Brigham v. United States

Decision Date12 December 1972
Docket Number282-70,284-70.,283-70,No. 281-70,281-70
PartiesClifton L. BRIGHAM and Jane G. Brigham v. The UNITED STATES. Jerome D. GAGE and Shirley K. Gage v. The UNITED STATES. Ralph H. GAGE, Individually, and Ralph H. Gage and Jerome D. Gage, Executors of the Estate of Nell D. Gage v. The UNITED STATES. Charles F. JARRARD and Margaret B. Jarrard v. The UNITED STATES.
CourtU.S. Claims Court

Donald A. Statland, Washington, D.C., for plaintiffs; Burton W. Kanter, Chicago, Ill., attorney of record. Calvin Eisenberg and Richard M. Kates, Chicago, Ill., of counsel.

John E. Evans, with whom was Asst. Atty. Gen. Scott P. Crampton, for defendant. Philip R. Miller, Washington, D.C., of counsel.

Before COWEN, Chief Judge, and DAVIS, SKELTON, NICHOLS, KASHIWA, KUNZIG, and BENNETT, Judges.

ON DEFENDANT'S MOTION FOR JUDGMENT ON THE PLEADINGS

KASHIWA, Judge:

The four suits listed above were consolidated by an order of this court. The suits were brought to recover income taxes and assessed interest for the years and amounts indicated,1 plus interest as provided by law. The defendant has moved for judgment on the pleadings. The plaintiffs oppose the motion, raising three separate and distinct issues for our resolution:

(1) Whether the provisions of sections 1311 to 1315 of the Internal Revenue Code of 1954 apply in mitigation of the otherwise applicable statute of limitations on refunds with respect to the taxable years in issue.

(2) Whether, assuming the provisions of the mitigation sections are inapplicable, the taxpayers are entitled to recovery under the doctrine of equitable recoupment.

(3) Whether the examination of certain of the taxpayers' returns for the year 1962 constituted informal claims for refund timely filed on behalf of all the taxpayers for the years 1958 through 1961.

We hold for the defendant in each of the cases for the reasons hereinafter stated.

In 1952 the shareholders of Gage Structural Steel Corporation ("Gage") and Midland Structural Steel Corporation entered into an agreement to sell their shares of stock to Illinois Wesleyan University ("University") on an installment sale basis. All the plaintiffs in this consolidated action were included in this group of shareholders. In 1957 there was a repurchase by the group of shareholders of the stock sold in 1952.

The taxpayers filed federal income tax returns for the calendar years 1958 through 1961 with the District Director of Internal Revenue in Chicago, Illinois. On those returns the taxpayers reported gains from the sales of Gage stock as capital gains. Each of the plaintiffs' tax returns for the years 1958 through 1961 were subsequently examined. The amounts treated by the plaintiffs as capital gains installment sale proceeds were reclassified as ordinary income. The resulting taxes and interest were paid during the period March 1, 1963, to June 4, 1963.

An Internal Revenue agent during the years 1965 and 1966 examined the 1962 federal income tax return of Jerome D. and Shirley K. Gage, two of the taxpayers, and again made the finding that the proceeds from their sale of Gage stock constituted ordinary income. These taxpayers filed a protest to that finding and, for reasons discussed below, received a refund of $941.96. The Commissioner conceded that the proceeds of the installment sale received during 1962 were to be treated as capital gain and not ordinary income.

At approximately the same time, the 1962 federal income tax return of Ralph H. and Nell D. Gage was also examined. Again, the finding was initially made that the proceeds from the sale of their Gage stock constituted ordinary income. After the taxpayers filed a protest to this finding, the Internal Revenue Service informed the taxpayers, by letter of June 27, 1967, that no deficiency would be asserted for the year 1962. The Internal Revenue Service, as in the case of the 1962 year of Jerome and Shirley Gage, had reversed its stance and now conceded that a legitimate sale had occurred and that the proceeds of the sale of the Gage stock were subject to capital gain treatment. The reason for this changed stance by the Internal Revenue Service is clear.

In April, 1965, the United States Supreme Court decided the case of Commissioner of Internal Revenue v. Brown, 380 U.S. 563, 85 S.Ct. 1162, 14 L.Ed.2d 75 (1965), which approved a transaction similar in nature to that involved in the instant case. In light of the Brown opinion, the Commissioner of Internal Revenue published Rev.Rul. 66-153, 1966-1, Cum.Bull. 187.2 There is no real doubt that the aboutface by the Internal Revenue Service with respect to the 1962 taxable year of Jerome and Shirley Gage and Ralph and Nell Gage was the consequence of the Brown decision as interpreted by the Revenue Ruling. Since it was the view of the Service that the Brown case was only applicable to cases in which the amount payable by the exempt foundation for the stock of the business is in accord with the fair market value of that stock, we are safe to assume that this was the situation with respect to the 1952 sale.

On June 17, 1968, within one year after the refund was granted to Jerome and Shirley Gage (and within one year after the above-described letter was sent to Ralph and the Estate of Nell Gage), all four groups of taxpayers filed claims for refund for the years 1958, 1959, 1960, and 1961 to recover the amounts of additional taxes and interest which they had paid. All of these claims were based on the treatment of the monies the taxpayers had received from their sales of Gage stock. All the claims were disallowed. The claims of Clifton L. and Jane G. Brigham were disallowed on December 9, 1968; and the claims of all the other taxpayers were disallowed on August 19, 1968. The taxpayers assert that they are entitled to recover the amounts which are specified in the aforementioned claims for refund, together with interest thereon, based upon the correct tax treatment of the Gage stock sale proceeds for the taxable years 1958 through 1961.

1. Statutory Mitigation of the Statute of Limitations, Sections 1311 through 1315 of the Internal Revenue Code of 1954.3

Plaintiffs' chief argument is that the Internal Revenue Service's action with respect to certain of the taxpayers' income taxes for the taxable year 1962 were inconsistent determinations within the meaning of section 1313(a). These inconsistent determinations entitle each of the four groups of plaintiffs to reopen years otherwise barred by the relevant statutory period of limitations contained in section 6511.

Sections 1311 through 1315, commonly referred to as the "mitigation sections," require the following:

1) a determination
2) which adopts a position maintained by (in this case) the Commissioner (In the present case, since the Commissioner is the beneficiary of the statutory bar, it is his maintenance of the inconsistent position which must be shown. Section 1311(b)(1)(A) above quoted.);
3) and that position is inconsistent with the prior treatment of the item in question;
4) which brings about an unfair result described in one of the paragraphs of section 1312.
A. Jerome D. Gage and Shirley K. Gage (No. 282-70)

The parties have assumed that the following prerequisites to relief under the mitigation provisions have been fulfilled: (1) a "determination" within the meaning of section 1313 has been made; (2) the position adopted by the determination is inconsistent with the erroneous tax treatment of the transaction in a previous taxable year; and (3) the determination is described in section 1312(7) of the Internal Revenue Code of 1954.

The crucial issue is whether the Commissioner of Internal Revenue has actively maintained a position with regard to the 1962 determination which is inconsistent with the erroneous inclusion or recognition. The requirement of the maintenance of the inconsistent position is basic to the existence of the statutory mitigation provisions. The legislative history of the predecessor section to section 1311 is unambiguous:

(1) To preserve unimpaired the essential function of the statute of limitations, corrective adjustments should (a) never modify the application of the statute except when the party or parties in whose favor it applies shall have justified such modification by active inconsistency * * *. S.Rep. No. 1567, 75th Cong. 3d Sess. 49 (1938).

Since the Commissioner, in the instant case, is the beneficiary of the statute of limitations, it is his maintenance of the inconsistent position which must be shown. Otherwise, the mitigation provisions will not permit the taxpayers to "awaken the sleeping dog." Maguire, Surrey, and Traynor, Section 820 of the Revenue Act of 1938, 48 Yale L.J. 719, 735 (1939).

Our decision in Heineman v. United States, 391 F.2d 648, 183 Ct.Cl. 17 (1968), controls the instant case. In Heineman, the taxpayer's decedent had viewed, for the years 1944 through 1946 and 1948 through 1952, the cash distributions made with respect to his common stock as nontaxable distributions in liquidation. Upon audit, it was determined that the distributions were in fact dividends. Deficiencies and interest were accordingly assessed and paid. Subsequently, the case of Maguire v. Commissioner of Internal Revenue, 222 F.2d 472 (7th Cir.1955), was decided, which held that the same company was, in fact, in partial liquidation. The distributions, therefore, were not subject to ordinary income tax. Although the Commissioner allowed the decedent Heineman a refund for 1954, the claims for the years enumerated above were denied by virtue of the statute of limitations, the predecessor of section 6511(a) of the Internal Revenue Code of 1954. In response to the plaintiffs' argument that the Commissioner's allowance of the 1954 refund claim constituted the maintenance by the Commissioner of a position inconsistent with the position taken in prior years with respect to the distributions of the corporation, this court ...

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