Girard Trust Bank v. United States

• Decision Date: 18 July 1979
• Docket Number: No. 45-78.,45-78.
• Citation: 602 F.2d 938
• Parties: GIRARD TRUST BANK and Markley H. Boyer, Executors of the Estate of Francis Boyer, Deceased, v. The UNITED STATES.
• Court: U.S. Claims Court

602 F.2d 938

GIRARD TRUST BANK and Markley H. Boyer, Executors of the Estate of Francis Boyer, Deceased, v. The UNITED STATES.

No. 45-78.

United States Court of Claims.

July 18, 1979.

Robert R. Batt, Philadelphia, Pa., attorney of record, for plaintiff; Bruce L. Castor, B. John Williams, Jr., Martin J. Aronstein, and Ballard, Spahr, Andrews & Ingersoll, Philadelphia, Pa., of counsel.

Jay G. Philpott, Jr., Washington, D.C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D.C., for defendant; Theodore D. Peyser, Jr., Washington, D.C., of counsel.

Before DAVIS, NICHOLS and KASHIWA, Judges.

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

KASHIWA, Judge:

This federal estate tax refund case is before the court on the parties' cross motions for summary judgment. Both parties submit there are no material facts in dispute and we agree. The posture of the case is unique in the sense that the parties are in agreement that there was an overpayment of estate taxes which plaintiffs are entitled to have refunded. The parties also are in agreement as to the amount of the refund. The disagreement in the case is over whether the form in which the Government made the refund is lawful (more precisely, whether an overpayment of estate taxes, which were paid with flower bonds,¹ can be refunded by a reinstatement of a portion of the flower bonds) and whether the Government must pay statutory interest, as prescribed in I.R.C. §§ 6611, 6621, on the amount of the refunded overpayment or merely interest at the reinstated flower bond rate (3½ percent per annum). After careful consideration of the briefs and oral arguments presented by the parties, as well as several postargument supplemental filings, we hold for the defendant on the form question and for the plaintiffs on the interest issue.

Francis Boyer died May 21, 1972. Plaintiffs are the executors of his estate. During the administration of the estate, Mr. Boyer's widow elected to take against his will, thereby becoming entitled to a one-third elective share of his estate. Since Mr. Boyer's will provided that all state inheritance taxes were to be paid out of the residue of the estate with no right of reimbursement from nonresiduary beneficiaries, plaintiffs took the position when filing the estate's federal estate tax return that the Pennsylvania inheritance tax paid in respect of the widow's elective share was not chargeable against that share. Accordingly, they deducted the one-third elective share, unreduced by any state inheritance taxes, as a marital deduction on the federal estate tax return.

Plaintiffs filed the return on February 20, 1973, showing estate taxes due in the amount of $13,397,957.17. Of that amount, plaintiffs paid $13,390,000 by surrendering to the Federal Reserve Bank at Philadelphia flower bonds² and paid the balance of $7,957.17 in part with accrued interest on the bonds and in part in cash.

On audit of the return the Internal Revenue Service (IRS) took the position, contrary to that taken by plaintiffs, that the Pennsylvania inheritance tax paid in respect of the one-third elective share was properly chargeable against the share. This resulted in a reduction of the allowable marital deduction by $1,142,443.26.³ This change, plus other issues, resulted in the IRS assessing a federal estate tax deficiency against the estate of $2,816,733.61. Plaintiffs chose not to contest the matter in the United States Tax Court and, instead, paid the assessed deficiency on February 15, 1974, by surrendering more flower bonds in the face amount of $2,816,500 plus a cash payment of $233.61. Deficiency interest in the amount of $166,496.28 was assessed on the deficiency. Plaintiffs paid the interest on May 9, 1974, by surrendering further flower bonds in the face amount of $165,000 and by paying the balance of $1,496.28 in part with accrued interest on the bonds and in part in cash.

On April 23, 1974, the Pennsylvania Supreme Court rendered its decision in Estate of Neamand, 456 Pa. 22, 318 A.2d 730 (1974). Therein the court held that under Pennsylvania law an elective share was not reduced by the Pennsylvania inheritance tax attributable to it if the decedent's will so provided.

After the court's decision, plaintiffs filed a refund claim with the IRS for a refund of estate taxes in the amount of $762,998.49 and deficiency interest applicable thereto of $45,100.61, plus statutory interest. In the refund claim plaintiffs, citing Estate of Neamand, supra, reasserted their position that the marital deduction should not be reduced by the state inheritance taxes paid in respect of the widow's one-third elective share. The refund claim was proposed for allowance by the District Director and allowed after approval by the Joint Committee on Taxation.

However, instead of issuing a refund check directly to the plaintiffs for the amount of the refund, the IRS issued a check payable to the order of the Bureau of Public Debt in the amount of $807,824.10. On August 5, 1976, the Federal Reserve Bank of Philadelphia, on instruction of the Bureau of Public Debt, delivered to plaintiffs flower bonds identical to the ones previously surrendered in the face amount of $806,500.⁴ Plaintiffs subsequently sold these bonds, realizing net proceeds of $681,618.52.

The Bureau of Public Debt also issued checks payable to plaintiffs in the total amount of $67,793.26, equivalent to interest at 3½ percent per annum on the $806,500 face amount of the flower bonds surrendered by plaintiffs in payment of estate taxes, for the period subsequent to each surrender date. Except for one other minor payment of $335.95, plaintiffs assert they have received no further payments in cash or property in satisfaction of their refund claim.⁵

After lodging an unsuccessful protest with the IRS over the form in which the refund was paid and interest rate used, plaintiffs filed the present petition. In it plaintiffs allege that the IRS's failure to make the refund of the agreed upon overpayment in cash constituted: (1) a pro tanto erroneous disallowance of the refund claim to the extent of the difference between the fair market value of the reinstated flower bonds and their face value and (2) an erroneous denial of statutory interest to the extent of the difference between the prevailing interest rate and the 3½ percent per annum flower bond interest rate.

We do not agree with plaintiffs that defendant could not refund the overpayment of federal estate taxes by reinstating a portion of the flower bonds previously surrendered. Nor do we find such a reinstatement constituted a pro tanto disallowance of plaintiffs' refund claim.

Plaintiffs contend that once they had surrendered the flower bonds in payment of estate taxes due, including any assessed deficiency and deficiency interest, in accordance with the pertinent statute,⁶ regulations,⁷ and offering circular,⁸ the flower bonds were lawfully redeemed. Citing Rosenman v. United States, 323 U.S. 658, 65 S.Ct. 536, 89 L.Ed. 535 (1945), and Ameel v. United States, 426 F.2d 1270 (6th Cir. 1970), plaintiffs argue that once the bonds were redeemed the par value of the bonds was applied in payment of the taxes due and not held as a mere deposit. Accordingly, when it was subsequently determined that part of the assessed deficiency was erroneously assessed, the Government was required to refund the overpayment. Since the pertinent regulations and the flower bond offering circular did not contain any express flower bond refund or reinstatement procedure, plaintiffs submit the exclusive, legally mandated method of refunding the overpayment was pursuant to I.R.C. § 6402(a) and Treas.Reg. § 301.6402-2(f)(1) (1954),⁹ requiring a cash refund of the overpayment to plaintiffs.

Although the flower bonds are issued pursuant to statutory authority, see note 1 supra, both parties agree that any early redemption right plaintiffs have stems from the terms of the contract between the bondholders and the Department of Treasury as that contract is expressed in the offering circular. Estate of Pingree v. Blumenthal, 41 AFTR 2d 78-1531, 78-1 USTC 84,412 (D.Me.1978); Estate of Watson v. Simon, 442 F.Supp. 1000 (S.D.N.Y. 1977). The flower bonds involved herein were issued under Treasury Department Offering Circular No. 1005 which provided the following early redemption rights:

* * * Any bonds issued hereunder which upon the death of the owner constitute part of his estate, will be redeemed at the option of the duly constituted representatives of the deceased owner's estate, at par and accrued interest to date of payment, provided: Footnote omitted.

(a) that the bonds were actually owned by the decedent at the time of his death; and

(b) that the Secretary of the Treasury be authorized to apply the entire proceeds of redemption to the payment of Federal estate taxes.

Thus, under the express terms of the offering circular plaintiffs had the right to pay the federal estate taxes on Mr. Boyer's estate by surrendering flower bonds owned by Mr. Boyer at the time of his death. Further, it is well settled that plaintiffs had the right to pay any assessed estate tax deficiencies, deficiency interest, or penalties by surrendering further flower bonds, as long as the bonds were owned by the decedent at the time of his death. Rev.Proc. 69-18, 1969-2 C.B. 300; see also Estate of Simmie v. Commissioner, 69 T.C. 890 (1978). We also agree with plaintiffs that when flower bonds are surrendered in payment of taxes, and accepted as such, that constitutes payment of those taxes for statute of limitations and statutory interest purposes. Rosenman v. United States, supra; Ameel v. United States, supra; Busser v. United States, 130 F.2d 537 (3d Cir. 1942).

Once a deficiency assessment is disputed and it is established that an overpayment of the estate taxes has been made by a taxpayer, who paid the assessed deficiency with flower bonds, we do not...