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O'BRIEN v. UNITED STATES

March 16, 1984

MICHAEL G. O'BRIEN, PLAINTIFF,
v.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Robert D. Morgan, District Judge.

DECISION AND ORDER

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.

FACTS

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.

DISCUSSION

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 ...


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