Before MAJOR, LINDLEY and SWAIM, Circuit Judges.
This case involves the allowance by the District Court of attorneys' fees and other expenses incurred in the prosecution by plaintiffs of a claim for refund of estate taxes which were illegally collected. Plaintiff Edwin J. Bohnen, as executor of the estate of his mother, Mary A. Bohnen, on October 14, 1945, filed a claim for the refund of estate taxes on the ground that the Commissioner of Internal Revenue had erroneously included in the decedent's gross estate the proceeds of a single premium life insurance policy purchased in 1935 on the decedent's life. At the time of her death in 1942 this policy had a value of $72,094.81. The Commissioner included this amount in the decedent's gross estate, insisting that she had made a gift of the amount of the premium on the policy to her children, and that this was therefore a "transfer * * * intended to take effect in possession or enjoyment at or after [decedent's] death" within the meaning of Section 811(c) of the Internal Revenue Code of 1939. 26 U.S.C.A. § 811 (1948). On this theory the Commissioner had charged and collected estate taxes, principal and interest in the amount of $26,954.38.
In the claim for a refund the executor contended that the decedent in 1935 made an absolute gift to her children of the premium on the policy; that thereafter decedent had no interest whatever in the policy, her children having collected all dividends on the policy for their own use and benefit; and that, therefore, the proceeds from the policy were not a part of the decedent's gross estate. The Commissioner by letter to the executor dated March 3, 1947, reported that the claim for refund was rejected "in its entirety."
Plaintiff Edwin J. Bohnen, as executor of his mother's estate and individually with the other heirs, then filed an action in the District Court for a refund of the alleged overcharge. In this complaint plaintiffs prayed for a judgment against the defendant "for the refund of the amount of tax resulting from the deduction from the gross estate of the attorneys' fees incurred herein ." (Our emphasis.) The defendant's answer did not deny that attorneys' fees would be incurred, and expressly admitted that the District Court had jurisdiction of the case under 28 U.S.C.A. § 1340. In that action the court held that the Commissioner of Internal Revenue erred in including in the decedent's gross estate, for estate tax calculation, the proceeds of the life insurance policy; and judgment was entered November 9, 1951, granting plaintiffs a refund of $22,427.47, with statutory interest.
It was clearly shown by the recomputation of the estate tax which was attached as an exhibit to plaintiffs' motion for judgment, that $5,564.15 of this judgment was based on the ground that the estate was entitled to a deduction for administration expenses, including attorneys' fees and other expenses incurred in the prosecution in the court of the claim for the refund.
In the judgment the court also retained jurisdiction of the cause for the purpose of allowing the plaintiffs such further refund to which they might become entitled by reason of further expenses incurred, including attorneys' fees and other expenses, in any rehearing or appeal which the defendant might take.
The defendant did appeal and the judgment was affirmed by this court, Bohnen v. Harrison, 7 Cir., 199 F.2d 492. The Supreme Court granted certiorari, 345 U.S. 903, 73 S. Ct. 650, 97 L. Ed. 1340, but affirmed by a per curiam decision, 345 U.S. 946, 73 S. Ct. 863, 97 L. Ed. 1371, and on June 8, 1953, denied a rehearing, 345 U.S. 978, 73 S. Ct. 1120, 97 L. Ed. 1392.Thus it was definitely established that the Commissioner had committed error in refusing to allow a deduction of the proceeds of the insurance policy.
Neither in the District Court nor on appeal from the first judgment did the defendant raise any question as to the propriety of an allowance of the amount of expenses, including attorneys' fees, as a deduction or as to the retention by the District Court of jurisdiction to allow additional attorneys' fees in case of appeal.
On March 10, 1954, a year after the petition for rehearing had been denied by the Supreme Court, the defendant filed in the District Court a motion for relief from the original judgment under Rule 60 of the Federal Rules of Civil Procedure, 28 U.S.C.A. In that motion the defendant for the first time questioned the allowance by that court under Section 812(b) (2) of the 1939 Code of a deduction of $5,564.15 for administration expenses, including attorneys' fees and other expenses incurred in the prosecution in the court of plaintiffs' claim for a refund. In that motion the defendant pointed out that the plaintiffs' original judgment was based in part on the allowance of administration expenses including attorneys' fees, and that no such ground for refund was made a part of the claim for a refund which was filed with the Collector of Internal Revenue.
The defendant in support of his motion cited Section 3772(a) (1) of the Internal Revenue Code of 1939, 28 U.S.C.A. § 3772 (1940), which provides that:
"No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected * * * until a claim for refund or credit has been duly filed with the Commissioner, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof."
In his motion the defendant also called attention to the regulation of the Bureau of Internal Revenue which requires that a claim for refund of estate tax "must set forth in detail and under oath each ground upon which a refund is claimed, and facts sufficient to apprise the Commissioner of the exact basis thereof." This regulation also provides that any claim which does not comply with the above requirements "will not be considered for any purpose as a claim for refund." Federal Estate Tax Regulations of the Bureau of Internal Revenue, Regulation 105, Section 81.96, 26 C.F.R. Sec. 81.96. However, the last sentence in Section 81.96 states: "For deduction of attorneys' fees incurred in prosecuting a claim for refund, see Section 81.34," thus clearly indicating that a claim for a deduction for attorneys' fees was covered by Section 81.34 and not by Section 81.96. Section 81.34 provides that an executor in filing the return "may deduct such an amount for attorneys' fees as has actually been paid or in an amount which at the time of such filing it is reasonably expected will be paid." Paragraph (b) of Section 81.34 provides that: "A deduction for attorneys' fees incurred * * * in prosecuting a claim for refund should be claimed at the time such deficiency is contested or such refund claim is prosecuted ." (Our emphasis.)
By a decision rendered January 12, 1955, 127 F.Supp. 232, the District Court denied the defendant's motion for relief from the original judgment and granted plaintiffs' motion for a supplemental judgment in the amount of $2,248.45 for additional attorneys' fees and expenses incurred by the plaintiffs in the ...