Chertkof v. U.S.

• Decision Date: 01 April 1982
• Docket Number: Nos. 81-1358,81-1359,s. 81-1358
• Citation: 676 F.2d 984
• Parties: 82-1 USTC P 9282 Jack O. CHERTKOF and Ethel Posnick, Executors of the Estate of Annie Chertkof, Appellants, v. UNITED STATES of America, Appellee. Jack O. CHERTKOF, Trustee of the David W. Chertkof Trust, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 984

676 F.2d 984

82-1 USTC P 9282

Jack O. CHERTKOF and Ethel Posnick, Executors of the Estate

of Annie Chertkof, Appellants, v. UNITED STATES of America, Appellee.

Jack O. CHERTKOF, Trustee of the David W. Chertkof Trust, Appellant, v. UNITED STATES of America, Appellee.

Nos. 81-1358, 81-1359.

United States Court of Appeals, Fourth Circuit.

Argued Dec. 8, 1981.

Decided April 1, 1982.

Richard E. Levine, Baltimore, Md. (Theodore W. Hirsh, Miles & Stockbridge, Baltimore, Md., on brief), for appellants.

Jo-Ann Horn, Tax Div., Dept. of Justice, Washington, D. C. (J. Frederick Motz, U. S. Atty., Baltimore, Md., John F. Murray, Acting Asst. Atty. Gen., Michael L. Paup, Jonathan S. Cohen, Tax Div., Dept. of Justice, Washington, D. C., on brief), for appellee.

Before WINTER, Chief Judge, and PHILLIPS and MURNAGHAN, Circuit Judges.

MURNAGHAN, Circuit Judge:

On September 17, 1968, David W. Chertkof died. On September 13, 1969, Annie Chertkof's life came to a close. There were transfers of certain shares of stock owned by the decedents to the estate of Annie and into a trust created by David. ¹ New bases for the securities were consequently established for the purposes of determining gain or loss for federal income tax purposes. ²

Estate tax returns were filed claiming values for the securities as fixed by the executors. The government did not accept the estate tax valuations and, on November 14, 1972, a Notice of Deficiency was issued to David's estate, and on November 8, 1973 such a Notice went to Annie's estate. In due course, the matter not having been settled administratively, cases were commenced in the United States Tax Court by the Chertkof fiduciaries. On November 1, 1974 (in Annie's estate) and November 4, 1974 (in David's estate), ³ as a result of negotiated settlements between the parties, the Tax Court entered decisions fixing values for the securities greater than those originally employed when the estate tax returns had been filed. ⁴ The resulting increases in estate tax liabilities ($284,144.47 in David's estate, $90,338.68 in Annie's estate) are not in issue here.

However, during the fiscal year ended February 28, 1971, sales and liquidating distributions on some of the securities in the David Chertkof trust and liquidating distributions on shares held in the Annie Chertkof estate had occurred. In computing the extent of aggregate gains thereby recognized, in income tax returns due and filed on June 15, 1971, i.e. well before the estate tax deficiency claim surfaced, the trustees and executors used the values contained in the estate tax returns. Consequently, on the basis of the higher values ultimately fixed for estate tax purposes by the Tax Court orders of November 4, 1974, the extent of gains for income tax purposes had been overstated (and the extent of a loss had been correspondingly understated). However, attempts to secure refunds were rebuffed on the ground that the limitations period of three years, ⁵ accounting from June 15, 1971, had already run. ⁶ That limitations had run was undoubtedly the case unless the special mitigation provisions of 26 U.S.C. §§ 1311-1314 applied. ⁷ Claims for refund of income taxes paid for the fiscal years ended February 28, 1971 were filed on April 15, 1975, and suits were instituted on March 30, 1977 by the David Chertkof trust and the Annie Chertkof estate in the United States District Court for the District of Maryland seeking refund of the income tax overpayments. ⁸ Although several of the taxpayers' contentions prevailed, they were ultimately unsuccessful in the district court. Chertkof v. United States, 81-1 U.S.T.C. P 9326 (1981).

In resisting the refund claims, the government's principal position is that the mitigation statutes are restricted in their application to any inequities resulting where income is overstated or understated in conjunction with a determination made in another connection solely and exclusively for income tax purposes. Here the government would emphasize that, although the refunds which the taxpayers seek are income tax refunds, the upward redetermination of values made by the Tax Court in its orders of November 4, 1974 grew out of a question arising under the estate tax law.

In arguing that position, the government, in our opinion, takes an unrealistically narrow view of language. While the Tax Court's 1974 determinations are for estate tax purposes, nevertheless, they are closely related to, or made respecting, an essential income tax consideration. The value as ultimately determined or redetermined for purposes of the federal estate tax necessarily constitutes the basis in any computation, for income tax purposes, of gain or loss.

As the focal point of its argument, the government points to the fact that, originally, the right to mitigation clearly was limited to situations in which a change for income tax purposes in one context led to an understatement or overstatement of income taxes in another context. It contends that the determination defined in § 1313(a) as "a decision by the Tax Court" should be construed as though the definition read "a decision by the Tax Court under the income tax laws."

To justify such supplementation of the language as it actually appears in the statute, the government points to the predecessor of the present §§ 1311-14, that is to § 820 of the Revenue Act of 1938 (§ 3801 of the 1939 Internal Revenue Code). The earlier statute provided, with respect to the circumstances under which an adjustment would be made under the mitigation provisions, that they should be specifically limited to "a determination under the income tax laws." That is admittedly strong medicine, and, were we still in the period prior to 1954, the government would readily win.

However, there is a difficulty of gargantuan proportions. In the amendments adopted in 1953, which became the 1954 Code, Congress cut out the language from which the government seeks to derive comfort. To us, it seems that the deletion of language, having so distinct a meaning, almost compels the opposite result when words of such plain meaning are excised. ⁹ See 2A C. Dallas Sands, Sutherland Statutory Construction § 51.02 (4th ed. 1973) ("(If) words used in a prior statute to express a certain meaning are omitted, it will be presumed that a change of meaning was intended."). Cf. Adams v. Proctor & Gamble Mfg. Co., No. 81-1197, slip op. at 6-7 (4th Cir.).

The government also seeks to bolster its position by citing the Regulation under the 1954 Code and two cases which have followed it. 26 C.F.R. § 1.1311(a)-2(b) states that:

Section 1311 may be applied to correct the effect of the error only as to the tax or taxes with respect to which the error was made which correspond to the tax or taxes with respect to which the determination relates. Thus, if the determination relates to a tax imposed by chapter 1 of the Internal Revenue Code of 1954, the adjustment may be only with respect to the tax imposed by such chapter or by the corresponding provisions of prior law.

The regulation, of course, must conform to the law as laid down in the statute. The deference due to a regulation does not extend to application of a law in a fashion contrary to its perceptible and perceived intent. See United States v. Vogel Fertilizer Co., --- U.S. ----, ----, 102 S.Ct. 821, 827, 70 L.Ed.2d 792 (1982). The regulation under the 1954 Code simply parrots the regulations earlier framed under § 820 of the 1938 Revenue Act, ¹⁰ and does not appear to have allowed any weight to the significant deletion of language previously appearing which restricted the mitigation provisions to situations where, when taxes for two different years were involved, if one was the income tax, the other had to be income tax too.

An uncritical acceptance of the Treasury Regulations, therefore, such as is found in Evans Trust v. United States, 462 F.2d 521, 524-25 (Ct.Cl.1972), does not lend substantial support to the government's position. The case has little precedential effect here in any event inasmuch as:

1) The court did not question the status of an estate tax decision as a "determination," but rather rested its conclusion on a failure to satisfy the provisions of § 1312(5). The decision on those latter grounds is fully defensible. We, however, have a case concerning whether a circumstance described in § 1312(7) is met, and, as we shall demonstrate infra, the Chertkof fiduciaries have satisfied the § 1312(7) requirements. The circumstance in § 1312(7) is "Basis of property after erroneous treatment of a prior transaction."

2) The Court of Claims did not have before it a situation in which a determination with respect to one tax which was in dispute had been made which was inconsistent with another. Instead, the situation was one in which the government fully accepted the taxpayer's valuations for estate tax purposes. As part of a settlement, the taxpayer agreed to treat certain assets as though they belonged to another distinct taxpaying entity, as to which there was no tax controversy pending at all. When the assets were so included, the second tax entity attempted not simply, as in the Chertkof case, to write up the values of assets by the amount of increases in a related proceeding. Instead, it claimed the right to classify and treat the assets as estate assets, and thereby to obtain certain advantages not otherwise available to it. The government could not have created an inconsistent position, because the assets placed, under the settlement agreement, into the estate were property which need not have been so placed at all. The issue, therefore, was not one of valuation, to which the mitigation statutes are especially addressed, but one of the includibility, vel non, of assets in the estate.

Similarly distinguishable is the case of Provident National Bank v. United States, 507 F.Supp. 1197 (E.D.Pa.1981), where valuations were never in question, the assets being shares of...