Hanover Bank v. United States

Decision Date18 January 1961
Docket NumberNo. 28-59.,28-59.
PartiesHANOVER BANK and Samuel B. Fortenbaugh, Jr., Executors of Estate of William F. Wall, Deceased, v. UNITED STATES.
CourtU.S. Claims Court

John J. Costello, New York City, for plaintiffs.

Eugene Emerson, Washington, D. C., with whom was Charles K. Rice, Asst. Atty. Gen., Washington, D. C., James P. Garland and L. M. Turner, Washington, D. C., were on the brief, for defendant.

JONES, Chief Judge.

This is an action for the refund of estate taxes in the amount of $89,928.72, and interest thereon at the rate of 6 percent per annum. Plaintiffs, the Hanover Bank of New York and Samuel B. Fortenbaugh, Jr., are the executors of the estate of William F. Wall, resident of the State of New York, who died on November 1, 1942. On December 7, 1943, plaintiffs filed with the Collector of Internal Revenue, an estate tax return for the estate of William F. Wall disclosing a net taxable estate before exemption of $847,119.28 and a net estate tax payable of $221,872.40. On February 1, 1944, plaintiffs paid the Collector the latter amount.

After the filing of the return, an examination was made of the books and records of the estate of William F. Wall. On December 4, 1946, following the examination, the Commissioner of Internal Revenue issued a statutory notice of deficiency in estate tax of $145,240.85. The deficiency was attributed primarily to various adjustments in the taxable estate: (1) the inclusion in the gross taxable estate of the corpus of an inter vivos trust created by decedent dated August 25, 1910, valued at $240,776.43; (2) changes in the fair market value of certain assets reported in the return and the inclusion of after-discovered assets; (3) the disallowance as a deduction of the entire amount of executors' commissions; (4) the disallowance as a deduction of the entire amount of attorneys' fees claimed on the return; and (5) the disallowance of the credit for state estate taxes paid.

On March 3, 1947, plaintiffs filed a petition to the Tax Court of the United States alleging error in disallowance of the deductions for the executors' commissions, attorneys' fees and the credit for state estate taxes paid. No error was asserted with regard to the inclusion of the trust created by the decedent August 25, 1910, under the provisions of section 811(c) of the Internal Revenue Code of 1939, 26 U.S.C. § 811(c). On September 23, 1947, counsel for plaintiffs, as executors of the estate of William F. Wall, entered into a written stipulation whereby in effect the Commissioner of Internal Revenue allowed the deductions of executors' commissions and attorneys' fees and credit for state estate taxes. It was stipulated that there was a deficiency in Federal estate tax in the amount of $82,391.19. On October 6, 1947, the Tax Court entered its decision determining that there was a deficiency in Federal estate tax due from the estate. The executors of the estate, the plaintiffs herein, paid the deficiency of $82,391.19. The Tax Court's decision became final on January 4, 1948.

On October 25, 1949, there was enacted into law the Technical Changes Act of 1949, 63 Stat. 891. Section 7(a) of that Act, 63 Stat. 894, provided that property the subject of a transfer intended to take effect in possession at or after death would not be includible in the decedent's taxable estate under § 811(c) of the Internal Revenue Code of 1939, 26 U.S.C. § 811(c), unless the reversionary interest in the grantor arose by the express terms of the agreement rather than by operation of law and unless the reversionary interest had a value, immediately before the death of the decedent, of at least 5 percent of the value transferred.

The value, immediately prior to his death on November 1, 1942, of the reversionary interest of William F. Wall in the trust created by him dated August 25, 1910, was .455 percent of the value of the corpus. The plaintiffs filed with the District Director of Internal Revenue, Albany, New York, a claim for refund of $76,993.77, together with the interest assessed and paid in respect thereto in the amount of $12,934.95, both with interest as provided by law. No action was taken by the Commissioner of Internal Revenue in respect to the filing of the claims.

Plaintiffs filed their petition in this court on January 22, 1959. It was then for the first time that the Government, by way of affirmative defense, asserted that the decedent, William F. Wall, made a series of transfers of property in contemplation of death. The defendant says that these transfers should have been, but were not, included in the value of the gross estate. The defendant's oversight is considerable in that it asserts that these transfers exceeded $240,776.53, which is the valuation of the inter vivos trust created by the decedent on August 25, 1910. Defendant reasons that plaintiffs' claims for (1) $76,993.77, allegedly attributable to the inclusion of the August 25, 1910, trust in the gross taxable estate, and (2) $12,934.95, the interest paid by plaintiffs on that principal sum, a total of $89,928.72, will, in any event, be offset as a result of the deficiencies arising from the Government's admittedly erroneous failure to include in the value of the gross estate the series of transfers which it now says were made in contemplation of death.

The defendant concedes that the value of the corpus of the trust created by William F. Wall on August 25, 1910, is not includible as a part of the decedent's gross estate under § 811(c). The decision of the Tax Court which became final on January 4, 1948, would have barred any claim by the plaintiffs for refund or credit under the original terms of the Technical Changes Act of October 25, 1949. The Act of August 1, 1956, 70 Stat. 917, however, removed the bar on refund or credit of overpayment of estate tax by plaintiffs. Assuming that the plaintiffs have no further tax liability, the Technical Changes Act of 1949 entitles them to a refund. It remains for us to decide whether the defendant may urge claims before us now which would completely dissipate the refund the plaintiffs would otherwise be entitled to. The prime matter for consideration therefore in determining plaintiffs' motion for summary judgment is whether the defendant can litigate its affirmative defense in this lawsuit.

We must decide whether it is permissible, 18 years after the death of this decedent, for the defendant in this suit to assert claims on transfers allegedly made in contemplation of death. There are two obstacles which defendant must surmount in respect to this question. The plaintiffs contend that § 7(c) of the Technical Changes Act, 63 Stat. 891, 896, 26 U.S.C. § 811 note, serves to release them from the operation of any rule of law which would tend to defeat their valid claim. Therefore plaintiffs assert that no setoff attributable to previously untaxed transfers can be allowed to diminish the recovery the Act would otherwise effect for them.

Besides the obstacle of § 7(c), the plaintiffs contend that defendant's theory cannot succeed because of the doctrine of res judicata. The plaintiffs say that this precise issue, the estate tax liability of decedent William F. Wall, was presented to the Tax Court by these same parties. Therefore, it is argued, neither of these parties is free to raise here an aspect of the very question which was adjudicated there.

We turn first to assay the effect of § 7(c) of the Technical Changes Act of 1949 on defendant's case. Section 7 (c) of the Technical Changes Act of 1949, 63 Stat. 891, 896, provides in material part:

"If refund or credit of any overpayment resulting from the application of subsections (a) and (b) is prevented on the date of the enactment of this Act, or within one year from such date, by the operation of any law or rule of law * * *, refund or credit of such overpayment may, nevertheless, be made or allowed if claim therefor is filed within one year from the date of the enactment of this Act." Emphasis supplied.

It is undoubtedly true that in a suit for refund the Commissioner may counterclaim when a like or greater amount is owed the Government even though the statute of limitations would prevent the Commissioner from suing for such amount in an independent action. While this is true as a general proposition, we think the precise language of § 7(c) serves to direct a different result here. The plaintiffs say that setoff is just such a "rule of law" as § 7(c) intended to remove as a barrier to recovery under § 7(a). A case much in point on this issue is Bank of New York v. United States, D.C.S.D.N.Y.1956, 141 F.Supp. 364. In that case the executors had made an offer of compromise limiting the tax liability of the estate. Subsequently, the executors found themselves within the relief provisions of § 7 of the Technical Changes Act of 1949. When suit was brought pursuant to § 7, the Government argued that plaintiffs' action with regard to compromising their claim served to preclude their suit because of the doctrine of equitable estoppel. The district court said — and on this the defendant relies — the following on page 367:

"As to the second defense, whether or not the facts of this case give rise to the doctrine of equitable estoppel is a somewhat more difficult question. The Supreme Court expressly left the matter open in the Botany Mills case Botany Worsted Mills v. U. S., 278 U.S. 282, 49 S.Ct. 129, 73 L.Ed. 379. The answer should probably be in the negative since the government may always assert a deficiency by way of recoupment when sued for a refund, even though an independent suit for the amount of the deficiency would be barred by the statute of limitations. citations omitted The mere fact that the government has not chosen to bring an action for recoupment in this suit should not prejudice the taxpayers in their claim for a refund."

The defendant's reliance on this passage is unjustified. The...

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