Tompkins v. United States

• Citation: 461 F.2d 1304
• Decision Date: 16 June 1972
• Docket Number: No. 315-66.,315-66.
• Parties: Trust U/W Lida R. TOMPKINS et al. v. The UNITED STATES.
• Court: Court of Federal Claims

461 F.2d 1304 (1972)

Trust U/W Lida R. TOMPKINS et al. v. The UNITED STATES.

No. 315-66.

United States Court of Claims.

June 16, 1972.

Stanley Worth, Washington, D. C., attorney of record, for plaintiffs; Hamel, Park, McCabe & Saunders, Washington, D. C., of counsel.

Ira Mark Bloom, Washington, D. C., with whom was Acting Asst. Atty. Gen. Fred B. Ugast, for defendant; Philip R. Miller and Theodore D. Peyser, Jr., Washington, D. C., of counsel.

Before COWEN, Chief Judge, DURFEE, Senior Judge, and DAVIS, SKELTON, NICHOLS, KASHIWA, and KUNZIG, Judges.

OPINION

PER CURIAM:

This case was referred to Trial Commissioner Saul Richard Gamer with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 134(h). The commissioner has done so in an opinion and report filed on September 27, 1971. Exceptions to the commissioner's opinion, findings of fact and recommended conclusion of law were filed by plaintiff, defendant requested the court to adopt the findings of fact and conclusion of law and the case has been submitted to the court on oral argument of counsel and the briefs of the parties. Since the court agrees with the commissioner's opinion, findings of fact and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case.^* Therefore, plaintiff is not entitled to recover and the petition is dismissed.

OPINION OF COMMISSIONER

GAMER, Commissioner:

Lida R. Tompkins, a resident of Washington, D. C., died in 1953. As vice-president and treasurer, and a 36 percent stockholder, she had been active with her husband, Charles H. Tompkins, in the construction business carried on by the Chas. H. Tompkins Company, a firm organized and controlled by her husband. In addition, she owned substantial real and personal property, including life insurance policies, various stocks and bonds, and interests in commercial properties producing rental income. The commercial properties were held jointly with her husband.

By her will, Mrs. Tompkins (sometimes herein referred to as "the decedent") created a trust to which all of her real estate interests passed upon her death. She designated her husband as the executor of her estate and as the sole trustee of the testamentary trust.

In 1954, her husband, as executor, filed the federal estate tax return. The return showed a net estate of over $1,230,000, and a tax thereon of over $379,000, which amount was then paid.

Mr. Tompkins, as executor, filed his final estate account in January 1956. Upon approval thereof by the probate court in July of that year, all remaining assets of the estate, consisting of principal and income account balances aggregating over $1,000,000 were distributed to the trust (Charles H. Tompkins, as executor, distributing the assets to Charles H. Tompkins, as trustee).

However, the following year the Commissioner of Internal Revenue, by a notice dated May 24, 1957, asserted a deficiency in the federal estate tax in the amount of over $2,160,000. The Commissioner felt that certain of the stocks, life insurance policies, and real estate listed in the estate tax return had been undervalued.

As stated, by this time the estate had been closed. Furthermore, Charles H. Tompkins had died the previous December. Under the provisions of decedent's will, two individuals and the Riggs National Bank of Washington, D. C., had become successor trustees of the testamentary trust. The will also named the same three as successor executors in the event the appointment of such successors became necessary.

The successor executors concluded that the deficiency asserted by the Commissioner should be contested. However, the trust did not have the cash with which to pay such large assessed amount, plus interest, as a basis for a refund suit in the United States Court of Claims or a United States District Court, nor did the executors consider that it would be prudent to raise the necessary amount by borrowings (assuming it would be possible to do so) or by sales of the real properties in the trust at what they felt would amount to forced liquidation prices. Accordingly, they decided that the best course to follow would be to contest the deficiency in the Tax Court of the United States, thereby making it unnecessary to make such a large payment at that time. Accordingly, upon their petition, the probate court took the necessary action to reopen the estate, to designate the three parties as successor executors, and to authorize them to contest the asserted federal estate tax liability, following which, as such executors, they filed, on August 21, 1957, a petition in the Tax Court for redetermination of the asserted deficiency.

Since all of the trust property came from the estate, the trustees recognized the trust's responsibility, as transferee, for any increased estate tax liability. Consequently, as both trustees and executors, they considered it unnecessary, upon the reopening of the estate, to go through the mechanics of transferring the trust property back to the estate.

Prior to the trial in the Tax Court, the parties were able to arrive at an agreement settling all of the disputed issues, with one exception. That exception involved the value of 186 shares of common stock of a close corporation called the H Street Building Corporation, all of the outstanding 650 shares of such stock being owned by members of the Tompkins family. The agreement of the parties was set forth in a stipulation filed in the Tax Court in September 1959.

The partial settlement was in itself sufficient to increase the estate's net assets by over $878,000, on which basis alone there was an agreed deficiency in estate tax of over $390,000.

Thereupon, the trustees, to halt the further accumulation of interest on such part of the agreed deficiency, decided to pay it, plus the interest thereon. Certain profitable sales of real estate in which the trust had an interest had been effected by the successor trustee-executors, and the trust was then in a sufficiently liquid position to be able to make such payment. Accordingly, in June 1960, August 1960, and May 1961, the trustees so paid $270,000, $95,000, and $185,250, respectively, totaling $550,250, designating $197,100, $68,500, and $130,000, respectively, or a total of $395,600, as applicable to the deficiency, and $72,900, $26,500, and $55,250, respectively, or a total of 154,650, as applicable to interest.

After they became successor trustees following the death of Mr. Tompkins in 1956, the trustees annually filed fiduciary income tax returns of the trust. For the calendar year 1959, they paid a tax of $485.63. The return for the calendar year 1960 was filed on April 14, 1961, and for such year the trustees paid a tax of $19,923.22. Although, as shown, they had made during such year two payments on account of the deficiency in the estate tax, of which $99,400 was allocated to interest, the return indicated no interest deductions at all for such year (nor did the return for the calendar year 1961 show any such deduction for interest, although, as indicated, $55,250 of the $185,250 payment with respect to the deficiency made during that year was allocated to interest).

Thereafter, the Tax Court, by an opinion filed on December 22, 1961, determined the sole issue upon which the parties had been unable to agree.¹ It decided that the value of the 186 shares of common stock of the H Street Building Corporation was $1,023,000, or $5,500 per share (instead of $155,193, or $834.32 per share, as set forth in the estate tax return). This finding, which was accepted by the parties, served to increase the estate tax deficiency by an amount of over $410,500. This indebtedness, plus interest, as adjusted by a credit for local taxes, was liquidated by two payments made in 1962 totaling over $418,000, of which $139,347.23 was allocated to interest. These payments too were made by the trustees of the testamentary trust out of trust funds. By 1962, as a result of further profitable sales of real estate which the decedent had jointly owned with her husband, there was only one income producing property left in which the trust had such an interest.

In March 1963, the trustees filed their federal fiduciary income tax return for the calendar year 1962. This time they did take an interest deduction with respect to the interest they had paid on the estate tax deficiency. However, although, as stated, they had paid almost $140,000 in such interest during the year, they took a deduction of only $35,168.12 (such computation not being explained in the return). In any event, the return indicated no taxable income and no tax liability.

The following year, the plaintiff trust received a letter dated August 25, 1964, from the District Director of the Internal Revenue Service at Baltimore, Maryland, which must have been a pleasant surprise. It informed plaintiff that, upon an examination of the fiduciary income tax returns it had filed for the five years 1957, 1959, 1960, 1961, and 1962, it was concluded that the entire aforementioned amounts of $485.63 and $19,923.22 which it had paid for 1959 and 1960, respectively, constituted overpayments. The report of the revenue agent who had made the examination was enclosed with the letter and explained the various changes made which produced this result. The report showed that such 1959 and 1960 overpayments stemmed from drastic changes, to the trust's benefit, which the agent made with respect to 1962. For such year, instead of an interest deduction of only $35,168.12 with respect to the estate tax deficiency which the trust had taken, the agent allowed the full amount of $358,921.47 in interest which plaintiff had paid in 1960, 1961, and 1962. The agent felt that the interest payments made in 1960 and 1961 did not constitute proper deductions for those years (as shown, plaintiff had not in fact claimed them as...