Zeeman v. United States, 356

• Decision Date: 28 May 1968
• Docket Number: No. 356,Docket 31969.,356
• Citation: 395 F.2d 861
• Parties: Audrey L. ZEEMAN, Individually and as Executrix of the Estate of Leon S. Lees, Jr., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

395 F.2d 861 (1968)

Audrey L. ZEEMAN, Individually and as Executrix of the Estate of Leon S. Lees, Jr., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 356, Docket 31969.

United States Court of Appeals Second Circuit.

Argued March 20, 1968.

Decided May 28, 1968.

COPYRIGHT MATERIAL OMITTED

Jerome Kamerman, New York City, (Kamerman & Kamerman, New York City), for plaintiff-appellant.

Irwin B. Robins, Asst. U. S. Atty. (Robert M. Morgenthau, U. S. Atty. for the Southern District of N. Y., Richard M. Hall, Asst. U. S. Atty.), for defendant-appellee.

Before LUMBARD, Chief Judge, FRIENDLY, Circuit Judge, and BLUMENFELD, District Judge.^*

BLUMENFELD, District Judge:

During the years 1960, 1961 and until December 12, 1962, when he died, the appellant's husband, Leon S. Lees, Jr., had been a general partner in the stock brokerage firm of Ira Haupt & Co. The appellant and her late husband had filed joint tax returns for the years 1960 and 1961 reflecting taxable income in the amounts of $83,359.79 and $89,107.05 respectively. After his death, the appellant, as she was permitted to do under § 6013(a) (3) of the Internal Revenue Code of 1954, filed a joint return for the year 1962 reflecting taxable income of $63,575.79. All of this reported income had been earned by her husband alone.

The appellant sustained a substantial loss¹ as a limited partner in Haupt & Co. in 1963 when it became insolvent as a result of its imprudent advances of credit to Allied Crude Vegetable Oil Refining Corporation, the principal tool of Tino DeAngelis in a huge financial fiasco known as the "salad oil scandal."

What started out as a clear-cut suit for refunds of the taxes paid on those joint returns for 1960-1962, based on a claim of a right to carryback to those years the loss she suffered in 1963, ended up with a dismissal of her action and a judgment against her on counterclaims of the government for additional tax liabilities because of understated income and overstated deductions by the joint taxpayers in those years.

The Carryback

The appeal raises several questions. The first is whether a net operating loss sustained by appellant in 1963 was available as a carryback under § 172(b) (1) (A) of the Code against her late husband's income reported in joint returns for prior years. The court below in a well-reasoned opinion, 275 F.Supp. 235 (1967), ruled that since she was not able to file a joint return for the period when the loss was suffered, she could not carry the loss back against income reported in the years when joint returns were filed. We affirm his ruling, but on a narrower ground.

Contending that when she sustained a loss in 1963 she was the same taxpayer she had been in 1962, notwithstanding the fact that she was no longer a joint taxpayer with her late husband, the appellant tenders a lengthy and involved argument premised on the omission of the words "the taxpayer" from § 172 when the Code was revised in 1954. We did not regard that as a notable omission in Allied Central Stores, Inc. v. Commissioner, 339 F.2d 503 (2d Cir. 1964), cert. denied, 381 U.S. 903, 85 S.Ct. 1447, 14 L.Ed.2d 285 (1965), and we find no basis in the legislative history for concluding that Congress intended thereby to effect any substantive change in the basic purposes of the carryback provisions. See Beckett v. Commissioner, 41 T.C. 386, 417-418 (1963) (reviewing the legislative history). Obviously, loss carrybacks may be utilized only by taxpayers. Omission of "the taxpayer" in § 172 simply brings its language into conformity with most of the other provisions in the Code relating to deductions. The appellant's argument, if we understand it,² may bear on a question of who sustained the loss, the answer to which was formerly sometimes difficult to reach in cases where a loss corporation or its assets were acquired through acquisition or merger by a successor corporation. Here, since it is undisputed that the appellant is the person who suffered the loss, the question is rather against whose income it may be carried back.

While net operating losses of one spouse may be carried backward or forward against the combined taxable income of both to years in which they filed or will be able to file joint returns, Treas.Reg. § 1.172-7(c), even if separate returns are filed, Treas.Reg. § 1.172-7(b), the privilege of filing joint tax returns given to married couples is something less than a merger of them into a permanent, single economic unit. The merger of their income for tax purposes is linked between different years for only so long as they are married.

The legal requirements for utilization of loss carrybacks in this area have not remained undefined. As pointed out in Calvin v. United States, 354 F.2d 202, 205 (10th Cir. 1965), where the pertinent regulations are analyzed, the presence of the critical requirement for carrying forward a loss against combined income of married taxpayers is dependent on their marital status at the time the loss was sustained. This case is the other side of the same coin considered in Calvin. There, the right of Mrs. Calvin to carry forward her premarital losses was restricted to that portion of the subsequent jointly reported income which was received by her. We see no valid reason why the same rule should not apply in the reverse situation here. Unfortunately, however, none of the jointly reported income in 1960-1962 was the appellant's.

Nor can it be deemed to have been her income by operation of law. Although the essential objective of the privilege of filing joint tax returns given to a husband and wife with a lower effective tax rate, Int.Rev.Code of 1954 § 6013, was to give all married persons the same tax reward on combined income that married persons in community property states enjoyed before its enactment, that was accomplished without changing their private ownership rights. New York is not a community property state.

However, since the government has not appealed from Judge Levet's determination that the loss of appellant's investment in Haupt was an ordinary rather than a capital loss, and that it was realized in 1963, 275 F.Supp. at 260, it will be available to her as a credit against any taxable income she may have received in the five years following 1963. Int.Rev.Code of 1954 § 172(b) (1) (B).

The Government's Counterclaim

It was the well-established rule when the appellant began this suit that the burden of showing her right to carryback her loss and to demonstrate that she and her husband had fully paid the taxes otherwise due would be on her. This follows from the principle that when a taxpayer sues for refund of taxes erroneously paid, Larchfield Corp. v. United States, 373 F.2d 159 (2d Cir. 1966), or for refund of taxes paid in a prior year by carrying back to it a loss sustained in a later year, Commissioner v. Van Bergh, 209 F.2d 23 (2d Cir. 1954), the action is one for restitution and a plaintiff must show that good conscience requires the refund. Cf. Taylor v. Commissioner, 70 F.2d 619, 620 (2d Cir. 1934), aff'd sub nom. Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623 (1935). "This of necessity put in issue every credit or deduction found in the particular tax return for which refund is sought or in a related tax return," Missouri Pac. R.R. v. United States, 338 F.2d 668, 671, 168 Ct.Cl. 86 (1964), as well as the adequacy of the amount of income reported. It was immaterial that the government had not asserted a deficiency. E. g., Compton v. United States, 334 F.2d 212 (4th Cir. 1964). Cf. Lewis v. Reynolds, 284 U.S. 281, 283, 52 S.Ct. 145, 76 L.Ed. 293 (1932).

During the trial, the government came forward with evidence of bank deposits by the taxpayers substantially in excess of the income reported, unreported capital gains, both short and long term, and interest income. Some charitable contributions and business expenses taken as deductions on the returns were disallowed for lack of any substantiation. 275 F.Supp. at 245-250 (Amended Findings of Fact). To the extent that these resulted in a computation of more taxable income than reported, they would, of course, operate to diminish the amount of any refund properly due. And, since no refund was allowable against the taxes paid on the joint returns, the government, after close of the evidence, was granted permission to file a counterclaim based on assessments of deficiencies for the years 1960, 1961 and 1962.

Appellant contends that because the assessments were made after the trial of the case presented by the appellant's original complaint, it was then too late for the government to rely upon them as a basis for counterclaims because that deprived her of the privilege given under Int.Rev.Code of 1954 § 7422 (e) of resisting those assessments in the Tax Court.³ Although § 7422(e) speaks only of deficiencies determined prior to hearing, this was a grant of an additional privilege to taxpayers to get their cases into the Tax Court — not a restriction on the government's right to file a late counterclaim if the court in its discretion allowed this. Cf. Florida v. United States, 285 F.2d 596 (8th Cir. 1960). We need not consider whether it would have been an abuse of discretion for Judge Levet to have refused a stay pending Tax Court review if Mrs. Zeeman had asked for one, even though the case was not within the letter of § 7422(e). No request was made.

Her contention with respect to the government's counterclaim is that just because the government incorporated into an assessment information gleaned from the evidence offered at the trial, she should not have been obliged to carry the additional burden of overcoming a presumption of the correctness of the commissioner's assessments. Whether in the Tax Court or in the District Court, the burden on the taxpayer does not differ. United States v. Lease, 346 F. 2d 696, 700 (2d Cir. 1965). She had the opportunity to make any defense, e. g., the...