Gindes v. United States, 472-73 and 57-76

• Decision Date: 23 September 1981
• Docket Number: 474-73 and 59-76 and 60-76.,No. 472-73 and 57-76,473-73 and 58-76,472-73 and 57-76
• Citation: 661 F.2d 194
• Parties: Samuel T. GINDES and Joan L. Gindes v. The UNITED STATES. Edward H. KAPLAN v. The UNITED STATES. Jerome A. and Deena L. KAPLAN v. The UNITED STATES. Nathan SINROD, Trustee for the benefit of Edward H. Kaplan, v. The UNITED STATES.
• Court: U.S. Claims Court

661 F.2d 194

Samuel T. GINDES and Joan L. Gindes v. The UNITED STATES.

Edward H. KAPLAN v. The UNITED STATES.

Jerome A. and Deena L. KAPLAN v. The UNITED STATES.

Nathan SINROD, Trustee for the benefit of Edward H. Kaplan, v. The UNITED STATES.

Nos. 472-73 and 57-76, 473-73 and 58-76, 474-73 and 59-76 and 60-76.

United States Court of Claims.

September 23, 1981.

Werner Strupp, attorney of record, Washington, D. C., for plaintiff.

Ellen C. Specker, with whom was Acting Asst. Atty. Gen. John F. Murray, Washington, D. C., for defendant; Theodore D. Peyser and Robert S. Watkins, Washington, D. C., of counsel.

Before COWEN, Senior Judge, and KASHIWA and BENNETT, Judges.

ON DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT

KASHIWA, Judge:

These cases are before the court on cross motions for partial summary judgment. There is no issue of material fact. We hold in defendant's favor after hearing oral argument.

During his life, Charles I. Kaplan (Charles) participated in numerous business undertakings with others. According to a Stipulation of Facts filed by the present parties, these enterprises were actively engaged in the business of operating and managing, through independent property management firms, apartment house complexes, commercial office buildings, shopping centers, and other rental properties. The principal assets of these enterprises were, with only two minor exceptions,¹ depreciable realty on which substantial depreciation had been taken. Consistent with the active conduct of a business, these enterprises annually incurred substantial operating expenses. Each enterprise maintained its own books of account as a partnership or joint venture. Following regular audits, a certified public accountant prepared financial statements treating each enterprise as a partnership or joint venture. For purposes of the federal income tax, partnership returns were filed on a calendar basis in which allowances for depreciation and the operating expenses as well as the income generated were set out.² These practices apparently were followed consistently once each enterprise commenced business.³ For convenience' sake, we refer to these enterprises as partnerships.

Taxpayers Edward H. Kaplan (Edward), Jerome A. Kaplan (Jerome), and Joan L. Gindes (Joan)⁴ are the children of Charles and Mary Kaplan (Mary). In 1950 Mary established trusts for the benefit of Edward and Jerome (the inter vivos trusts). Nathan Sinrod and Charles were named as co-trustees. As of December 31, 1963, Charles had transferred a portion of his interest in seven of the partnerships to the inter vivos trusts.⁵ Charles died testate on January 27, 1964. His will created, inter alia, trusts benefiting Edward, Jerome, and Joan (the testamentary trusts). The corpus of each testamentary trust was comprised of interests Charles held at the time of death in the 19 partnerships. These 19 included the seven partnerships listed in note 5, supra, in which interests had been given to the inter vivos trusts.

Charles' estate tax return was filed on April 27, 1965. The partnership interests held at death were included as assets of the gross estate, but the partnership interests transferred to the inter vivos trusts were not. Upon audit, the Internal Revenue Service (IRS) determined in August 1967 that certain of the partnership interests held at the time of death had been valued too low⁶ and that the partnership interests transferred to the inter vivos trusts should have been included in the gross estate. A statutory notice of deficiency was sent in January 1968.

In March 1968 the estate filed a timely petition in the Tax Court seeking a redetermination of the deficiency. In its petition, the estate contested only one of the new valuations, but asserted any estate inclusion of the interests transferred to the inter vivos trusts was incorrect. Eventually, the Government conceded the original valuation of the contested interest had been correct while the estate conceded inclusion of the interests transferred to the inter vivos trusts was proper. A stipulated decision to this effect was entered by the Tax Court in May 1969 (sometimes referred to hereafter as the 1969 inclusion or the 1969 stipulation).

Thereafter, plaintiffs apparently became aware that if a proper election was made by each partnership under I.R.C. § 754⁷ and the regulations promulgated thereunder,⁸ each partnership could adjust its bases in its assets upward under I.R.C. § 743(b) to reflect the inclusion of each interest in Charles' gross estate.⁹ With higher bases in the partnership assets, greater annual depreciation allowances would be generated by the partnerships and distributed under I.R.C. § 702 to the trusts holding the partnership interests. Thereafter, the trusts would pass on the higher depreciation deductions to the trusts' beneficiaries, Edward, Jerome, and Joan, for use on their personal tax returns.

No I.R.C. § 754 elections, however, were in effect on the date of Charles' death. Moreover, no I.R.C. § 754 elections were made with the partnership returns for the period in 1964 in which Charles' death occurred.¹⁰ See note 8, supra. The estate return as filed in 1965 included numerous partnership interests, and thus, the I.R.C. § 754 election would have been of benefit at that time. However, it was apparently only in 1969, when the partnership interests held in the inter vivos trusts were included in the gross estate, that plaintiffs realized additional depreciation could be claimed at the partnership level and passed ultimately to Edward, Jerome, and Joan as individuals.¹¹

Thereafter, these plaintiffs filed refund claims for various years based on added depreciation allowances allegedly passed to them through the trusts. Edward filed refund claims for 1961, 1962, 1963, 1964, and 1965 on July 30, 1969; for 1966 on October 28, 1971; for 1967 on May 10, 1974; and for 1968 on October 17, 1974. Edward's refund theories were bottomed on larger personal depreciation deductions in 1964, 1965, 1966, 1967, and 1968. The larger deductions in 1964 and 1965 allegedly gave rise to net operating losses in those years which could be carried to 1961, 1962, and 1963, causing overpayments in the earlier years as well. Similarly, larger depreciation deductions in 1967 and 1968 allegedly generated net operating loss, investment credit, and foreign tax credit carrybacks which resulted in further claims for 1964 and 1966. Jerome filed refund claims for 1961, 1962, 1963, 1964, and 1965 on July 24, 1969 and for 1966, 1967, and 1970 on November 2, 1973. Joan filed a refund claim for 1961 on July 8, 1969; for 1964 on October 22, 1969; and claims for 1966 and 1968 on November 2, 1973. In his fiduciary capacity, Nathan Sinrod in May 1971 filed a refund claim alleging Edward's inter vivos trust had overpaid its 1966 taxes. The theories of Jerome's personal claims, Joan's personal claims, and the fiduciary claim were similar to those presented by Edward, i. e., that larger depreciation allowances were available to the partnerships which could be passed to the trusts and ultimately, the beneficiaries. After the refund claims were denied or plaintiffs waived notice of denial, these petitions were filed. Consolidation occurred and cross motions for partial summary judgment followed. The cross motions are a commendable attempt to clear much of the legal underbrush from this controversy.

The parties are apparently in agreement that the literal language of I.R.C. § 6511¹² bars Edward's and Jerome's claims for 1964. Their refund claims for that year were filed on July 30, 1969, and July 24, 1969, respectively, more than 3 years after April 15, 1965, when their 1964 returns were filed and the tax shown thereon paid.¹³ As to Jerome's and Edward's claims for pre-1964 years based on a net operating loss carryback from 1964, the Code is clear that taxpayers have only a 3-year period, running from the due date of the 1964 return, in which to claim for the carryback years. I.R.C. § 6511(d)(2)(A). Thus, the claims based on the carryback from 1964 also appear barred. Similarly, any recovery by Jerome is limited by the literal language of I.R.C. § 6511(b)(2)(B) to the portion of the 1966 tax paid within 2 years of the refund claim, $1,219.36.¹⁴

Moreover, even to the extent that I.R.C. § 6511 does not bar or limit these actions, the Government contends these petitions have further problems. Treas.Reg. § 1.754-1(b)(1), supra, requires, says the Government, that the I.R.C. § 754 election be made by the partnership "with the partnership return for the taxable year during which the distribution or transfer occurs." As the "transfer" of all interests included in Charles' estate occurred for federal tax purposes on Charles' death in 1964, the argument goes, only an I.R.C. § 754 election filed with each partnership return for 1964 could allow the I.R.C. § 743(b) adjustments. Thus, the Government concludes, once the partnerships failed to elect under I.R.C. § 754 in their returns for the year of Charles' death, no I.R.C. § 743(b) adjustments can be made based on that death, regardless of when actual inclusion within the gross estate results or when subsequent I.R.C. § 754 elections are made.

In reply, plaintiffs advance two general arguments. Plaintiffs argue that Treas. Reg. § 1.754-1(b)(1) as amended in 1972 should not apply to them or is invalid and that the doctrine of equitable recoupment excuses the failures to file timely refund claims and I.R.C. § 754 elections.

Plaintiffs assert a variety of theories why Treas.Reg. § 1.745-1(b)(1) is inapplicable or invalid. We considered and rejected these arguments in Jones v. United States, 213 Ct.Cl. 529, 553 F.2d 667 (1977). Jones of course binds us, see, e. g., Alabama Hospital Association v. United States, 228 Ct.Cl. 176, 656 F.2d 606 at 612 (1981), and even if it did not, we would similarly reject these arguments upon de novo...