Parker v. U.S.

• Decision Date: 31 March 1997
• Docket Number: No. 95-17347,95-17347
• Citation: 110 F.3d 678
• Parties: -1766, 97-1 USTC P 60,264, 37 Fed.R.Serv.3d 653, 97 Cal. Daily Op. Serv. 2366, 97 Daily Journal D.A.R. 4261 Mary Helen PARKER and Jean Parker Griffith, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 678

110 F.3d 678

79 A.F.T.R.2d 97-1766, 97-1 USTC P 60,264,

37 Fed.R.Serv.3d 653, 97 Cal. Daily Op. Serv. 2366,

97 Daily Journal D.A.R. 4261

Mary Helen PARKER and Jean Parker Griffith, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 95-17347.

United States Court of Appeals,Ninth Circuit.

Argued and Submitted Oct. 4, 1996.

Decided March 31, 1997.

Dale Beck Furnish, Tempe, Arizona, for plaintiffs-appellants.

Theodore Doolittle, United States Department of Justice, Washington, D.C., for defendant-appellee.

Appeal from the United States District Court for the District of Arizona, Robert C. Broomfield, District Judge, Presiding. D.C. No. CV-93-179 RCB (PHX).

Before: SKOPIL and FLETCHER, Circuit Judges, and RHOADES, ^* District Judge.

RHOADES, Senior District Judge:

Appellants Mary Helen Parker and Jean Parker Griffith appeal from the decision of the district court granting summary judgment in favor of the United States. Appellants brought a refund claim for $90,000 in estate taxes paid by the estate of Appellants' deceased stepfather, Edward Allison ("Stepfather"). ¹ The taxes were paid from the corpus of a settlement trust of which Appellants were beneficiaries. The district court held that the doctrine of equitable recoupment applied, allowing the Government to retain the erroneously-paid tax. We reverse and hold that equitable recoupment is not available to the Government in this case.

Background

Appellants are the remaining heirs of Eleanor Landon Parker Allison ("Mother"). Mother died in February of 1971. In 1972, Appellants sued Stepfather and the United States Trust Company of New York ("UST"), alleging embezzlement of funds from Mother's separate assets and breach of fiduciary duties in relation to a testamentary trust created by Mother for Appellants. ² Appellants' action against Stepfather was settled in 1975. Under the terms of the settlement, Stepfather and UST paid Appellants $125,000, and Stepfather created a $325,000 settlement trust ("Trust"), the income from which was paid to Stepfather during his life, the remainder to be paid to Appellants upon Stepfather's death.

Stepfather died in 1985. At the request of the executor of Stepfather's estate, and over the protests of Appellants, the trustee paid $90,000 in estate taxes owed on Stepfather's estate from the corpus of the Trust. ³ Following the estate tax payment, Appellants filed a timely claim for refund with the IRS, arguing that the Trust was not includable in Stepfather's estate because it was established in settlement of hostile litigation and was therefore a "bona fide sale," excludable under the exceptions to I.R.C. §§ 2036 and 2038. ⁴ The IRS disallowed the claim, finding that all parties to the Trust had contemplated that the trust would be includable in Stepfather's estate. Appellants then filed a suit for refund in the district court.

The Government moved to dismiss the suit on the ground that Appellants failed to timely effect service upon the Government in the manner required under Fed.R.Civ.P. 4(i). In the alternative, the Government argued that dismissal was required because Stepfather's estate was the proper party to bring a claim for refund and, therefore, that Appellants did not have standing. Appellants then filed a summary judgment motion, arguing that the Trust was excludable under the "bona fide sale" exception to I.R.C. § 2036(a). The Government filed a cross-motion for summary judgment, reasserting the contentions of its then-pending motion to dismiss, and adding the affirmative defense of equitable recoupment. The district court considered all motions together.

Initially, the district judge noted that under new Fed.R.Civ.P. 4(m), dismissal for failure to timely effect service was discretionary, and that the new rule could be applied to cases pending at the time of its effective date when "just and practical." Because Appellants were unemployed senior citizens who were unable to retain a tax lawyer, the district judge found that dismissal was not warranted. The district judge also found that Appellants had standing to seek a tax refund on the authority of Williams v. United States, 24 F.3d 1143 (9th Cir.1994), affirmed, 514 U.S. 527, 115 S.Ct. 1611, 131 L.Ed.2d 608 (1995). Thus, as to the issues originally raised in the Government's motion to dismiss, the district judge held in favor of Appellants. The Government does not contest this holding on appeal.

The district judge then addressed the Government's equitable recoupment argument. In its cross-motion for summary judgment, the Government argued that Appellants were not entitled to a refund because the value of the Trust, if not part of Stepfather's estate, was part of Mother's estate. The Government claimed that taxes due from Mother's estate greatly exceeded the $90,000 Appellants were attempting to recover. Appellants argued that the Government waived the equitable recoupment defense when the IRS failed to pursue the evidence of Stepfather's fraud submitted by Appellants in 1975. Appellants further argued that equitable recoupment was not available to the Government in this case, particularly because application of the doctrine would lead to the inequitable result of taxing the innocent parties and exempting the wrongdoer. Relying on Stone v. White, 301 U.S. 532, 57 S.Ct. 851, 81 L.Ed. 1265 (1937), the district judge ruled that the Government was entitled to equitable recoupment. The district judge rejected Appellants' estoppel argument finding that Appellants had not submitted sufficient evidence detailing the notice given to the IRS of Stepfather's fraud. ⁵ The district judge also found that Appellants failed to demonstrate how the IRS' inaction had adversely impacted them because the 1972 case against Stepfather had been settled, with Stepfather paying $325,000 into the settlement trust. Furthermore, the district judge found that, assuming the IRS could have helped Appellants had it pursued their allegations of fraud, he was unaware of any case law holding that inaction by the IRS constitutes a waiver of the government's right to raise the equitable recoupment defense. Accordingly, the district judge granted the Government's summary judgment motion, denied Appellant's summary judgment motion, and denied as moot the Government's motion to dismiss.

Appellants filed a timely motion for reconsideration on February 21, 1995, arguing for the first time that equitable recoupment did not apply because the case did not involve a single transaction or an identity of interest as required under the doctrine. Appellants also argued that they did not concede, as stated by the district judge in his order, that the Trust should have been included in Mother's estate when not taxed in Stepfather's estate. The district judge denied Appellants' motion for reconsideration, again finding that equitable recoupment applied. The district judge reasoned that the case involved a single transaction, the taxation of the settlement trust, and that the requisite identity of interest was present because the parties seeking a refund were the same parties who received the benefit of a larger inheritance when Mother's estate was not taxed. The district judge also rejected Appellants' renewed argument that equitable recoupment should not apply because the IRS failed to investigate the claims of Stepfather's fraud. Finally, the district judge rejected Appellants' contention that the Trust should not have been taxed at all. The district judge agreed with the Government that the Trust was includable in Mother's estate under I.R.C. § 2033 because at the time of her death, Mother had a cause of action against Stepfather for his fraudulent conveyances. The court found that Appellants' power to pursue litigation against Stepfather arose from their capacity as beneficiaries of Mother's estate, and that Mother's claim was converted into a sum certain by settling the suit for $325,000.

Discussion

This court reviews a grant of summary judgment de novo, employing the same standard used by the trial court under Fed.R.Civ.P. 56(c). Jesinger v. Nevada Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir.1994); Suitum v. Tahoe Regional Planning Agency, 80 F.3d 359, 361 (9th Cir.), cert. granted, --- U.S. ----, 117 S.Ct. 293, 136 L.Ed.2d 213 (1996). The Court must view the evidence in the light most favorable to the non-moving party and determine whether there are any genuine issues of material fact and whether the trial court correctly applied the relevant substantive law. Bagdadi v. Nazar, 84 F.3d 1194, 1197 (9th Cir.1996).

Generally speaking, when a decedent transfers property while retaining a life estate, the value of the property so transferred is included in the decedent's gross estate under I.R.C. §§ 2036 and 2038. Sections 2036 and 2038, however, create an exception where the transfer qualifies as a "bona fide sale for adequate and full consideration in money or money's worth," because in this situation, the decedent's estate is enriched by the consideration returned for the transfer, and the total value of the estate does not vary. Appellants argue that the release of their claims against Stepfather in return for Stepfather's creation of the Trust qualified as a "bona fide sale" under §§ 2036 and 2038 because Stepfather's estate was enriched through the settlement of the litigation by the same amount that was paid out to create the Trust. Thus, Appellants maintain that when the $90,000 tax was paid from the settlement trust, Stepfather's estate was subjected to double taxation, thereby thwarting the purpose of the statutory exceptions. ⁶ The Government concedes that the Trust was not includable in Stepfather's estate. The district court likewise found that the Trust was erroneously taxed as part of Stepfather's estate. ⁷

Upon finding that the Trust was improperly included in Stepfather's estate, the district court agreed with the Government's argument that Mot...