U.S. v. Northern Trust Co.
| Decision Date | 29 February 2000 |
| Docket Number | No. 98 C 8217.,No. 98 C 7272.,98 C 7272.,98 C 8217. |
| Citation | 93 F.Supp.2d 903 |
| Parties | UNITED STATES of America, Plaintiff, v. The NORTHERN TRUST COMPANY, as Trustee of the Caterpillar Tractor Company Master Trust, Defendant. United States of America, Plaintiff, v. The Northern Trust Company, as Trustee of the Inland Steel Industries Pension Trust, Defendant. |
| Court | U.S. District Court — Northern District of Illinois |
Samuel D. Brooks, United States Atty's Office, Chicago, IL, Stacy Hallet, Donald J. Gavin, United States Dept. of Justice, Washington, DC, for plaintiff.
Jeffrey E. Stone, Steven Samuel Scholes, Matthew F. Kluchenek, McDermott, Will & Emery, Chicago, IL for defendant.
On December 22, 1998, the government filed two complaints pursuant to Internal Revenue Code ("IRC") § 7405 to recover tax refunds issued to the Inland Steel Industries Pension Trust (Inland Trust) (98 C 8217) and the Caterpillar Tractor Company Master Trust (Caterpillar Master Trust) (98 C 7272). The Northern Trust Company (Northern Trust), the named defendant in both actions, served as trustee and securities lending agent for both Inland Trust and Caterpillar Master Trust (collectively "the trusts") during the taxable years in question.1 In nearly identical complaints, the government alleges that the tax-exempt trusts were not entitled to refunds they received for taxes paid on a security's undistributed capital gains because the trusts had previously transferred the benefits and obligations incident to stock ownership to other taxpayers. We have jurisdiction over these matters pursuant to 26 U.S.C. § 7402 and 28 U.S.C. §§ 1340 and 1345. Defendant moves to dismiss the pre-1995 claims pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, arguing that the government's complaints are insufficient to trigger the extended five-year statute of limitations available under IRC § 6532(b) for claims to recover refunds induced by fraud or misrepresentation of fact.
When deciding a motion to dismiss we must assume the truth of a plaintiff's well-pleaded factual allegations, making all possible inferences in the plaintiff's favor. Sidney S. Arst Co. v. Pipefitters Welfare Educ. Fund, 25 F.3d 417, 420 (7th Cir. 1994). Accordingly, the following factual allegations contained in the government's amended complaints are taken as true for the purpose of deciding these motions to dismiss.
Inland Trust is a tax-exempt organization established to administer the qualified retirement plans of Inland Steel Industries. Caterpillar Master Trust is a tax-exempt organization established to administer the qualified retirement plans of the Caterpillar Tractor Company. The Northern Trust Company serves as trustee for both trusts and, as such, acts on behalf of these organizations with respect to securities owned by the trusts. During the taxable years in question the trusts owned shares of a closed-end regulated investment company2 (an "RIC") known as the Quest for Value Dual Purpose Fund ("Quest"). All of the Quest shares owned by the trusts were held at Depository Trust Company ("DTC"), a service company owned by major members of the financial industry, including Northern Trust. DTC operates as a national clearinghouse for the settlement of securities trades and, with its nominee, Cede & Co., acts as a custodian of securities for participating banks.
Pursuant to "stock loan agreements" with the trusts, Northern Trust was authorized to transfer or "lend" shares of Quest to third parties. Although the transferees under the loan agreements were designated as "borrowers," the loan agreements provided that the "borrowers" actually acquired all incidents of ownership with respect to the "borrowed" securities, including the right to vote, the right to sell, and the right to transfer or lend the securities to others. In return, the trusts received a fee plus cash-equivalent collateral equal to 102% of the market value of the shares at the time of the transfer.
For each of the years 1991 through 1995, Quest had undistributed long-term net capital gains. According to the requirements of the IRC, Quest filed a return each year and paid the federal income taxes due on the capital gains. Quest also issued an IRS Form 2439 — Notice to Shareholders of Long-Term Capital Gains — to Cede & Co. (as nominee of DTC, custodian of the shares managed by Northern Trust on behalf of the trusts) that designated DTC's proportional share of the undistributed capital gains and of the tax paid on the undistributed capital gains. Shareholders must include their proportionate share of undistributed capital gains in their individual computation of capital gains and are given a credit for the proportionate share of the tax paid by the RIC. Accordingly, DTC reissued Forms 2439 to those entities to which a portion of Northern's shares of Quest had been transferred pursuant to the stock loan agreements and to Northern Trust itself, to the extent it retained shares of Quest as of the last day of Quest's taxable year. The following table sets out the share of undistributed capital gains and taxes paid by Quest attributable to Northern Trust's various custodial clients (as allegedly reported on Form 2439 by DTC through its nominee Cede & Co. to Northern Trust).
Taxable Year Undistributed Capital Gains Paid Capital Gains Tax
|-------------|------------------------------|---------------------------|
| 1991 | figures not provided | figures not provided |
|-------------|------------------------------|---------------------------|
| 1992 | $2,202.39 | $748,668.84 |
|-------------|------------------------------|---------------------------|
| 1993 | 465,120.66 | 162,788.70 |
|-------------|------------------------------|---------------------------|
| 1994 | 170,304.83 | 59,605.35 |
|-------------|------------------------------|---------------------------|
| 1995 | 338,871.48 | 118,603.88 |
|-------------|------------------------------|---------------------------|
TABLE A
According to the government, Northern Trust then prepared and issued to the trusts Forms 2439 that "erroneously" reflected the trusts' proportionate shares of taxes paid by Quest on its undistributed capital gains. The following table sets out the trusts' shares of Quest's undistributed capital gains and taxes paid as reported each year on Form 2439 by Northern Trust to Inland Trust and Caterpillar Master Trust, respectively.
Taxable Year INLAND TRUST CATERPILLAR MASTER TRUST
Undistributed Paid Capital Undistributed Paid Capital
Capital Gains Gains Tax Capital Gains Gains Tax
|------------||---------------|----------------||-----------------|---------------|
| 1991 || n/a | n/a || $1,736,700.00 | $590,500.00 |
|------------||---------------|----------------||-----------------|---------------|
| 1992 || n/a | n/a || 2,816,820.00 | 957,690.00 |
|------------||---------------|----------------||-----------------|---------------|
| 1993 || $2,374,680.00 | $831,120.00 || 3,562,020.00 | 1,246,680.00 |
|------------||---------------|----------------||-----------------|---------------|
| 1994 || 905,579.80 | 316,967.04 || 1,444,050.00 | 505,440.00 |
|------------||---------------|----------------||-----------------|---------------|
| 1995 || 2,005,605.00 | 701,955.00 || 3,119,830.00 | 1,091,930.00 |
|------------||---------------|----------------||-----------------|---------------|
TABLE B
Each year Northern Trust also filed Forms 990-T with the IRS seeking a refund on behalf of the trusts of the taxes paid on Quest's undistributed capital gains. The Forms 2439, allegedly prepared by Northern Trust, were attached to the Forms 990-T. The Internal Revenue Service refunded all of the claimed overpayments occasionally with interest.3 At some point after November 18, 1996, however, the IRS determined that the Forms 2439 submitted by Northern Trust reflected, at least in part,4 undistributed capital gains, and tax paid on those gains, for shares of Quest which the trusts had previously transferred to others pursuant to the stock loan agreements.
On December 22, 1998, the government filed two complaints pursuant to IRC § 7405, which authorizes an action by the United States to recover an erroneous refund of "any portion of a tax imposed by [the tax code]." The complaints allege that the IRS was "induced to issue the refund[s] based upon the misrepresentations of material facts made by Northern." Neither complaint alleges an intent to deceive or mislead, nor does either allege any willful, reckless, or even negligent misconduct.
Section 6532(b) of the Internal Revenue Code provides the applicable statute of limitations:
Recovery of an erroneous refund by suit under section 7405 shall be allowed only if such suit is begun within 2 years after the making of such refund, except that such suit may be brought at any time within 5 years from the making of the refund if it appears that any part of the refund was induced by fraud or misrepresentation of a material fact.
The 1995 refunds fall within the two-year statute of limitations and are not at issue here. Defendant moves to dismiss the pre 1995 claims pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, arguing that the government failed to allege any misrepresentations of fact which would allow the government to avail itself of the extended five-year period available under § 6532(b) for certain claims.
The five-year period is triggered if "it appears that any part of the refund was...
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