Karpe v. United States

• Decision Date: 17 July 1964
• Docket Number: No. 161-59.,161-59.
• Citation: 335 F.2d 454
• Parties: A. H. KARPE v. The UNITED STATES. The UNITED STATES (Cross-Complainant) v. Birda M. VIERA (Cross-Defendant).
• Court: U.S. Claims Court

335 F.2d 454 (1964)

A. H. KARPE v. The UNITED STATES.

The UNITED STATES (Cross-Complainant) v. Birda M. VIERA (Cross-Defendant).

No. 161-59.

United States Court of Claims.

July 17, 1964.

J. Everett Blum, Beverly Hills, Cal., for plaintiff. Lloyd G. Rainey, Beverly Hills, Cal., on the brief.

Stephen E. Wall, Bakersfield, Cal., for third party, Birda M. Viera. Baker, Palmer, Wall & Raymond, Bakersfield, Cal., on the brief.

Cynthia Holcomb, Washington, D. C., with whom was Asst. Atty. Gen. Louis F. Oberdorfer, for defendant. Edward S. Smith, Lyle M. Turner and Philip R. Miller, Washington, D. C., on the brief.

Before JONES, Senior Judge, and WHITAKER, LARAMORE, DURFEE and DAVIS, Judges.

LARAMORE, Judge.

This is a suit by plaintiff, A. H. Karpe, to recover $55,868.05 in income taxes, plus interest, for the year 1944, which were assessed against cross-defendant, Birda M. Viera, but paid by plaintiff by means of crediting his overassessment to her deficiency. The first question presented in this case is whether the mitigation statutes, sections 1311-1315 of the Internal Revenue Code of 1954, permit the assessment of the deficiency against cross-defendant. In the event the taxes were properly assessed, then we must determine whether plaintiff was obligated to pay the resulting deficiency under the terms of a property settlement agreement entered into between plaintiff and cross-defendant, his former wife. In connection with this second issue, plaintiff has raised the defense that cross-defendant by her failure to fully cooperate in contesting the assessed deficiency breached the agreement, thus relieving plaintiff of his obligation to pay the additional taxes.

During the year in issue, 1944, plaintiff, and cross-defendant were husband and wife living in California, a community property state.¹ In preparing their separate Federal income tax returns for that year, they divided family income between separate and community by applying the formula approved in Parker v. Commissioner, 31 B.T.A. 644 (1934). Under that formula, 69.2 percent of the total family income was ultimately reported by plaintiff as separate income and the remaining 30.8 percent was considered community income reportable one-half by each spouse. Cross-defendant did not have any separate income for the year in issue.

In 1949 the Commissioner of Internal Revenue discovered that plaintiff had fraudulently failed to include $225,000 as income in his 1944 Federal income tax return. As a result of the discovery of this fraudulently omitted income, the Commissioner assessed plaintiff additional taxes, fraud penalties, and interest. In so doing, the Commissioner allocated to plaintiff 69.2 percent of the unreported income as separate income and 30.8 percent as community income, one-half reportable by plaintiff. The Commissioner also in 1949 assessed cross-defendant a deficiency on the resulting increase in her share of the community income. The manner in which the omitted income was allocated by the Commissioner among separate and community income was in conformity with the formula used by plaintiff in his 1944 tax return. The resulting deficiency, interest, and fraud penalties were paid by the parties in 1949 and 1950.

Plaintiff in 1954 instituted a suit for refund in the U.S. District Court for the Southern District of California claiming that a larger portion of the family income for the year in issue was community income reportable one-half by each spouse rather than separate income reportable solely by him.² The basis for his claim was that the income derived from his business "was primarily due to his personal activities, management, skill, judgment and hard work,"³ and thus constituted community income. Plaintiff further contended that his separate income was to be determined under controlling California law⁴ by crediting his separate capital, i. e., that amount of capital which was employed in his business at the time of his marriage, "with the usual rate of interest prevailing during the subject period on a well secured long-term investment."⁵ Under his theory, the excess of family income left after his separate capital had been credited with the appropriate rate of return, constituted community income since this excess was wholly due to the unique and extraordinary nature of his personal services performed in the production of that income.

The District Court partially agreed with plaintiff that a larger portion of the family income for the year in issue was community income rather than separate income as originally reported by plaintiff and allocated by the Commissioner of Internal Revenue.⁶ The trial court determined that $60,000 of the family income was attributable to plaintiff's "personal services and labors in the conduct of his farming ventures and farm equipment business."⁷ Then the court found that "a return before income taxes of eight percent per annum on invested capital is reasonable and could be expected from an investment in a business like that of the plaintiff for the year 1944."⁸ The court went on and determined that since the return on his separate capital plus the amount allocated as remuneration for his services was less than the total family income, the excess was "in large part attributable to intangibles" constituting both separate and community income. The court used the Parker formula to allocate this excess in the same proportion as the computed separate and community income bear to each other.⁹ Thus under the District Court's decision, only 50.77 percent of the family income was plaintiff's separate income as compared to 69.2 as originally reported, and 49.23 percent of the family income was community income, reportable one-half by each spouse, instead of the 30.8 percent originally used. The result of the determination was that plaintiff's separate income was decreased with the concomitant increase in the community income reportable one-half by each spouse. As a consequence of this reallocation of the parties' family income, plaintiff had a total overpayment of about $97,000 including both fraud penalties and interest.¹⁰ Since the District Court's determination increased the amount of family income which was considered community income, cross-defendant's share of that income increased with the result that she underpaid her taxes for the year in issue in the sum of about $55,000.

Within six months after the District Court's decision became final, cross-defendant was sent a statutory notice of deficiency proposing an assessment of additional taxes for the year 1944 under the mitigation provisions of the Internal Revenue Code of 1954. Cross-defendant failed to file a petition in the Tax Court within 90 days after receipt of the statutory notice of deficiency. Plaintiff's overassessment for 1944, as determined by the District Court, was credited in payment of cross-defendant's resulting deficiency. The balance of plaintiff's overassessment for that year was refunded to him. The government by crediting plaintiff's overassessment in payment of cross-defendant's resulting deficiency, purported to act pursuant to the property settlement agreement entered into between plaintiff and cross-defendant, in which it was provided, inter alia, that plaintiff would pay any tax deficiencies assessed against either of them for the years of their marriage.¹¹

In 1959 plaintiff filed this suit on the judgment he had obtained in the District Court,¹² claiming that (1) the statute of limitations for the assessment and collection against cross-defendant for the year 1944 had run. (In connection with this contention, plaintiff asserts that by defendant's failure to specifically plead the application of sections 1311 through 1314 of the Internal Revenue Code of 1954, which in certain prescribed circumstances mitigates the bar of the statute of limitations, it has not placed said sections in issue before the court and, therefore, cannot avail itself of the provisions to justify what would otherwise be a time-barred assessment); (2) even if the mitigation sections are properly before us, their provisions are not applicable in the instant case, since (a) the District Court's determination did not require a double exclusion of an item of gross income as required by section 1312 (3) (A) which prescribes those circumstances under which the application of the statute of limitations is mitigated by section 1311, and (b) the District Court in its determination did not adopt plaintiff's inconsistent position as required by section 1311(b) (1) (B); (3) in the event that the mitigation sections are applicable to the instant case, defendant cannot use the property settlement agreement entered into by plaintiff and cross-defendant for authority to credit his overassessment with cross-defendant's resulting deficiency; (4) in the event that under the property settlement agreement defendant could properly credit his overpayment, cross-defendant by her failure to cooperate fully in contesting the assessed deficiency breached the agreement, thus relieving plaintiff of his obligation to pay the additional taxes.

I

We address ourselves first to plaintiff's procedural issue. Plaintiff raises the contention that by defendant's failure to specifically plead the application of sections 1311 through 1314 of the 1954 Code, it cannot now invoke said sections as an exception to the application of the statute of limitations as a bar to the assessment of cross-defendant's deficiency for the year in issue.

Rule 22(b), formerly Rule 18, of the Rules of this court, states in pertinent part, as follows:

"When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendments of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after

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