First Nat. Bank of Fort Smith v. United States

• Citation: 610 F. Supp. 933
• Decision Date: 06 June 1985
• Docket Number: Civ. No. 84-2255.
• Parties: The FIRST NATIONAL BANK OF FORT SMITH, and S.W. Jackson, Jr., Co-Executors of the Estate of Captilles A. Lick, Jr., Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Arkansas

610 F. Supp. 933

The FIRST NATIONAL BANK OF FORT SMITH, and S.W. Jackson, Jr., Co-Executors of the Estate of Captilles A. Lick, Jr., Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. No. 84-2255.

United States District Court, W.D. Arkansas, Fort Smith Division.

June 6, 1985.

Thomas A. Daily, Fort Smith, Ark., for plaintiffs.

Jack D. Warren, Washington, D.C., W. Asa Hutchinson, U.S. Atty., Fort Smith, Ark., for defendant.

MEMORANDUM OPINION

H. FRANKLIN WATERS, Chief Judge.

Plaintiffs, The First National Bank of Fort Smith and S.W. Jackson, Jr., brought this civil action against the defendant, United States of America, under 28 U.S.C. § 1346(a)(1) to recover estate taxes and interest which they allege were improperly assessed and collected by the Internal Revenue Service. On March 27, 1985, this matter was tried to the court without a jury. After full consideration of all evidence, testimony of witnesses, stipulations, and arguments of counsel, the court enters its memorandum opinion incorporating its findings of fact and conclusions of law.

I.

A. Captilles A. Lick, Jr., the decedent, died on September 14, 1980. At the time of his death he owned 5,708 shares of the common stock of Weldon, Williams & Lick, Inc. (WWL), a privately-held commercial printing company specializing in the printing of admission tickets and other prenumbered products. The common stock of WWL was owned by 29 individuals including the decedent; his ownership amounted to 28.54% of the total of the then outstanding shares of common stock of WWL. On September 14, 1980, none of the common stock of the company was publicly traded and there was no readily available existing market for the sale of such common stock.

Plaintiffs, as duly appointed co-executors of the decedent's estate, filed a timely federal estate tax return which reflected an estate tax liability of $1,189,216.00. On April 12, 1983, the District Director of the Internal Revenue Service assessed an estate tax deficiency against plaintiffs in the amount of $716,401.00. Plaintiffs paid this assessment plus interest¹ and filed a claim with the Director for refund of the deficiency and interest. When more than six months elapsed from the date of the filing of the claim, plaintiffs filed this action for refund of estate tax and interest. The court finds that all jurisdictional prerequisites for filing and maintenance of this suit have been satisfied and the court has jurisdiction pursuant to 28 U.S.C. § 1346(a)(1).

B. As previously noted, WWL is a closely-held commercial printing company which specializes in prenumbered products such as admission tickets and stickers for vehicle control. At the date of decedent's death, WWL made sales to over 10,000 accounts nationwide. The primary basis for assessment of the estate tax deficiency was the government's determination that the fair market value of decedent's WWL stock was $285 per share or $1,626,780.00 for the block of shares. Plaintiffs had claimed a value of $68.16 per share for an aggregate value of $389,057.00. Originally, the difference in the respective valuations stemmed in large part from the fact that the IRS chose to value decedent's individual holdings as part of a 61.1% controlling interest held by Mr. Lick and family members. However, by a memorandum opinion entered on March 25, 1985, the court ruled that decedent's interest in WWL should be valued independent of any consideration of other interests held by family members. The ultimate issue which still remains to be resolved concerns the fair market value of decedent's WWL stock.

II.

A. Before we can consider the issue as to the value of decedent's WWL stock, we must first take up the government's objection to the testimony of certain of the plaintiffs' witnesses.

During the trial, counsel for the government objected to the testimony of plaintiffs' witnesses on the grounds that the facts about which the witnesses were questioned were not set out either in the administrative claim for refund or plaintiffs' response to the government's interrogatories. Specifically, defendant objected to the testimony of S.W. Jackson, Jr., a plaintiff and president of WWL, and Harvey Earp and Molly Wilson, financial analysts. Mr. Jackson testified about those factors which would have influenced a knowledgeable buyer of WWL stock on the date of Mr. Lick's death. His testimony touched upon those conditions which threatened the printing industry generally and those conditions which affected WWL specifically. Mr. Earp testified as an expert about the method he used to value decedent's interest in WWL; Ms. Wilson testified about a prior sale of WWL stock. Government's counsel earnestly argued that plaintiffs' failure to disclose the underlying facts of their claim deprived the government of its right to effective cross-examination and subjected defendant to "trial by ambush."

B. As a general rule, a ground for a refund that is neither specifically raised by a timely claim for refund, nor included within the general language of the claim, cannot be considered by a court in a subsequent suit for a refund. Angelus Milling Co. v. Comm'r, 325 U.S. 293, 65 S.Ct. 1162, 89 L.Ed. 1619 (1945); First Nat. Bank of Fayetteville, Ark. v. United States, 727 F.2d 741, 744 (8th Cir.1984); Ottawa Silica Co. v. United States, 699 F.2d 1124, 1138 (Fed.Cir.1983). Under 26 U.S.C. § 7422(a), a taxpayer may not maintain an action for a refund until a claim for refund has been filed with the Secretary according to the Secretary's regulations.² Section 301.6402-2(b)(1) of the regulations of the Department of the Treasury requires that each claim for a refund must set forth in detail each ground upon which a refund is claimed as well as facts sufficient to apprise the Commissioner of the exact basis of the claim.³

The reasons for the rule requiring a taxpayer to state the grounds for his claim are "to prevent surprise ... to give adequate notice to the Service of the nature of the claim and the specific facts upon which it is predicated, thereby permitting an administrative investigation and determination ...," to provide the Commissioner with an opportunity "to correct any errors, and ... to limit the scope of any ensuing litigation to those issues which have been examined...."

First Nat. Bank of Fayetteville, Ark., supra, at 744, citing Union Pacific Railroad v. United States, 389 F.2d 437, 442 (Ct.Cl. 1968). Where a claim for refund seeks relief on general grounds, an item arising in litigation will be permitted, even though not specifically mentioned in the claim, if the taxpayer has sufficiently alerted the Service to the fact that the item is a ground for refund. Ottawa Silica Co., supra, at 1139, n.6.

C. There are a number of reported cases where the IRS has successfully raised the variance issue at trial. Review of those decisions indicates the government most often prevailed for one of two reasons. One, courts have refused to consider a taxpayer's grounds for refund where the taxpayer attempted to raise at trial any issue which was entirely separate and apart from any issue listed in the administrative claim. Clearly, a taxpayer may not raise a new ground for refund at trial when the Service had no opportunity to investigate the ground administratively. See, e.g., Real Estate Title Co. v. United States, 309 U.S. 13, 60 S.Ct. 371, 84 L.Ed. 542 (1940) (taxpayer claimed a deduction for obsolescence at the administrative level and a casualty loss deduction in court); Ottawa Silica Co., supra, (taxpayer disputed the appropriate depletion rate with the Service but added claims for errors in calculating depletion deduction and net operating loss at trial). See also Gindes v. United States, 661 F.2d 194, 202, 228 Ct.Cl. 632 (1981); Strick Corp. v. United States, 625 F.2d 1001, 1003, 223 Ct.Cl. 262 (1980); Salyersville Nat. Bank v. United States, 613 F.2d 650, 651 (6th Cir.1980); Forward Communications Corp. v. United States, 608 F.2d 485, 508, 221 Ct.Cl. 582 (1979); Cook v. United States, 599 F.2d 400, 406, 220 Ct.Cl. 76 (1979); Southwestern Life Ins. Co. v. United States, 560 F.2d 627, 631 (5th Cir.1977); and Twin City Const. Co. of Fargo v. United States, 515 F.Supp. 767, 770 n. 1 (D.C.N.D.1981).

Second, a taxpayer may not litigate a refund claim where the administrative claim was so vague or so general that the Commissioner could only guess at the precise nature of the taxpayer's claim. A general objection and demand for refund would in fact encompass all conceivable grounds for a refund, but the Service is not required to ferret out on its own the specific claims advanced by the taxpayer. See, e.g., Stoller v. United States, 444 F.2d 1391, 1393 (5th Cir.1971); Union Pacific Railroad Company v. United States, 389 F.2d 437, 445, 182 Ct.Cl. 103 (1968); and Fearis v. C.I.R., 548 F.Supp. 408, 409 (N.D. Tex.1982).

Clearly, plaintiffs' claim in this case does not fall within either of the foregoing categories. We find that the claim for refund brought before this court is based upon substantially the same grounds outlined in the claim filed with IRS; we also find that plaintiffs' administrative claim adequately apprised the Service of the basic nature of their dispute over the valuation of decedent's interest in WWL. The claim filed with the Service in pertinent part reads:

Therefore it is necessary to apply the evaluation procedures outlined in Revenue Ruling 59-60, 1959-1 Cum.Bull. 237 in determining the "fair market value" of the decedent's stock.... Furthermore, the Internal Revenue Service's evaluation of the decedent's interest in Weldon, Williams and Lick was founded on erroneous conclusions as to economic and industry conditions on September 14, 1980; the dividend payout potential; the book value of the stock of Weldon, Williams and Lick and liquidation value; its financial condition on September 14, 1980, and further, the Internal Revenue Service, in its evaluation, attempted to

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