Summary
In Albert W. Priest Trust v. Commissioner, 6 T.C. 221 (1946), the Tax Court considered and rejected the argument made by the taxpayers therein that the mitigation provisions should not apply to their disadvantage unless they had maintained inconsistent positions.
Summary of this case from Chertkof v. C. I. ROpinion
Docket No. 5217.
1946-02-19
ALBERT W. PRIEST TRUST FOR THE BENEFIT OF ITOLA M. RANSOM, FIRST NATIONAL BANK IN OSHKOSH, TRUSTEE, TRANSFEREE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert R. Thompson, Esq., for the petitioner. Charles Munz, Esq., for the respondent.
Petitioner's transferor, a decedent's estate, was allowed a deduction by the Commissioner of Internal Revenue for amounts currently distributable to beneficiaries, and those amounts were included by him in the income of the beneficiaries, against whom he determined deficiencies. One of the beneficiaries appealed to the Tax Court which held that only the amount paid to her was includible in her income. The Commissioner thereupon determined a deficiency against petitioner arising out of the deduction erroneously allowed to its transferor under section 3801 of the Internal Revenue Code, the statute of limitations preventing adjustment of the error otherwise. Held, section 3801 of the Internal Revenue Code is applicable as to the deduction erroneously allowed on account of amounts distributable to the beneficiary appealing to the Tax Court. Robert R. Thompson, Esq., for the petitioner. Charles Munz, Esq., for the respondent.
The Commissioner asserts a liability against petitioner as transferee of the estate of Albert W. Priest, against which the Commissioner determined a deficiency in income tax for the period January 1 to October 11, 1938, in the sum of $1,434.50. The deficiency was determined on March 8, 1944, under the provisions of section 820 of the Revenue Act of 1938 (section 3801 of the Internal Revenue Code), against the estate as a related taxpayer of Itola M. Evans Ransom, a beneficiary thereof.
FINDINGS OF FACT.
Albert W. Priest died testate on February 5, 1930. His last will and testament was admitted to probate in Oshkosh County, Wisconsin, on March 30, 1930, and the estate was in process of administration until October 11, 1938. On that date a final decree was entered ordering two-thirds of the assets of the estate to be transferred to First Trust Co. of Oshkosh, as trustee, for the benefit of Itola M. Ransom, the income to be paid to her during her life, with remainder over to others upon her death. The remaining one-third of the assets was distributed to Gwendolyn Randall Thalhafer. A full statement of facts concerning the estate of the decedent and its administration is found in our findings in Itola M. Ransom, 2 T.C. 647, which we incorporate herein by reference.
Petitioner is the successor to First Trust Co. of Oshkosh, and is the duly appointed, qualified, and acting trustee under the will of Albert W. Priest of the trust for the benefit of Itola M. Ransom. During the period January 1 to October 11, 1938, there existed the relationship of fiduciary and beneficiary between the estate of Albert W. Priest, deceased, George Randall, Alfred C. Bosser, and First Trust Co. of Appleton, executors, and Itola M. Evans Ransom.
The estate of Albert W. Priest, deceased, of which petitioner is a transferee, filed a fiduciary income tax return for the period from January 1 to October 8, 1938, with the collector of internal revenue for the district of Wisconsin, on February 23, 1939, reporting gross income of $37,317.08, total deductions of $75,848.74, and a net loss of $38,317.08. In schedule A of said return the ‘beneficiary's share of income and credits‘ was reported to be a loss of $25,544.72 for Itola M. Ransom, and of $12,772.38 for Gwendolyn Randall Thalhafer.
Itola M. Evans Ransom, filed her individual income tax return for the calendar year 1938 with the collector for the Wisconsin district, in which she reported as ‘income from fiduciaries‘ a loss of $25,544.72 from ‘First Trust Co. Appleton,‘ and income of $3,771.17 from ‘First Trust Co. Oshkosh, Wis.‘ from October 8 to December 31, 1938, together with other items of income and deductions, resulting in a net loss of $23,010.51, with no tax due.
Gwendolyn Thalhafer filed a joint return with her husband for the calendar year 1938, in which there was not reported any income or loss from fiduciaries. This report showed no net taxable income, but a net loss in excess of $2,600.
The First Trust Co. of Oshkosh, as trustee of the trust for Itola M. Ransom, filed a fiduciary return for the period October 11, 1938, to January 1, 1939, and reported income distributable to Itola Ransom in the amount of $3,871.17 and no net income taxable to itself as fiduciary.
On February 19, 1942, the Commissioner determined a deficiency in the income tax of the First Trust Co. of Appleton, a trustee of the estate of Albert W. Priest, for the year 1938, in the amount of $56.64. He determined that the estate was not in process of administration during 1938, but, as to the two-thirds thereof held for the benefit of Mrs. Ransom, was a trust created by the will. He disallowed deductions in the amount of $61,774.12 claimed on account of worthless stock and a bad debt, on the ground that the stock did not become worthless and the bad debt was not ascertained to be worthless and charged off in the taxable year, and therefore determined that, instead of the loss shown on the return, there was income totaling $26,733.88, of which $17,329.19 was distributable to Itola M. Ransom and $7,888.80 to Gwendolyn Thalhafer, and $1,515.89 was taxable to the trust. In the computation of the deficiency the Commissioner allowed a deduction for the amounts set out above as income currently distributable to the beneficiaries. The resulting deficiency, in the amount of $56.64, was paid and no appeal was taken.
On the same date the Commissioner determined a deficiency in the income tax of Gwendolyn Thalhafer in the amount of $60.96. He included in her taxable income the amount of $7,888.80 as income currently distributable to her from one-third of the assets of the Priest estate. The resulting deficiency was paid and no appeal was taken. The amount of $2,000 was actually paid to Gwendolyn as such income.
On the same date the Commissioner determined a deficiency in the income tax of Itola M. Ransom for the calendar year 1938 in the amount of $1,034.59. He disallowed the net fiduciary loss in an amount of $21,773.55 which she had claimed in her return, a corollary to the disallowance of the losses of the estate and an adjustment from which she did not later appeal. It was also determined that she was taxable on $17,329.19 as the amount currently distributable to her from the trust, pursuant to his contemporaneous determination that the estate was not in process of administration, but held two-thirds of the assets in trust for her. Itola M. Ransom, by her guardian, appealed to the Tax Court from the determination of deficiency, and she alleged in her petition that the estate of Albert W. Priest was in process of administration from January 1 to October 8, 1938, and that any income received during that period was income of the estate, taxable thereto, and no part thereof was taxable to her except $4,000 which was actually distributed to her. The Tax Court adopted the position contended for by her, and held that the estate was in process of administration until October 11, 1938, that the amount in dispute was not currently distributable to her, and that she was not taxable thereon. The Tax Court promulgated its opinion therein, under the title ‘Itola M. Evans Ransom, E. A. Prellwity, Guardian v. Commissioner of Internal Revenue,‘ Docket No. 11104, on September 8, 1943, and on October 26, 1943, it entered its decision pursuant to an agreed computation, and the deficiency of $92.54 was paid. No appeal was taken by either party from that decision, which became final on January 26, 1944.
The estate of Albert W. Priest, deceased, was a related taxpayer to the prior taxpayer, Itola M. Evans Ransom, during the period January 1 to October 11, 1938. The decision of the Tax Court referred to above adopted the position of Itola M. Ransom, which position was inconsistent with the erroneous allowance of the deduction to the estate of Albert W. Priest, deceased, which is involved here. Correction of the error is prevented by operation of the internal revenue laws other than section 820 of the Revenue Act of 1938 (section 3801 of the Internal Revenue Code). Petitioner is a transferee of the estate of Albert W. Priest, deceased. The notice of liability was timely issued to the petitioner.
OPINION.
KERN, Judge:
The determination of the primary question involved here depends upon the correct interpretation of section 3801 of the Internal Revenue Code (section 820 of the Revenue Act of 1938). If that section is not applicable to the facts before us, the error which this proceeding is designed to correct is beyond reach by reason of the statute of limitations.
The applicable provisions of the statute, contained in section 3801(b) of the code, are set forth below.
The exact provision with which we are immediately concerned is as follows:
(b) CIRCUMSTANCES OF ADJUSTMENT.— When a determination under the income tax laws—(1) Requires the inclusion in gross income of an item which was erroneously included in the gross income of the taxpayer for another taxable year or in the gross income of a related taxpayer; or(2) Allows a deduction or credit which was erroneously allowed to the taxpayer for another taxable year or to a related taxpayer; or(3) Requires the exclusion from gross income of an item with respect to which tax was paid and which was erroneously excluded or omitted from the gross income of the taxpayer for another taxable year or from the gross income of a related taxpayer; or(4) Allows or disallows any of the additional deductions allowable in computing the net income of estates or trusts, or requires or denies any of the inclusions in the computation of net income of beneficiaries, heirs, or legatees, specified in section 162(b) and (c) of chapter 1, and corresponding sections of prior revenue acts, and the correlative inclusion or deduction, as the case may be, has been erroneously excluded, omitted, or included, or disallowed, omitted, or allowed, as the case may be, in respect of the related taxpayer; or(5) Determines the basis of property for depletion, exhaustion, wear and tear, or obsolescence, or for gain or loss on a sale or exchange, and in respect of any transaction upon which such basis depends there was a erroneous inclusion in or omission from the gross income of, or an erroneous recognition or nonrecognition of gain or loss to, the taxpayer or any person who acquired title to such property in such transaction and from whom mediately or immediately the taxpayer derived title subsequent to such transaction—and, on the date the determination becomes final, correction of the effect of the error is prevented by the operation (whether before, on or after May 28, 1938), of any provision of the internal-revenue laws other than this section and other than section 3761 (relating to compromises), then the effect of the error shall be corrected by an adjustment made under this section. Such adjustment shall be made only if there is adopted in the determination a position maintained by the Commissioner (in case the amount of the adjustment would be refunded or credited in the same manner as an overpayment under subsection (c) or by the taxpayer with respect to whom the determination is made * * * which position is inconsistent with the erroneous inclusion, exclusion, omission, allowance, disallowance, recognition, or non-recognition, as the case may be. In case the amount of the adjustment would be assessed and collected in the same manner as a deficiency, the adjustment shall not be made with respect to a related taxpayer unless he stands in such relationship to the taxpayer at the time the latter first maintains the inconsistent position in a return, claim for refund, or petition (or amended petition) to the Board of Tax Appeals for the taxable year with respect to which the determination is made, or if such position is not so maintained, then at the time of the determination.
* * * Such adjustment shall be made only if there is adopted in the determination a position maintained * * * by the taxpayer with respect to whom the determination is made * * * which position is inconsistent with the erroneous inclusion, exclusion, omission, allowance, disallowance, recognition, or non-recognition, as the case may be. * * *
The erroneous action in this case is the allowance of a deduction to the estate for an amount currently distributable to a beneficiary.
The determination of the Tax Court that the amount was not currently distributable and not taxable to the beneficiary was essentially inconsistent with the allowance of the deduction to the estate. This seems to us to fulfill the requirements of the statute.
Petitioner argues earnestly that there has been no inconsistency in its position or that of any related taxpayer, so far as their contentions are concerned. It points out that its initial fiduciary return was filed on the theory that it was an estate in process of administration, and this was also the position of its beneficiary which was adopted by the determination of the Tax Court. The deduction which was allowed, and which is the subject of the dispute here, was allowed on the initiative of the Commissioner, who, having adopted the theory that a trust existed, followed that theory to its logical result and allowed the deduction in his computation of petitioner's tax liability. Petitioner accepted that result and paid the tax computed on that theory. Petitioner's present argument seems to suggest that it may, nevertheless, have continued privately to maintain its original position. It expressly suggests that whatever inconsistency exists here springs solely from the respondent's erroneous theory in the first instance.
There is implicit in petitioner's argument an interpretation of the statute with which we can not agree. We do not think there is any requirement that the position of the taxpayer which is adopted in the determination must be inconsistent with a position theretofore maintained by that of a related taxpayer. The sole requirement of the statute is that the position so adopted be inconsistent with the prior erroneous allowance of the deduction. It does not seem important to us who proposed the allowance of the deduction, or upon what theory. The important fact is that it was allowed, that a tax was paid pursuant to the allowance of the deduction, and that the action was erroneous. The later determination, adopting a position of a related taxpayer which was inconsistent therewith, seems clearly to invoke the application of the statute.
We are convinced that Congress did not intend to limit the applicability of the statute to cases where inconsistent positions were knowingly and deliberately assumed for the purpose of achieving tax advantages, although these no doubt were most persuasive of the need for corrective legislation. In fact, the report of the Senate Finance Committee indicates that it intended ‘to take the profit out of inconsistency, whether exhibited by taxpayers or revenue officials, and whether fortuitous or the result of design.‘ P. 49, S. Rept. 1567, 75th Cong., 3d sess. The facts here serve very well as an example of such fortuitous inconsistency. We conclude that section 3801 is applicable.
Petitioner challenges the respondent's calculations with respect to the amount of the deduction erroneously allowed which is subject to correction here. As we have set out in our findings, Gwendolyn Thalhafer paid a tax on $7,888.80 which respondent assessed against her as a deficiency on the theory that it was income currently distributable to her. Petitioner was allowed the corollary deduction. Only $2,000 had actually been paid to her. Respondent now contends that all of that deduction of $7,888.80 in excess of $2,000 was erroneously allowed, and he seeks the addition to petitioner's taxable income, therefore, of $5,888.80, to which petitioner vigorously objects.
We think this adjustment is not permissible under the statute, which provides, in subsection (d), that:
* * * There shall then be ascertained the increase or decrease in the tax previously determined which results solely from the correct * * * disallowance * * * of the item * * * which was the subject of the error. * * *
There is, as to the deduction claimed by reason of amounts paid or payable to Mrs. Thalhafer, no such inconsistency of position on the part of petitioner or a related taxpayer as the statute requires as a condition precedent to its operation. There is, on the other hand, inconsistency in the position of the Government, in whose behalf correction of the error is sought. This is not sufficient to bring the provisions of section 3801 into operation. We conclude, therefore, that the only adjustment which can be authorized by this proceeding is that which arises from the deduction of the item with respect to which petitioner's related taxpayer maintained the inconsistent position which was adopted by the Tax Court.
Reviewed by the Court.
Decision will be entered under Rule 50.