Appeals from the United States District Court for the Southern District of Indiana, Terre Haute Division. Nos. 80 C 59 and 80 C 60 -- Gene E. Brooks, Judge.
Cudahy and Eschbach, Circuit Judges, and Aspen, District Judge.*fn*
This appeal arises from judgments of the United States District Court for the Southern District of Indiana in companion cases holding that the income tax assessments issued against and collected from Joseph and Mary Cloutier (the "Cloutiers") and Charles Metzger, as successor trustee of the Grace Hulman Descendants Trust (the "Trust"),*fn1 were erroneous and that the taxpayers were entitled to refunds. Cloutier v. United States, 546 F. Supp. 12 (S.D.Ind. 1982). The United States appeals from the judgment in both cases. We reverse the judgment of the district court in both Numbers 82-2219 and 82-2220.
The relevant facts which give rise to these cases are not in dispute. In October of 1966 Joseph Cloutier and Anton Hulman, as trustee of the Trust at that time, each acquired 23% of the stock of Indiana Cable Television, Inc. ("Indiana Cable") for $11,500 (for a combined ownership of 46%). At some point prior to 1970, Joseph Cloutier and Anton Hulman (in his individual capacity and not as trustee of the Trust) also acquired 14% and 80%, respectively, of the stock of the Wabash Valley Broadcasting Corporation ("Wabash Valley"). As of 1970, Joseph Cloutier and Anton Hulman were senior executives and directors of both companies.
In June of 1970, the Federal Communications Commission (the "FCC") adopted regulations prohibiting common control of a television broadcast station and a cable television system in the same community. These regulations also established deadlines for the divestiture of any prohibited interest. The effect of the FCC regulations was to require that Cloutier and trustee Hulman divest their interest either in Indiana Cable or in Wabash Valley. After an unsuccessful effort to obtain a waiver of this requirement from the FCC, the taxpayers each sold their respective interests in Indiana Cable on November 9, 1973. Each taxpayer realized a gain of $486,651.25 on his respective sale.
In early December of 1973 taxpayers filed a request for a ruling from the Internal Revenue Service (the "IRS") concerning the applicability of Sections 1071 and 1033 of the Internal Revenue Code, 26 U.S.C. §§ 1033, 1071 (1980), to their sale of the Indiana Cable stock. The IRS issued a ruling on March 28, 1974 which stated that:
Provided that Trust and Joseph [Cloutier] comply with the other requirements of sections 1033 and 1071 of the Code, and provided that the F.C.C. issues the appropriate certification under section 1071, then subject to the provisions of sections 1245(b)(5) and 1250(d)(5), gain on the sale of stock in [Indiana] Cable shall be recognized only to the extent that the amount realized upon the conversion exceeds the cost of qualified replacement property under section 1033(a)(3)(A).
546 F. Supp. at 14. On or before April 15, 1974, the Trust and the Cloutiers then filed their 1973 income tax returns. In their 1973 returns, neither taxpayer reported the gain on the sale of the Indiana Cable stock, nor did either include a statement of election under section 1071 or any other reference to the sale of the stock in their return. Both taxpayers reported income on the cash receipts and disbursements method of accounting, and their taxable year coincided with the calendar year.
On April 29, 1974, the taxpayers petitioned the FCC to issue a tax certificate pursuant to section 1071, and on May 31, 1974, the taxpayers each taxpayers each purchased 2,058 additional shares of Wabash Valley for $500,098. Thereafter, the Cloutiers, on January 13, 1975, and the Trust, on February 3, 1975, filed amended income tax returns for 1973. These amended returns included statements of "election," under which the taxpayers specifically elected to treat the sale of the Indiana Cable stock as an involuntary conversion and to defer the recognition of the gain realized on those sales under sections 1071 and 1033.
After auditing both taxpayers' returns, the IRS determined that the elections were not timely and proposed that the taxpayers recognize the respective capital gain which they had each realized on the sales of the Indiana Cable stock. The parties were not able to agree on the treatment of this gain, and the IRS asserted a deficiency of $195,653 against the Cloutiers and a deficiency of $204,944 against the Trust. Both taxpayers paid these amounts to the IRS, filed claims for refund, and, after those claims were disallowed, filed suit in the district court for refunds.
In the district court, the taxpayers argued that a timely section 1071 election could be made on an amended return filed after the due date for filing their 1973 returns. The government argued that the taxpayers were not entitled to enjoy the benefits of section 1071 since neither had made the election required under section 1071 in a timely filed return for 1973. The district court found that the government was relying on form rather than substance and ordered the government to refund the tax assessment which had been collected. The court further found that the regulations issued under section 1071 did not explicitly refer to making an election in an "original" or "timely" return, that the taxpayers' December 1973 request for a ruling had given the IRS actual notice of the taxpayers' ...