The opinion of the court was delivered by: Robert D. Morgan, District Judge.
Both plaintiff and defendant have filed motions for summary
judgment, and the entry of summary judgment is justified. Since
all material facts are stipulated, or otherwise admitted, the
only issues remaining relate to the legal consequences compelled
by those facts. One party is entitled to judgment as a matter of
law. Rule 56, F.R.Civ.P.
Joseph G. O'Brien died on February 1, 1974. Prior to his death
he had made gifts, individually, of shares of stock in a
closely-held corporation to his children, including the
plaintiff. He had also created three irrevocable trusts in favor
of his three children, individually, giving further shares of the
same stock to each trust. Upon Joseph's death, all of the stock
was subject to recapture and inclusion in his estate as gifts
made in contemplation of death. Internal Revenue Code § 2035.
A federal estate tax return was duly filed in the estate, which
stated a value for all stock of the corporation of $215.7796 per
share. Ultimately, the Internal Revenue Service disputed that
evaluation and the issue of evaluation was submitted to the Tax
Court for decision. The matter remained pending until April 9,
1980, when the Tax Court entered a stipulated order fixing the
value at $280.10 per share.
In the meantime, in January 1975, the corporation was
liquidated under an agreement for the sale of all corporate
assets. Plaintiff reported his share of the liquidated proceeds
as a capital gain on his income tax return filed for the calendar
year 1975. He reported his basis in the stock at the $215.7796
basis stated in the estate tax return. He paid income tax for
that year on the capital gain realized through his liquidation
distribution over and above that cost-basis figure.
By virtue of the recapture provisions, plaintiff's stock was
included as a part of the estate. The basis for determining value
of the stock for estate tax purposes, and for determining the
cost basis of the stock for the purpose of reporting capital
gains, was the fair market value of the stock at the date of
Joseph's death. The order of the Tax Court thus had the practical
effect of not only fixing value for estate tax purposes but also
fixing the cost value to plaintiff of his individually-owned
stock.
After the Tax Court's order fixing the enhanced value at the
date of death, plaintiff filed a claim for a refund on his income
tax paid for the calendar year 1975. That claim was based on the
differential between the $215.7796 claimed in 1975, as his cost
basis, and the $280.10 figure which subsequently had been fixed
by the Tax Court's order as the true market value of the stock in
the estate. At about the same time when plaintiff filed his claim
for refund, like claims were filed by the executor of Joseph's
estate and by the Trustee on behalf of the three trusts, all of
which rested upon the like adjustment in cost basis occasioned by
the Tax Court order. All of those claims for refund were allowed,
but plaintiff's claim was rejected as barred by the statutes of
limitations contained in the Code. It is stipulated that,
absent the bar of limitations, plaintiff would have been entitled
to the refund claimed. As a result of that differential in basis,
he overpaid his 1975 income tax by the amount of $7,367.
Plaintiff's motion for summary judgment rests upon two
theories. He asserts that the Government is estopped by the
judicially-pronounced doctrine of equitable recoupment to deny
the refund which plaintiff claims. Secondly, he relies on the
mitigation provisions of the Code, §§ 1311-1314, which were
enacted and designed to sustain a claim for a refund in
specifically-enumerated situations, notwithstanding the fact that
the claim is barred by the statutes of limitation contained in
the Code. The Government, by its motion and arguments, contests
both theories.
This court concludes that plaintiff is entitled to summary
judgment in his favor. The triggering event for evaluation of the
stock for both income tax and estate tax purposes was the death
of Joseph. The Government cannot dispute that conclusion. On the
contrary, it admits that plaintiff's income taxes were overpaid
to the tune of $7,367 because of the use of a share-cost basis,
which the Internal Revenue Service later rejected, for the
evaluation of the same shares for estate tax purposes. The
Government cannot dispute the inconsistency of the positions
which it took between 1975 and 1980, when the evaluation of the
stock was substantially enhanced by the Tax Court order in the
proceeding which it had initiated. On the contrary, its admission
that the refund claimed by plaintiff would have been allowed
except for the statute of limitations, stands as an admission
that it did take inconsistent positions on the same subject
matter which worked to plaintiff's detriment.
Plaintiff is entitled to judgment by application of the
doctrine of equitable recoupment as established in Bull v. United
States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 (1935). In
Bull, following a decedent's death, the estate reported the
interest in earnings of a partnership, of which decedent had been
a part, as $24,124.20, for estate tax purposes. The Commissioner
increased that amount to $235,202.99 by including earnings for
one year after the death, pursuant to a provision in the
partnership agreement. Estate tax was paid upon the latter
evaluation. The estate income tax return for 1920 did not report
as income the earnings during that year upon which the estate tax
had already been assessed. After a claimed deficiency in income
tax was affirmed by the Board of Tax Appeals, the tax was paid.
Suit was filed in the Court of Claims following the denial of a
claim for refund. That court held that the amount was income, but
it rejected the argument that the estate tax previously paid on
the same sum must be credited against the income tax deficiency
because a refund was barred by the statute of limitations. The
Court reversed that decision. In pertinent context, it said that
since the money was income, not capital, estate tax had been
assessed by mistake without fraudulent intent, but that the
unjust retention of the double payment would be immoral and would
amount in law to a fraud perpetrated against the taxpayer. At
261, 55 S.Ct. at 700. The Court then applied the doctrine of
equitable recoupment to the money erroneously paid in estate tax
as a credit against the claimed deficiency in income taxes. At
263, 55 S.Ct. at 701.
Thus the Court recognized that equity does provide a remedy,
notwithstanding the limitations statutes, for the taxpayer who is
subjected to double taxation because the Government has taken
inconsistent positions which do impinge upon the same funds or
other property. Moreover, the Court indicated that fraud will be
presumed in such circumstances without any showing of fraudulent
intent.
Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 67
S.Ct. 271, 91 L.Ed. 296 (1946), which the Government cites, is
wholly inapposite to the situation presented here. In that case,
the plaintiff, a battery manufacturer, had paid excise taxes on
its products, without protest, for a number of
years. It then filed a claim for refund of excise taxes paid for
the several years which were not then barred by limitations, and
successfully supported its claim that the taxes were illegal by a
suit against the Government. The Government paid the refund
required by the judgment and assessed an income tax deficiency
upon the refund in the year when it was paid. In litigation,
which followed, the taxpayer invoked the doctrine of equitable
recoupment, contending that excise taxes paid for prior years,
which were time-barred, must be set off against the claimed
income tax deficiency. The lower courts adopted that contention.
The Supreme Court reversed, holding that the excise tax
assessment for each year was a separate taxable event, saying, by
implication at least, that a taxpayer who had slept on his rights
for many years could not recoup a position which he had
voluntarily abandoned. The Court distinguished Bull and Stone v.
White, 301 U.S. 532, 57 S.Ct. 851, 81 L.Ed. 1265 (1937), saying
that there was no relationship between the income tax deficiency
assessment and the time-barred excise taxes which the taxpayer
had elected in those prior years to pay without protest. It said
that the doctrine of equitable recoupment as pronounced in Bull
was limited to situations in which the Government had ...