Heineman v. United States, 212-64.

• Citation: 391 F.2d 648,183 Ct. Cl. 17
• Decision Date: 15 March 1968
• Docket Number: No. 212-64.,212-64.
• Parties: Hettie HEINEMAN, Stephen D. Heineman, James H. Heineman, Yvonne Jensen, and Simon Rose, surviving Executors of the Estate of Daniel N. Heineman, Deceased, and Hettie Heineman v. The UNITED STATES.
• Court: Court of Federal Claims

183 Ct. Cl. 17, 391 F.2d 648 (1968)

Hettie HEINEMAN, Stephen D. Heineman, James H. Heineman, Yvonne Jensen, and Simon Rose, surviving Executors of the Estate of Daniel N. Heineman, Deceased, and Hettie Heineman v. The UNITED STATES.

No. 212-64.

United States Court of Claims.

March 15, 1968.

Robert Arum, New York City, attorney of record, for plaintiffs. David G. Miller, New York City, of counsel.

Michael I. Sanders, Washington, D. C., with whom was Asst. Atty. Gen., Mitchell Rogovin, for defendant. Philip R. Miller, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON, and NICHOLS, Judges.

OPINION

COLLINS, Judge.

Taxpayers, the surviving wife and the surviving executors of the estate of Daniel Heineman, have brought this refund suit to recover overpayments of income taxes for the calendar years 1944 through 1946 and 1948 through 1952. The parties agree that recovery is time-barred unless the mitigation provisions of the Internal Revenue Code of 1954, sections 1311-15, are applicable.

At all times during the period June 5, 1940, through January 31, 1962, Daniel Heineman, the decedent, owned common stock in the Missouri Kansas Pipe Line Company (hereinafter referred to as "MOKAN"). During the years 1944 through 1954, inclusive, decedent received cash distributions made with respect to his MOKAN stock. For all the years involved in this suit, decedent had claimed all such distributions as nontaxable distributions in liquidation. On auditing decedent's income tax returns in 1950 and thereafter for the years 1944, 1945, 1946, 1948, 1949, 1950, and 1951 (1947 is not involved in this action), the Internal Revenue Service determined that all such cash distributions were dividends on said stock and were taxable as ordinary income. Deficiencies were assessed and were paid by decedent with interest.

In the case of Maguire v. Commissioner of Internal Revenue, 222 F.2d 472 (7th Cir. 1955), the court of appeals held that MOKAN was in a state of partial liquidation within the meaning of section 115 of the Internal Revenue Code of 1939, that the intention to liquidate came into existence on March 27, 1944, and that the distributions during the calendar year 1945 to Maguire were amounts distributed in partial liquidation and were thus not taxable dividends subject to ordinary income tax.

On April 9, 1958, decedent and his spouse timely filed a claim for refund for the year 1954, in which they claimed, inter alia, that the MOKAN distribution received in 1954 was not an ordinary dividend distribution, but instead was a nontaxable distribution of capital. On October 13, 1961, the refund was allowed in full. Within 1 year from the date of the allowance of the 1954 refund claim, decedent (together with his spouse for the years in which joint returns were filed) filed claims for refund for the years 1944 through 1946 and 1948 through 1952, contending that the MOKAN cash distributions in those years should also properly be treated as distributions in liquidation rather than as taxable dividends. On April 22, 1963, the taxpayers were notified by the appropriate District Director of Internal Revenue that the refund claims were disallowed in full because they were barred by the statute of limitations.

It is stipulated that such claims had not been filed within 3 years of the time the returns were filed, nor within 2 years from the time the taxes were paid, as prescribed by section 6511(a) of the Internal Revenue Code of 1954 and section 322(b) (1) of the Internal Revenue Code of 1939.

Nevertheless, taxpayers contend that the Commissioner of Internal Revenue (hereinafter "Commissioner") erred in applying the statute of limitations and instead should have applied sections 1311-15 of the 1954 Code¹ and should have allowed the refund claims. Under the limited circumstances specified therein, these sections lift the bar of the statute of limitations on either an assessment by the Commissioner or a claim for refund to the taxpayer. So far as relief for a taxpayer is concerned, these sections permit an adjustment where (1) there is a determination (as defined in section 1313) which adopts a position maintained by the Commissioner, and (2) that position is inconsistent with the erroneous tax treatment of a transaction in a previous taxable year, and (3) this inconsistency results in double taxation of an item or in one of the other inequitable results enumerated in section 1312.

We hold that taxpayers' claims do not fall within the purview of sections 1311-15 because there has been no inconsistent position maintained by the Commissioner as required by section 1311(b) (1) (A). Under the language of section 1311(b) (1), which covers this requirement, a taxpayer can obtain an adjustment for a closed year only if —

* * * there is adopted in the determination a position maintained by the Secretary or his delegate * * * and the position maintained by the Secretary or his delegate * * * is inconsistent with the erroneous inclusion, exclusion, omission, allowance, disallowance, recognition, or nonrecognition, as the case may be.

The allowance of the 1954 refund claim by the Commissioner is clearly a "determination" within the meaning of section 1313. Also, for the sake of argument only, we are assuming, without deciding, that the position adopted in this determination is inconsistent with previous erroneous tax treatment of MOKAN distributions. Nevertheless, this determination did not adopt a position maintained by the Commissioner.

The relevant portion of the 1954 refund claim which taxpayers filed with the District Director reads as follows:

Dividends from Missouri-Kansas Pipe Line Company which have been decided by Court to be non-taxable distributions were erroneously included in taxpayers\' return * * *.

The allowance of the refund by the Commissioner clearly constituted the adoption of a position maintained by the taxpayers and not the Commissioner, and yet it is the taxpayers who are here relying on the mitigation provisions to open a closed year. This is contrary to both the language and the purpose of the mitigation provisions.

Stated another way, the mitigation provisions do not prevent the Commissioner from pleading the statute of limitations because the Commissioner was not the party who maintained the inconsistent position. Taxpayers, however, contend that since the Commissioner did allow the 1954 refund claim, this in itself is enough to constitute the maintenance by the Commissioner of a position inconsistent with the position taken in prior years with respect to MOKAN distributions. This contention misconstrues the nature of the inconsistent position requirement of section 1311(b) (1). One does not "maintain" a position, in the ordinary sense of that phrase, merely by accepting a contention or position originated and actively asserted by an opposing party. In order for section 1311(b) (1) to apply, defendant, as the party relying upon the bar of the statute of limitations, must be the active party in maintaining the position, not merely a passive party acceding to a position actively maintained by taxpayers. As this court said in Karpe v. United States, 335 F.2d 454, 461, 167 Ct.Cl. 280, 292, (1964), cert. denied, 379 U.S. 964, 85 S. Ct. 655, 13 L.Ed.2d 558 (1965):

* * * The requirement of section 1311(b) (1) is that the determination adopt a position inconsistent with the error and that this position must have been actively maintained by the party seeking to interpose the bar of the statute of limitations. Footnotes omitted. * * *

See also Commissioner of Internal Revenue v. Weinreich's Estate, 316 F. 2d 97, 105 (9th Cir. 1963), which held that the mitigation provisions only apply in the case of "active inconsistency" by the party pleading the bar of the statute of limitations.

The legislative history of the bill enacting the mitigation sections confirms the fact that the statute requires active urging of a position by a party when it speaks of a "position maintained by" a party. The Senate Report noted that adjustments under the mitigation sections would never modify the application of the statute of limitations "except when the party or parties in whose favor * * * the statute of limitations applies shall have justified such modification by active inconsistency * * *." Emphasis supplied. S.Rep. No. 1567, 75th Cong., 3d Sess. 49 (1938).

The following comment of the Harvard Law Review is also relevant to our conclusion that maintaining a position under the mitigation provision means actively urging the adoption of a position:

* * * Corrections under the mitigation provisions are purely compensatory in that they balance a correct result obtained by an active party in an open year with a correction of an error for the benefit of the passive party for the closed year. * * * Emphasis supplied. Sections 1311-15 of the Internal Revenue Code: Some Problems in Administration, 72 Harv.L.Rev. 1536, 1541 (1958-59).

This interpretation of the inconsistent position requirement is in full accord with the recognized purpose of the mitigation provisions. The Senate Report amply demonstrates that the mitigation provisions were enacted primarily to prevent either the Commissioner or the taxpayer from gaining the advantage of double taxation or double tax avoidance by the offensive use of the statute of limitations. Particularly pertinent is the following language of...