United States v. Herring, 7288.

• Decision Date: 02 January 1957
• Docket Number: No. 7288.,7288.
• Citation: 240 F.2d 225
• Parties: UNITED STATES of America, Appellant, v. Flora F. HERRING, Administratrix of W. A. Herring Estate, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

240 F.2d 225 (1957)

UNITED STATES of America, Appellant, v. Flora F. HERRING, Administratrix of W. A. Herring Estate, Appellee.

No. 7288.

United States Court of Appeals Fourth Circuit.

Argued November 19, 1956.

Decided January 2, 1957.

Carrington Williams, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and A. F. Prescott, Attys., Dept. of Justice, Washington, D. C., Julian T. Gaskill, U. S. Atty., Goldsboro, N.C., and Jane A. Parker, Asst. U.S. Atty., Smithfield, N.C., on brief), for appellant.

Joseph H. Levinson, Benson, N. C., for appellee.

Before PARKER, Chief Judge, SOPER, Circuit Judge, and CHESNUT, District Judge.

SOPER, Circuit Judge.

This suit was brought by Flora F. Herring, administratrix of the estate of W. A. Herring, her deceased husband, against the United States to secure a refund of income taxes which had been paid by the estate after the decedent's death. W. A. Herring died on July 18, 1948, leaving a gross estate of $230,387.94. On July 12, 1949, the administratrix made an estate tax return showing a 1949 estate tax liability of $28,280.63, which she then paid; but in 1950 it was ascertained that there had been an overpayment of the estate tax in the sum of $13,686.90, which was thereupon refunded to the administratrix.

On July 10, 1951, after an investigation, the Commissioner issued a preliminary notice proposing a deficiency in income taxes, civil penalties for fraud, delinquency penalties and interest against the widow individually and against the estate for the years 1932 to 1948 in the amount of $103,102.28. The assessment of this tax, however, was not made until October, 1952. The tax was subsequently paid in instalments, the last payment of $18,549.72 being made on April 16, 1954. The payment of this tax greatly reduced the size of the estate and the amount of the estate tax liability. Consequently, on October 24, 1952, the administratrix filed a claim for refund of estate taxes; but the claim was rejected and the administratrix then filed suit for the refund in the District Court below. Recovery was then denied on the ground that the claim had not been filed in three years after the payment of the estate taxes as required by the statute. Subsequently in May 1955, the administratrix filed a timely claim with the Director for refund of income taxes in the amount of $13,752.77, the same amount as the claim for refund of estate taxes which had been made in the earlier litigation; and upon its rejection the instant suit was filed.

The theory of the suit is that in making its claim for refund the estate is entitled to recoup the overpayment of estate taxes against the amount of the income taxes which were paid by the administratrix after the death of the decedent. The District Judge approved this theory and gave judgment for the estate for the amount claimed under the authority of Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421. In that case the Government wrongfully collected and retained an estate tax on monies earned and paid to the estate in partnership transactions after the decedent's death, which were not part of the corpus of the estate but were subject to tax as income. Subsequently and before the time allowed for filing a claim for refund had elapsed, the Government assessed and collected an income tax on the same money. Thereafter the administratrix filed a timely suit in the Court of Claims for refund of the income tax, contending that the Government should have credited against that tax the amount of the overpayment of the estate tax. The Court rejected the claim on the ground that it was then too late to recover for the overpayment, but the Supreme Court reversed the judgment, holding that under equitable principles the estate was entitled to recoup from the amount of the income tax lawfully due the amount of the estate tax unlawfully imposed, although suit to recover the unlawful tax independently had become barred. The Court said, 295 U.S. at pages 260, 261, 262, 263, 55 S.Ct. at page 700:

"In a proceeding for the collection of estate tax, the United States through a palpable mistake took more than it was entitled to. Retention of the money was against morality and conscience. But claim for refund or credit was not presented or action instituted for restitution within the period fixed by the statute of limitations. If nothing further had occurred congressional action would have been the sole avenue of redress.

"In July, 1925, the government brought a new proceeding arising out of the same transaction involved in the earlier proceeding. This time, however, its claim was for income tax. The taxpayer opposed payment in full, by demanding recoupment of the amount mistakenly collected as estate tax and wrongfully retained. Had the government instituted an action at law, the defense would have been good. The United States, we have held, cannot, as against the claim of an innocent party, hold his money which has gone into its treasury by means of the fraud of its agent. United States v. State Nat. Bank, 96 U.S. 30, 24 L.Ed. 647. While here the money was taken through mistake without any element of fraud, the unjust retention is immoral and amounts in law to a fraud on the taxpayer\'s rights. * * * If the claim for income tax deficiency had been the subject of a suit, any counter demand for recoupment of the overpayment of estate tax could have been asserted by way of defense and credit obtained, notwithstanding the statute of limitations had barred an independent suit against the government therefor. This is because recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiff\'s action is grounded. Such a defense is never barred by the statute of limitations so long as the main action itself is timely.

"The circumstance that both claims, the one for estate tax and the other for income tax, were prosecuted to judgment and execution in summary form does not obscure the fact that in substance the proceedings were actions to collect debts alleged to be due the United States. It is immaterial that in the second case, owing to the summary nature of the remedy, the taxpayer was required to pay the tax and afterwards seek refundment. This procedural requirement does not obliterate his substantial right to rely on his cross-demand for credit of the amount which, if the United States had sued him for income tax, he could have recouped against his liability on that score." 295 U.S. at pages 262-263, 55 S.Ct. at pages 700, 701.

The taxpayer also relies on Stone v. White, 301 U.S. 532, 57 S.Ct. 851, 81 L. Ed. 1265, where testamentary trustees sued for refund of income taxes erroneously collected and the equitable principle of recoupment...