Bank of New York v. United States

• Decision Date: 24 August 1948
• Docket Number: No. 9611.,9611.
• Citation: 170 F.2d 20
• Parties: BANK OF NEW YORK v. UNITED STATES.
• Court: U.S. Court of Appeals — Third Circuit

170 F.2d 20 (1948)

BANK OF NEW YORK v. UNITED STATES.

No. 9611.

United States Court of Appeals Third Circuit.

Argued May 7, 1948.

Decided August 24, 1948.

Sydney A. Gutkin, of Newark, N. J. (Alfred J. Grosso, of Orange, N. J., on the brief), for appellant.

Leland T. Atherton, of Washington, D. C. (Theron Lamar Caudle, Asst. Atty. Gen., Sewall Key, and A. F. Prescott, Sp. Assts. to Atty. Gen., and Edgar H. Rossbach, U. S. Atty., and Roger M. Yancey, Asst. U. S. Atty., both of Newark, N. J., on the brief), for appellee.

Before McLAUGHLIN and O'CONNELL, Circuit Judges, and LEAHY, District Judge.

McLAUGHLIN, Circuit Judge.

This is an appeal from a judgment of the District Court in an action for the recovery of alleged overpayment of estate taxes. The case was tried below without a jury on the complaint, answer, amended answer and stipulation of facts, in accordance with an order allowing a separate trial of the government's affirmative defense that the taxpayer is estopped to maintain the suit. This was the only issue before the court.

The decedent, Edward R. Nichols, died September 30, 1935, a resident of Essex County, New Jersey. His will was duly probated with appellant named as executor and qualifying as such. On December 18, 1936, appellant reported a tax liability in its estate tax return of $3,204,215.41, which it paid on that date. The return included the following items set out in paragraph ten of the complaint:

"(a) Item 1 — 22,987 shares of Allied Chemical & Dye Corp., common stock, no par (New York) at 169½, valued at $3,861,816.00.

"(b) Item 2 — 3,056 shares Allied Chemical & Dye Corp., preferred stock, par $100 (New York) at 125¾, valued at $384,292.00.

"(c) Item 8 — 14,505 shares Phelps Dodge Corp. stock par $25. (New York) at 24 3/8, valued at $353,559.37."

On August 28, 1937, the Deputy Commissioner sent appellant a thirty day deficiency letter advising of a proposed deficiency assessment of $1,304,294.94 before allowance of the eighty per cent credit for state inheritance taxes, making a proposed net deficiency of $363,283.90. This was based primarily on the inclusion in the gross estate of property transferred by decedent prior to his death. Three items of stocks and bonds were listed, one of which was item 1 above. The only thing done with reference to these was to add accrued income. Their base valuation was not disturbed. Appellant, through its attorney, answered that letter November 24, 1937, saying:

"1. The above letter proposed to add to the gross estate an amount of $743,700.26 as transfers alleged to have been made in contemplation of death. In order to avoid litigation and to dispose of the entire case promptly, the executor will consent to the addition of $318,722.85 to the gross estate in lieu of the above amount of $743,700.26.

"2. All other items protested by the executor are waived.

"3. The attorneys' fees will be reduced from $200,000 to $150,000.

"4. The executor's commissions will be reduced from $272,666.59 to $180,743.33.

"It is understood that the credit for state, estate and inheritance, legacy or succession taxes paid will be allowed upon the presentation of evidence required under Article 9, Regulations 80.

"It is further understood that if this settlement, which is submitted in the form of a compromise, is not accepted, then this letter is not to be used in any way in any proceedings before the United States Board of Tax Appeals, the Courts or any other tribunal which might consider the matter.

"It is also understood that this offer will be either accepted or rejected promptly."

The Deputy Commissioner replied to this on December 27, 1937, as follows:

"Reference is made to your protest against the deficiency in the Federal estate tax of the above-named estate, as set forth in Bureau letter of August 28, 1937.

"The protest, as modified at conferences in this office and the offer of settlement in a letter of November 24, 1937, from J. Marvin Haynes, attorney, relates to the following:

                                                         GROSS ESTATE
                  Transfers          Returned            Tentatively          Proposed
                                                         Determined         Determination
                                   $       400           $743,700.26         $318,722.85
                

"From a careful consideration of the law and facts, it is believed that as a basis of settlement, the case may equitably be closed on the basis of the inclusion of $318,722.85 of the transfers.

* * * * * *

"The deficiency may be reduced to $223,359.12 through the submission of the evidence required by Article 9 of Regulations 80 on account of State estate, inheritance, legacy or succession taxes. In order to facilitate closing of the case, it is suggested that the enclosed waiver be signed and returned promptly. If the waiver is so returned, the net tax will be assessed and reasonable opportunity afforded for the submission of the credit evidence.

"A reply within twenty days from the date of this letter is desired."

Appellant replied to the above on December 29, 1937:

"We have received your letter of December 27, 1937 in which you advised us of the deficiency in the Federal Estate tax on the above mentioned Estate, amounting to $223,359.12, after allowance for the customary 80% credit for taxes paid to other states.

"Accordingly, we are enclosing herewith the waiver consenting to the immediate assessment of the deficiency of $223,359.12 in estate taxes in connection with this Estate."

A note printed on the waiver sent by the appellant with the above letter reads:

"Note. — This waiver does not extend the statute of limitations for refund or assessment of tax, and is not an agreement as provided under section 606 of the Revenue Act of 1928 26 U.S.C.A.Int.Rev.Act, page 458. The submission of the waiver will not prejudice the right to file a claim for refund of any portion of the tax, but will expedite the settlement of the case and will reduce the accumulation of interest, as the regular interest period terminates 30 days after the filing of the waiver or on the date of assessment, whichever is earlier."

The deficiency of $223,359.12 was paid by the estate on January 31, 1938, and on April 21, 1939, the Deputy Commissioner wrote appellant that the estate's evidence of payment of state estate, inheritance, legacy or succession taxes entitling it to a credit of $924,766.34 had been received and "is herein allowed." He then said, "Inasmuch as the entire estate tax liability has been assessed, the case is considered closed by the Bureau."

On January 20, 1941 appellant filed a claim for refund with the Collector of Internal Revenue for the Fifth District of New Jersey. This alleged overpayment of net tax in the amount of $416,937.60 plus interest of $13,915.58, a total of $430,853.18. It was based on (1) the valuations assigned to the stock items above mentioned, which were alleged to be excessive and erroneous, and (2) the inclusion in the gross estate of the $318,722.15 above referred to, which was said to be unjustified. This suit followed. After it had been commenced appellant's letter of November 24, 1937 was endorsed as accepted on September 23, 1943 by the Commissioner of Internal Revenue and approved September 24, 1943 by the acting Secretary of the Treasury.

The District Court, 76 F.Supp. 549, 552, held "that the principles of equity prohibit the plaintiff's repudiation of the account stated and settled, and the plaintiff is therefore estopped to maintain this action." The District Court further found that stock items 2 and 8 may not have been included in the settlement and were not so identified. In referring to those two items it is conceded that through inadvertence item 1 was not named, as it should have been because it is in the same category. As to these items the Court went on to state that, "Any claim for refund based upon the latter items appears to be barred by statute, Revenue Act of 1926, § 319(b), 26 U.S.C.A.Int.Rev.Code, § 910, which limits the amount of the refund to `the portion of the tax paid during the three years immediately preceding the filing of the claim.' The only payment here made by the plaintiff was that in settlement of the account stated." The Court thereupon dismissed the complaint.

There was unquestionably in this case an informal agreement to settle the one disputed tax item remaining open, namely, the property transfers. The government did accept the compromise proposed by the taxpayer and did consider the matter closed. But with this agreement now blandly repudiated, it is immediately apparent that it was not a true account stated because, as is frankly admitted, the agreement was not a final settlement. To be that it had to be signed by the Commissioner or his designate and approved by the Secretary or Undersecretary of the Treasury in accordance with the statute.¹ Those necessary signatures were obtained after suit had been started, but by then it was too late. The note attached to the waiver expressly states that, "The submission of the waiver will not prejudice the right to file a claim for refund of any portion of the tax * * *."

The cases are clear on the point. Their foundation is the Botany Mills decision² where, under a quite similar provision in the Revenue Act of 1921, 42 Stat. 227, the Court said, "It is plain that no compromise is authorized by this statute which is not assented to by the Secretary of the Treasury. * * * For this reason, if for no other, the informal agreement made in this case...