Bornstein v. United States

• Decision Date: 14 May 1965
• Docket Number: 271-61,No. 270-61,273-61.,272-61,270-61
• Parties: Alfred B. BORNSTEIN and Ethel Bornstein v. The UNITED STATES. Robert E. BORNSTEIN and Doris H. Bornstein v. The UNITED STATES. William BORNSTEIN and Kate Bornstein v. The UNITED STATES. ESTATE of Adolph KLEIN, Deceased, William Bornstein, Executor, and Jean Klein v. The UNITED STATES.
• Court: U.S. Claims Court

345 F.2d 558 (1965)

Alfred B. BORNSTEIN and Ethel Bornstein v. The UNITED STATES.

Robert E. BORNSTEIN and Doris H. Bornstein v. The UNITED STATES.

William BORNSTEIN and Kate Bornstein v. The UNITED STATES. ESTATE of Adolph KLEIN, Deceased, William Bornstein, Executor, and Jean Klein v. The UNITED STATES.

Nos. 270-61, 271-61, 272-61, 273-61.

United States Court of Claims.

May 14, 1965.

Gerald H. Sherman, Washington, D. C., for plaintiffs. Leonard L. Silverstein, Washington, D. C., of counsel.

Thomas A. Troyer, Washington, D. C., with whom was Asst. Atty. Gen., Louis F. Oberdorfer, for defendant. C. Moxley Featherston, Lyle M. Turner, and Philip R. Miller, Washington, D. C., were on the brief.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS and COLLINS, Judges.

COWEN, Chief Judge.

This is a suit for refund of income taxes, plus interest, arising from the distribution of certain funds by a corporation of which plaintiffs are shareholders. The defendant treated the distribution as ordinary income to plaintiffs, pursuant to 26 U.S.C. (I.R.C.1939) § 117(m) (1952 Ed.) Collapsible Corporations. Plaintiffs concede that the distributions were properly taxable under that statute as ordinary income unless the Commissioner of Internal Revenue is estopped or otherwise prohibited from assessing the deficiency because of his issuance of a prior inconsistent private ruling to a similarly situated corporation, and because of oral representations made by an employee of the Bureau of Internal Revenue. Plaintiffs have receded from the other contentions set forth in their petitions. The facts in these cases were stipulated by the parties and are incorporated in our findings of fact.

Plaintiffs are minority shareholders in Shirley-Duke Apartments, Section IV, Inc., and Shirley-Duke Apartments, Section V, Inc. They are not officers or directors of these corporations or of any of the Shirley-Duke group of corporations.

In June 1949, six corporations denominated "Shirley-Duke Apartments", and then bearing the additional designation of "Section I, Inc." through "Section VI, Inc.", inclusive, were incorporated in the State of Virginia. Their purpose was to own a single, multi-unit, apartment project that was to be constructed in the metropolitan Washington area. It was necessary to create six corporations (as opposed to a lesser number) because the lending institution had set a ceiling on the mortgage obligation of any one corporate entity. Shortly after incorporation, a parcel of land was purchased in Fairfax County, Virginia, and construction started.

Construction of apartment buildings for each of the six corporations was carried on as a single endeavor. Such construction proceeded with major regard to land topography, availability of materials, and other physical factors. Little attention was paid to the matter of which corporation's building was being constructed. Some costs were incurred by, and paid by, each corporation individually. Most costs were allocated among the various corporations based upon the percentage that the units in the particular corporation bore to the total units of all six corporations. Some persons were employed only by certain of the individual corporations, and not by all of the six corporations.

The construction of the apartment dwellings and their subsequent management were performed by a partnership formed by the principal stockholders in all of the corporations. The plaintiffs in the present action have never been members of this partnership.

A motive force in the formation of the Shirley-Duke corporations, a shareholder in all corporations, and general counsel of all of the corporations, was Mr. Carl Budwesky, a practicing attorney. Mr. Budwesky's offices are in a commercial building which is a part of the Shirley-Duke project.

By September 1950, all of the project was completed. It became apparent that the FHA insured mortgage funds received by each corporation would greatly exceed the corporation's actual construction costs. In informal discussions, certain shareholders of the various Shirley-Duke corporations expressed a desire to distribute the excess, and discussed the method of distribution, as well as the tax consequences thereof. They wished to be sure that the gain realized would be taxable as capital gains, and Mr. Budwesky advised them that this would be the treatment accorded.

In order to secure an authoritative opinion, Mr. Budwesky, at the behest of the shareholders and as legal counsel to all of the Shirley-Duke corporations, was authorized to secure a ruling from the Internal Revenue Bureau now the Internal Revenue Service.

Accordingly, Mr. Budwesky had two conferences at the Internal Revenue Bureau with Mr. E. G. Parker and some of his associates regarding the possibility of obtaining a ruling from the Internal Revenue Bureau and the actual content of such a ruling.

Mr. Parker was a Conferee Reviewer in the Coordinating and Advisory Section of the Practice and Procedure Division of the Internal Revenue Bureau. His duties entailed the performing of research and analysis upon questions on which the Internal Revenue Bureau had been requested to rule. He also prepared initial drafts of such rulings. He had no authority to sign or otherwise to issue rulings on behalf of the Internal Revenue Bureau; that authority was confined to the head of his division, the Deputy Commissioner and the latter's assistant. Prior to their issuance by the Internal Revenue Bureau, all drafts of rulings which Mr. Parker prepared were required to be reviewed by at least two of his superiors. Mr. Parker never stated to Mr. Budwesky that he had authority to issue rulings on behalf of the Internal Revenue Bureau, and he never stated that he did not have such authority.

All of the work assigned to Mr. Parker during the period in question related to either the problems of capital gains or losses or to problems of business deductions. Mr. Parker had no specialized knowledge of any of the other areas of federal tax law, and his duties did not include any responsibility for work in such other areas.

In one of the conferences between Mr. Budwesky and Mr. Parker, Mr. Budwesky stated that he represented all six of the Shirley-Duke corporations and asked whether or not it would be necessary to apply for separate rulings for each of the six corporations. Mr. Parker advised him that, since the ruling would involve a legal determination, an application on behalf of one of the corporations would be sufficient and, since the same principle was involved, the ruling would be applicable to all of the six corporations.

Mr. Parker had no authority to make these statements, or to make any other statements or representations on behalf of the Internal Revenue Bureau about the applicability of its rulings. He had been given no authority to make, for the Internal Revenue Bureau or for the United States Government, any statements, either oral or written, about the law or its bearing upon particular situations. Mr. Parker's lack of authority to do anything of this character had been made clear to him by his superiors many times, and he was well aware of it. Mr. Parker never stated to Mr. Budwesky that he had such authority, and never stated that he did not have such authority.

On October 18, 1950, Mr. Budwesky submitted a formal written request for a ruling on behalf of the Shirley-Duke Apartments, Section III, Inc. The request made no reference to any of the other apartments.

On November 30, 1950, the Internal Revenue Bureau by the Deputy Commissioner, in response to the October application issued a ruling addressed to "Shirley-Duke Apartments, Section III, Inc.", hereinafter referred to as Section III. The ruling concluded that the distributions in question would be taxable as "long-term capital gains in accordance with the provisions of section 117(b) of the Internal Revenue Code 1939." This ruling was never published.

Thereafter, Mr. Budwesky reported the oral advice given him by Mr. Parker to certain of the shareholders of the Shirley-Duke corporations. The directors of each of the corporations caused their corporations to declare and pay cash dividends in December 1950, and early in 1951. The corporate resolutions authorizing the distributions made no reference to the November 30, 1950, ruling of the Internal Revenue Bureau or to the oral statements made to Mr. Budwesky by Mr. Parker. No attempt to obtain a ruling upon the tax status of the distributions in the hands of plaintiffs was ever made by them or the corporations in which they held shares. No such ruling was issued.

The Internal Revenue Service allowed capital gains treatment of the distribution to the shareholders of Section III, Inc., because of the issuance of the letter ruling to that corporation. The distributions to the shareholders in the other Shirley-Duke corporations have been treated as ordinary income by virtue of 26 U.S.C. (I.R.C.1939) § 117(m) (1952 Ed.).

In April 1959, deficiencies were assessed by the District Director against plaintiffs on the basis that the distributions reported as capital gains in their tax returns for 1950 and 1951 should be taxed as ordinary income. Plaintiffs paid the deficiencies, and after their timely claims for refund were denied, they brought these actions.

Plaintiffs advance three general propositions as a basis for their recoveries in these suits.

First, plaintiffs maintain that they refrained from requesting a written ruling in behalf of the corporations in which they held stock, in reliance on the oral representations of Mr. Parker, the Internal Revenue Bureau employee. Consequently, they argue that the defendant's refusal to honor the Section III ruling with respect to the remaining corporations is inequitable and defendant should now be estopped to assert the deficiency against these other corporations. Although plaintiffs say that the representations were made by an agent who acted...