restrictions provided in Section 871(a) of the Internal Revenue Code, and consent to the assessment and collection of a deficiency in estate tax in the sum of $37,564.15, together with interest thereon as provided by law.

"It is understood that evidence of payment of estate, inheritance, legacy or succession taxes to any of the several States, Territories, or the District of Columbia, as required by Section 81.9 of Regulations 105, will be filed with the Bureau of Internal Revenue at Washington, D. C., as promptly as practicable.

"This Offer of Waiver of Restrictions is subject to acceptance by or on behalf of the Commissioner of Internal Revenue, on the basis of the adjusted liability as hereinabove proposed, and is to take effect as such only from the date said adjusted liability is accepted by or on behalf of the Commissioner as a basis for closing the case, and if not thus accepted will have no force or effect.

"If this proposal is accepted by or on behalf of the Commissioner, the case shall not be reopened nor shall any claim for refund be filed or prosecuted respecting the taxes for the above-named estate, in the absence of fraud, malfeasance, concealment or misrepresentation of material fact, or of an important mistake in mathematical calculations, except that a claim for refund may be filed with respect to any overpayment resulting from the allowance of any credit under Section 813(b) of the Internal Revenue Code 26 U.S.C.A. § 813(b), and the Executors also agree, upon request of the Commissioner, to execute at any time a final closing agreement as to the estate tax liability, on the foregoing basis, under the provisions of Section 3760 of the Internal Revenue Code 26 U.S.C.A. § 3760.

"Bank of New York "By (Name indecipherable) _______________________________ "Trust Officer _______________________________ "Executor "(Sgd) Margaret Thaw Morris _______________________________ "Executor "Date Sep 26 1947."

The deficiency was thereafter paid with interest.

Subsequently Congress amended § 811 (c) of the Internal Revenue Code of 1939 by § 7 of the Technical Changes Act of 1949, 63 Stat. 894. This, in short, retroactively excluded from the gross estate of decedents making transfers before October 8, 1949, expressly created reversionary interests unless they exceeded 5 per centum of the value of the property. Plaintiffs, relying upon this Act, filed a timely claim for a refund. This was denied and the present action was instituted.

The government has interposed three defenses: (1) the waiver signed by the plaintiffs is binding upon them and constitutes a bar to this action; (2) even if the waiver is not binding the plaintiffs are barred by the doctrine of equitable estoppel, and (3) even if plaintiffs are entitled to maintain this action, the deficiency was assessed on the theory that the grantor retained the right to the income from the trust and not that he retained a reversionary interest so that plaintiffs are not entitled to the benefits of the amendment.

As to the government's first defense, the binding effect of waivers not rising to the dignity of closing agreements or compromises contemplated in §§ 3760, 3761 of the Internal Revenue Code of 1939, 53 Stat. 462, 26 U.S.C.A. §§ 3760, 3761, has been the subject of considerable litigation. There now seems to be general agreement that waivers, similar to but not identical with the one presently under consideration, do not bind either party unless they conform to the requirements of the above-cited sections of the Code, or more specifically, unless the closing agreement or compromise is made with the approval of the Secretary, Under Secretary or Assistant Secretary of the Treasury. Leach v. Nichols, 1 Cir., 1927, 23 F.2d 275; Anderson v. P. W. Madsen Inv. Co., 10 Cir., 1934, 72 F. 2d 768; Brast v. Winding Gulf Colliery Co., 4 Cir., 1938, 94 F.2d 179; Joyce v. Gentsch, 6 Cir., 1944, 141 F.2d 891; Bank of New York v. United States, 3 Cir., 1948, 170 F.2d 20; Sanders v. Commissioner, 10 Cir., 1955, 225 F.2d 629; Davidson v. United States, D.C.E.D.Wis. 1944, 58 F.Supp. 481; O'Connor v. United States, D.C.S.D.N.Y.1948, 76 F.Supp. 962; Steiden Stores, Inc., v. Glenn, D.C. W.D.Ky.1950, 94 F.Supp. 712; Cuba Railroad Co. v. United States, D.C.S.D. N.Y.1954, 124 F.Supp. 182; Cuba Railroad Co. v. United States, D.C.S.D.N.Y. 1955, 135 F.Supp. 847; Schneider v. Kelm, D.C.D.Minn.1956, 137 F.Supp. 871; Cf. L. Loewy & Son, Inc., v. Commissioner, 2 Cir., 1929, 31 F.2d 652; United States v. Lustig, 2 Cir., 1947, 163 F.2d 85. Indeed, this result is clearly required by Botany Worsted Mills v. United States, 1939, 278 U.S. 282, 49 S. Ct. 129, 131, 73 L.Ed. 379, wherein the Supreme Court said: "Independently of these concessions, we are of the opinion that the informal settlement made in this case did not constitute a binding agreement. Section 3229 authorizes the Commissioner of Internal Revenue to compromise tax claims before suit, with the advice and consent of the Secretary of the Treasury, and requires that an opinion of the Solicitor of Internal Revenue setting forth the compromise be filed in the Commissioner's office. Here the attempted settlement was made by subordinate officials in the Bureau of Internal Revenue. And although it may have been ratified by the Commissioner in making the additional assessment based thereon, it does not appear that it was assented to by the Secretary, or that the opinion of the Solicitor was filed in the Commissioner's office.

"We think that Congress intended by the statute to prescribe the exclusive method by which tax cases could be compromised, requiring therefor the concurrence of the Commissioner and the Secretary, and prescribing the formality with which, as a matter of public concern, it should be attested in the files of the Commissioner's office; and did not intend to intrust the final settlement of such matters to the informal action of subordinate officials in the Bureau. When a statute limits a thing to be done in a particular mode, it includes the negative of any other mode. Raleigh, etc., R. R. Co. v. Reid, 13 Wall. 269, 270, 20 L.Ed. 570; Scott v. Ford, 52 Or. 288, 296, 97 P. 99.

"It is plain that no compromise is authorized by this statute which is not assented to by the Secretary of the Treasury. Leach v. Nichols, 1 Cir., 23 F.2d 275, 277. For this reason, if for no other, the informal agreement made in this case did not constitute a settlement which in itself...