Routzahn v. Brown
| Decision Date | 07 April 1938 |
| Docket Number | No. 7781.,7781. |
| Citation | 95 F.2d 766 |
| Parties | ROUTZAHN v. BROWN. |
| Court | U.S. Court of Appeals — Sixth Circuit |
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W. C. Jennings, of Washington, D. C. (James W. Morris, Sewall Key, J. Louis Monarch, and Julian G. Gibbs, all of Washington, D. C., and Emerich B. Freed and Everett L. Foote, both of Cleveland, Ohio, on the brief), for appellant.
Horace Andrews, Jr., and John Hadden, both of Cleveland, Ohio (Andrews, Hadden & Putnam, of Cleveland, Ohio, on the brief), for appellee.
Before HICKS, SIMONS, and ALLEN, Circuit Judges.
The case is here for the second time, and is a suit to recover from the collector of internal revenue an overpayment of estate taxes after the rejection of a timely claim for refund. When the case was first tried, the collector defended upon the ground that property willed to the decedent by his deceased wife was part of his gross estate, and that the taxes collected were attributable to a determination of that fact by the Commissioner. The executor contended that the decedent had renounced his interest in his wife's estate so that the property left to him by her had never become part of his. Judgment for the collector followed, reversed by this court in Brown v. Routzahn, Collector, 6 Cir., 63 F.2d 914, with mandate of remand for new trial. Certiorari was denied, 290 U.S. 641, 54 S.Ct. 60, 78 L.Ed. 557.
When the case again reached the court below, the appellant filed an amended answer setting up additional distinct defenses neither adjudicated nor urged at the first trial and not reviewed upon appeal. He alleged that the decedent had transferred in contemplation of death within the meaning of section 402(c) of the Revenue Act of 1921, 42 Stat. 278, securities of the value of upwards of $3,000,000 in trust, that they were a material part of the estate, and that their transfer was in the nature of a final disposition without consideration in money or money's worth. He also alleged that the decedent had transferred to the Cleveland Trust Company as trustee life insurance policies in sums aggregating more than $500,000, which to the amount receivable by the executor therefrom over and above exemptions were also part of the decedent's gross estate and subject to tax. He also alleged that the decedent had transferred to his son, the present appellee, under a revocable trust agreement, securities of the approximate value of $1,200,000, which were a material part of the decedent's property, and that this transfer was likewise in the nature of a final disposition in contemplation of death. He also alleged that certain deeds executed by the decedent of his interest in the realty devised to him by the will of his wife constituted a transfer in the nature of final disposition without consideration in contemplation of death. The amended answer further alleged that upon original audit and later review of the executor's estate tax return the Commissioner had erroneously failed to include as part of the gross estate of the decedent the value of the securities and the amount of realizable insurance, less exemption, so transferred, in consequence of which the estate of the decedent was under assessed in an amount exceeding the claim for refund, and that while collection of additional taxes upon the estate was barred by the statute of limitations, the plaintiff was entitled to recover nothing in his action because there had been no overpayment of the estate tax.
Over plaintiff's objection, the amended answer was received by one of the district judges. Upon retrial to the court without a jury, a second District Judge presiding, the plaintiff moved for judgment upon the ground that the answer as amended failed to allege that the new defenses therein asserted were based upon official determination of the Commissioner, and that such omission was fatal. The collector had offered proof of intra-departmental communications between the General Counsel for the Bureau of Internal Revenue and the Deputy Commissioner in respect to recomputation of tax liability in preparation for the second trial, and now moved further to amend the answer to correspond with such proof, whereupon the court reserved decision and directed him to go forward with the evidence. At the conclusion of the trial the court overruled the motion to amend on the ground that it was untimely and unfair to the plaintiff. It likewise overruled the collector's motion for judgment, held his proofs inadequate to constitute valid defense to the petition, and gave judgment for the plaintiff.
The principle is now well established that upon a claim for refund the Commissioner may redetermine the entire tax liability of the taxpayer, and even though no new assessment can be made because the bar of the statute has fallen, the taxpayer is nevertheless not entitled to a refund unless he has overpaid his tax, for that is the ultimate question presented for decision. Lewis v. Reynolds, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293. Such defense is equitable, comparable to equitable recoupment or in diminution of the plaintiff's right to recover rather than set-off, for there is no counter-demand on him, but merely a denial of his equitable right to the overpayment, and so is not even now precluded by section 275 (a) or sections 607, 609 of the Revenue Act of 1928, 26 U.S.C.A. § 275 note and sections 1670(a) (2) 1675. Stone v. White, 301 U.S. 532, 538, 539, 57 S.Ct. 851, 852, 81 L.Ed. 1265.
The executor does not challenge the validity of the principle. Supporting the judgment upon the merits, he also urges that the amendment to the answer should not have been allowed after final judgment and review because it changed the character of the controversy and made of it a new case, and that to permit it was an abuse of discretion. Walden et al. v. Bodley et al., 14 Pet. 156, 10 L.Ed. 398; Cotten v. Fidelity & Casualty Co., C.C., 41 F. 506; Bassick Mfg. Co. v. Adams Grease Gun Corp., 2 Cir., 54 F.2d 285; Peavy-Byrnes Lumber Co. v. Commissioner, 5 Cir., 86 F.2d 234, 235. He also urges that there was violation of the mandate of this court in permitting the amendment.
Our mandate to the court below was for new trial without qualification or direction for judgment. In this situation we are not persuaded of its violation. Decisions such as In re Potts, 166 U.S. 263, 17 S.Ct. 520, 41 L.Ed. 994, and Peavy-Byrnes Lumber Co. v. Commissioner, supra, are not, therefore, in point.
While the rules governing amendments to pleadings in the federal court are liberal, and their allowance within the discretion of the court even after judgment and reversal, Mutual Life Insurance Co. v. Hill, 193 U.S. 551, 24 S.Ct. 538, 48 L.Ed. 788; Smith v. Adams, 130 U.S. 167, 9 S.Ct. 566, 32 L.Ed. 895; Everhart v. Huntsville Female College, 120 U.S. 223, 7 S.Ct. 555, 30 L.Ed. 623, and while allowance should not be reviewed upon appeal unless there has been a clear abuse of such discretion, yet it is generally recognized that the character of the controversy should rarely be changed after judgment and review. It is to be expected that a defendant will submit to the court in the first instance all defenses in derogation of the plaintiff's right to recover that are known to him, or which in the exercise of diligence he should have known, and indeed in equity cases the rules, Rule 30, 28 U.S.C.A. following section 723, seem to require it. We have here two motions to amend the answer, the first adding new defenses and allowed, the second to conform the pleading to the proofs and disallowed. No good reason appears for passing upon the soundness of the court's discretion in allowing the original amendments since the movant's subsequent motion impliedly declares their ineffectiveness to permit proofs of his defense, and it is the movant who attacks the judgment.
What we have to decide is a question that transcends technical rules of pleading and involves the question whether the United States or its representatives having asserted a deficiency in estate taxes as the result of classifying specific property transferred as being part of a decedent's gross estate, and asserting no tax liability attributable to other transfers either when the deficiency assessment is made, the claim for refund denied, or a suit for recovery of an overpayment defended, may now after trial and reversal and after the lapse of years, assert in diminution of the plaintiff's right to recover a tax liability attributable to...
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