Provident Nat. Bank v. United States, Civ. A. No. 79-1515.
| Decision Date | 29 January 1981 |
| Docket Number | Civ. A. No. 79-1515. |
| Citation | 507 F. Supp. 1197 |
| Parties | PROVIDENT NATIONAL BANK, co-trustee of four trusts u/a dated June 16, 1971 v. UNITED STATES of America. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Arthur Makadon, Philadelphia, Pa., for plaintiff.
Thea Duell, Asst. U. S. Atty., Philadelphia, Pa., Patricia A. Scott, U. S. Dept. of Justice, Trial Atty., Tax Div., Washington, D. C., for defendant.
This action was brought by the plaintiff as co-trustee of four trusts to contest the denials of claims of the trusts for refund of income taxes. Presently before the court are motions for summary judgment by plaintiff and defendant. Under Fed.R. Civ.P. 56(c) summary judgment is appropriate if the record shows that there is no genuine issue of material fact and that the moving party is entitled to summary judgment as a matter of law. For the following reasons, summary judgment will be granted in favor of the defendant. The following are the facts as developed from documents, pleadings, and affidavits.
Plaintiff, Provident National Bank, is the co-trustee of four trusts created on June 16, 1971 by the late George D. Widener for his four stepdaughters. The day after the trust was created, Widener transferred equal amounts of publicly traded stock in five corporations, including Gulf Oil Corporation and IBM, to each of the trusts. Widener reported the transfers as gifts and paid gift taxes thereon.
Sometime in August, 1972, each of the four taxpayer-trusts sold the same amounts of Gulf Oil and IBM stocks. Under section 1015 of the Internal Revenue Code, 26 U.S.C. § 1015, the basis of the stocks was calculated by using the same basis as the stocks had in the hands of the donor and increasing it by the gift tax paid. Thus, when each of the taxpayer-trusts sold 1,037 shares of Gulf Oil and 325 shares of IBM stock, the capital gain thereon was determined as follows:
Securities Long-Term
Sold Sale Price Basis Capital Gain
Gulf Oil 1037 shares $ 23,232.28 $18,727.62 $ 4,504.66
IBM 325 shares $135,262.29 $49,966.04 $85,296.25
The taxpayer-trusts reported the gain on their returns for the fiscal year ended February 28, 1973 and paid the tax thereon.
Widener died on December 8, 1971. In the federal estate tax return for the estate, the executor disclosed the taxpayer-trusts and took the position that the 1971 trust securities were not includable in Widener's estate. On March 31, 1975, the Internal Revenue Service (IRS) sent the Widener estate a letter advising it, among other things, that because the IRS considered the transfers of the 1971 trust securities to be gifts in contemplation of death, their date of death value was to be wholly included in Widener's estate for estate tax purposes. If the stocks were includable in the Widener estate, then their basis would be determined under section 1014 of the Internal Revenue Code. Section 1014 provides that the basis of the property in the hands of one acquiring property from a decedent shall be the fair market value of the property at the date of the decedent's death. Subsequent to the March 31 letter, the IRS mailed a statutory notice of deficiency to the estate.
On November 21, 1975, the Widener estate petitioned the tax court for relief. The Widener estate and the Commissioner of the IRS entered into a settlement of all issues in the deficiency notice on November 17, 1976. On November 19, 1976, the tax court entered a stipulated decision based on the settlement agreement reflecting the final estate tax deficiency. The settlement provided that one-half of the value of the 1971 trust securities would be included in the gross estate for purposes of computing the estate tax.
In addition to the settlement, the executors of the Widener estate and the trustees of the trusts entered into a collateral agreement. The collateral agreement sets forth the understanding reached by the parties as to the effect of the settlement of the estate taxes on the basis of the 1971 trust securities. It provides that each share of the 1971 trust securities shall have a basis consisting of fifty percent of the fair market value of each share as determined under section 1014 for federal estate tax purposes plus fifty percent of the basis determined under section 1015, the donor's basis increased by the gift tax paid thereon.
The basis of the 1971 trust securities provided for in the collateral agreement sets forth a higher basis than that used by the taxpayer-trusts in determining the gain reported from the sale of stock in August of 1972. More specifically, the effect of the collateral agreement was to step-up the basis of the stock that has been sold in 1972 in the following manner:
Basis as Finally
Determined By the
Basis As Used On Basis Per Stipulated Decision
1973 Return For Original and Collateral
Reporting Long-Term Contention of Agreement in
Capital Gains Service in 1975 November 1976
Gulf Oil $18,727.62 $ 27,610.13 $23,165.47
IBM $49,966.04 $102,496.87 76,270.86
On June 4, 1977, plaintiff filed claims for refund on income taxes on behalf of the four taxpayer-trusts using the basis of the stock as set forth in the collateral agreement for determining the gain from the sale of stock in August of 1972. These claims for refund were disallowed as barred by the statute of limitations.1
Plaintiff seeks relief from the ruling under three alternate theories: (1) sections 1311 through 1314 of the Internal Revenue Code apply to mitigate the effect of the statute of limitations, (2) the statute of limitations cannot begin to run until the taxpayer's cause of action for the refusal accrues, and (3) the collateral agreement does not reflect the true intent of the parties and therefore must be reformed.
The mitigation provisions of the Internal Revenue Code of 1954 (sections 1311 through 1314) are designed to grant relief for the erroneous treatment of tax matters when because of the operation of a law, such as the statute of limitations in section 6514, such a correction would be barred. Kappel's Estate v. C.I.R., 615 F.2d 91 (3rd Cir. 1980). However, this relief is limited to defined circumstances. The statute "does not purport to permit the correction of all errors and inequities." Brennen v. Commissioner, 20 T.C. 495, 500 (1953). Section 1311(a) reads as follows:
Thus, to obtain the benefits of these provisions there must be a determination under section 1313 that is described in one or more of the seven circumstances set forth in section 1312.
Plaintiff contends that there was a determination as defined in section 1313(a)(1) when the tax court issued the stipulated decision and the collateral agreement was signed by the related parties. That section defines "determination" to include:
"... a decision by the Tax Court or a judgment decree, or other order by any court of competent jurisdiction, which has become final;"
Defendant contends that because there has been no "determination" within the meaning of section 1313, plaintiff's case cannot qualify under the mitigation provisions. Defendant's argument has three prongs: (1) the mitigation provisions apply to income tax determinations only, not to estate tax determinations, (2) the stipulated decision of the Tax Court in this matter was a determination of estate taxes, and (3) the collateral agreement is merely an informal agreement concerning the basis of the stock and cannot qualify as a "determination" under section 1313.
The mitigation provisions, as they exist today, are essentially the re-enactment in 1939, and then in 1954, of section 820 of the Internal Revenue Act of 1938.2 Section 820 was an attempt to do equity in the tax area and permit correction of errors in otherwise barred years. The legislative history of section 820 indicates that the mitigation provisions were to be applied specifically to income tax determinations.
In 1938, the Subcommittee on Internal Revenue Taxation of the House Committee on Ways and Means stated:
The amendments to section 820 by the Senate Finance Committee Report also support the proposition that the...
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