Cleveland v. Higgins

• Decision Date: 01 May 1943
• Citation: 50 F. Supp. 188
• Parties: CLEVELAND et al. v. HIGGINS, Collector of Internal Revenue.
• Court: U.S. District Court — Southern District of New York

50 F. Supp. 188

CLEVELAND et al. v. HIGGINS, Collector of Internal Revenue.

District Court, S. D. New York.

May 1, 1943.

Earl A. Darr, of New York City, for plaintiffs.

Mathias F. Correa, U. S. Atty., of New York City (Arnold C. Stream, Asst. U. S. Atty., of New York City, of counsel), for defendant.

LEIBELL, District Judge.

The defendant has moved the Court for an order dismissing the plaintiffs' complaint for failure to state a claim upon which relief can be granted. The present action is brought by the plaintiffs as executors for the recovery of an alleged overpayment of the Federal Estate Tax on the estate of the late, Alfred W. Erickson.

In substance, the complaint contains the following allegations.

Alfred W. Erickson, a resident of the Borough of Manhattan, New York City, died on or about November 2, 1936, and his last will and testament was thereafter admitted to probate in the New York County Surrogate's Court. Letters testamentary were issued to the plaintiffs who have ever since been the executors of the said will.

The plaintiffs filed their return of the Federal Estate Tax on the decedent's estate, at the same time exercising the option given them by Section 302 (j) of the Revenue Act of 1926, as amended by Section 404 of the Revenue Act of 1934 and Section 202 (a) of the Revenue Act of 1935, 26 U.S.C.A. Int.Rev. Code, § 811 (j), to have the value of the estate determined as of a date one year after Mr. Erickson's death. The Commissioner of Internal Revenue, acting pursuant to Article 11 of Regulations 80, which purport to be interpretations of the legislation pertaining to the assessment of Federal Estate Taxes, thereafter included in the gross of decedent's taxable estate, $242,050.93, the income earned by the estate during the year following Mr. Erickson's death. The Commissioner of Internal Revenue then determined that the correct Federal Estate tax, computed on the estate as thus increased, was $1,489,824.71, which amount, plus interest, was paid in two instalments, the last on September 29, 1939.

In the belief that the above-mentioned year's income of $242,050.93 should not have been included in the decedent's gross estate for tax purposes, the plaintiffs duly filed a claim for refund with the Commissioner of Internal Revenue on October 24, 1939. On November 24, 1939, an amended claim for refund, based upon the recited facts, was likewise filed. The Commissioner of Internal Revenue completely rejected the original claim and the amended claim on or about January 29, 1940. Meanwhile, the plaintiffs had retained the law firm of Phillips & Avery and it was these attorneys who had perfected and filed the refund claims. When the claims were rejected, the plaintiffs, acting through their attorneys by Earl A. Darr, a member of the firm, instituted a civil action in this Court (hereinafter referred to as action No. 1) against the present defendant. The purpose of action No. 1 was to compel repayment of the tax sum in controversy, the $101,177.27 and interest. The action was dismissed with prejudice after the defendant paid the plaintiffs a refund of $122,243.53 ($105,823.49 with interest from September 29, 1939). The complaint in this present action No. 2 does not allege when the payment was made in settlement of action No. 1 or when the said action was dismissed with prejudice.

The amount charged by Phillips & Avery for their legal services in connection with the claim for refund, the civil action and the result obtained, was $18,346.18, and the plaintiffs paid that indebtedness on or about August 21, 1942. The complaint does not show when the bill was rendered or any of its details. The plaintiffs followed this on or about September 14, 1942, by filing with the defendant a further claim for the refund of $7,668.69, with interest. A copy of the claim (which will be hereinafter referred to as claim No. 2) is annexed to the complaint and it demonstrates that the basis of the demand was the additional sum which the plaintiffs had to pay for attorneys' fees and disbursements in obtaining the previous refund through action No. 1. The money thus paid to Phillips & Avery was claimed to be "a proper deduction in arriving at the amount of the Estate tax on said Estate" (an expense in the administration of the estate), thus allegedly warranting a smaller net estate, a smaller total Estate Tax, and a refund as claimed. Claim No. 2 was rejected by the Commissioner of Internal Revenue on or about November 16, 1942, by registered mail. A copy of the letter of rejection is annexed to the complaint. After referring to the previous action and the steps there taken, including the payment to the plaintiffs, it stated: "In view of the agreement on the part of the representatives of this estate to receive the said sum in full settlement of all issues involved, it would appear that the determination of the Federal estate tax liability of this estate is res adjudicata. In this connection see the case of Guettel v. United States 8 Cir., 95 F.2d 229 118 A.L.R. 1060."

The complaint in action No. 2 states that under the applicable Federal Estate Tax Law administration expenses are proper deductions from the gross estate for estate tax purposes; that the applicable Regulations, promulgated by the Commissioner of Internal Revenue, regard attorneys' fees as part of the administration expenses; and that the laws of the State of New York, governing the administration of the estate, regard the said legal expenditure as a proper item of administration expense.

Claiming jurisdiction in this Court by reason of Section 41, subdivision (5) of 28 U.S.C.A., section 24(5) of the Judicial Code, the complaint in action No. 2 demands judgment for the sum of $7,668.69 with interest thereon from September 14, 1942.

A motion of this kind searches no further than the complaint itself (including any documents annexed to and made part of the complaint) in determining whether a valid claim for relief is stated. All the allegations of the complaint must be taken as true and are to be considered in a light most favorable to the plaintiff. Tahir Erk v. Glenn L. Martin Co., 4 Cir., 116 F.2d 865.

It is the defendant's contention that the complaint in action No. 2 shows on its face that it fails to state a claim on which relief can be granted, in that it pleads facts which constitute res adjudicata and estoppel and bar the plaintiffs' present action. The defendant urges that the Federal Estate Tax is a single tax; that the plaintiffs' previous litigation, followed by a dismissal with prejudice and payment by the defendant, is decisive of all the issues which were, or could have been, raised at that time in connection with the indivisible tax in question, that the present claim could have been included, in an estimated amount, in the claim for refund on which the first suit (action No. 1) was brought, and that this complaint in action No. 2, having recited the other suit on the previous claim for refund, is insufficient in law on its face.

The plaintiffs argue that whatever the law may be in other cases, it cannot bar this action because the expense upon which this claim for refund is based was not ascertained prior to the conclusion of the previous action, and that, even if it had been, no action could have been brought thereon until after full compliance with the legal condition precedent requiring the presentation and rejection of a claim for refund before it could be the basis of an action at law.

The first question presented by this motion appears to be this: Could the plaintiff executors have included in their first claim for refund ($101,177.27, filed October 24, 1939, amended November 24, 1939) an estimated but undetermined amount representing the sum by which the Federal Estate tax should be reduced if the attorneys' fees for filing and litigating the said claim for refund was a proper administration expense? In my opinion they could not. No facts were available at the time of the first claim for refund on which any one could form any reliable estimate of what the attorneys' fees would be for services to be rendered in connection with the said claim for refund or with the litigation that might follow if the claim was rejected. The attorneys' fee would depend on many elements — the time consumed, the intricate character of the points involved, the extent to which the claim would be litigated through the courts, and the results obtained. No one could even hazard a guess on any one of these elements at that time. It so happened that after the litigation (action No. 1) was instituted on that claim for refund, the United States Supreme Court decided the appeal of Maass v. Higgins, 312 U.S. 443, 61 S.Ct. 631, 632, 85 L.Ed. 940, 132 A.L.R. 1035, decided March 3, 1941. In that case it was held that "where an executor avails himself of the option extended by the estate tax law to value a decedent's gross estate as of one year after the decedent's death, rents, dividends, and interest...