Opinion
No. 44732.
June 7, 1943.
Theodore B. Benson, of Washington, D.C. (Oscar P. Most, of Washington, D.C., on the brief), for plaintiff.
Joseph H. Sheppard, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen., for defendant.
Before WHALEY, Chief Justice, and MADDEN, WHITAKER, and LITTLETON, Judges.
Suit by Grace Jones Stewart, executrix of the estate of Melodia B. Jones, deceased, against the United States to recover income tax paid, wherein the defendant filed a plea in bar.
Plea sustained and petition dismissed.
This case having been heard by the Court of Claims on defendant's plea in bar, the court, upon the report of the commissioner and the evidence, makes the following special findings of fact on defendant's plea in bar:
1. Plaintiff, Grace Jones Stewart, is the daughter of Melodia B. Jones, who died March 11, 1931 (hereinafter sometimes referred to as the "decedent"), and brings this suit as executrix of her mother's estate.
2. September 15, 1927, the decedent filed her individual income-tax return for the calendar year 1926 in which she reported a net income of $320,052.87 and a resulting tax of $99,727.33. In computing her tax liability the decedent included tax on capital net gain in the amount of $43,764.84. The capital net gain was based in part on the sale by her during the year 1926 of certain oil properties at a price of $3,200,000. A part of these oil properties had been acquired by the decedent under the will of her husband, who died December 6, 1916, and the balance between that date and the date of the sale in 1926, but all of the property had been acquired more than two years prior to 1926.
In determining the profit on the sale, the decedent used as the net cost or value of the properties $297,670.86, and computed a net profit to be realized of $2,902,329.14. A cash payment of $500,000 was made at the date of the sale and the balance was payable in installments over succeeding years. The decedent did not report as income for 1926 the entire difference between the selling price, $3,200,000, and the net cost or value as determined by her of the properties at the date of sale, $297,670.86, but elected to return the profit on the installment basis under the provisions of section 212(d) of the Revenue Act of 1926, 26 U.S.C.A. Int.Rev. Acts, page 162. On that basis she returned a profit for 1926 of $453,500 on account of the cash payment received in that year of $500,000.
3. December 16, 1930, after an examination by a revenue agent, the Commissioner sent the decedent a sixty-day deficiency letter advising her of his determination of deficiencies in her income taxes for the years 1926 and 1928 in the total amount of $83,450.40 and of an overassessment for 1927 of $7,532.54. That letter advised the decedent of her right to appeal to the United States Board of Tax Appeals for a redetermination of her tax liability for the years for which deficiencies were disclosed. The deficiency for the year 1926 was based in part upon a reduction by the Commissioner of the valuation or cost of the oil properties in connection with the sale referred to in the preceding finding from $297,670.86, as used by the decedent in her return, to $104,755. That reduction in the value of the properties increased the net profit to be realized from $2,902,329.14, as shown in the return, to $3,095,245, and increased the net profit to be returned on the installment basis for 1926 from $453,500 to $483,632, that is, additional profit to be reported in 1926 of $30,132.
4. March 11, 1932, plaintiff as executrix filed an individual income-tax return for the decedent for the period January 1, 1931, to March 11, 1931, the date of decedent's death. That return disclosed a net income of $28,241.10 and a tax liability of $766.85 which amount was paid March 18, 1932. Following an examination of decedent's books and records by a revenue agent in connection with that return, the plaintiff was advised by letter dated February 13, 1934, from the revenue agent in charge of a proposed deficiency in tax for the period January 1 to March 11, 1931, in the amount of $587,597.88. That deficiency was due in part to the inclusion in the decedent's gross income for that period of $2,369,796.80 representing the value of the installment obligations at the decedent's death from the sale heretofore referred to of oil properties remaining unpaid at that time. In computing that deficiency, the revenue agent in charge included the $2,369,796.80 in decedent's gross income as ordinary income and not as capital gain although all of the assets had been held by the decedent for more than two years prior to the date of the sale in 1926.
5. February 17, 1934, plaintiff filed a waiver extending the period for the assessment of the decedent's income taxes for the period January 1, 1931, to March 11, 1931, to June 30, 1935, and that waiver was signed by the Commissioner of Internal Revenue February 26, 1934.
6. February 20, 1934, plaintiff filed a protest against and exceptions to the report of the revenue agent referred to in finding 4 which read as follows:
"I hereby make and file protest against and exceptions to the report, findings, and recommendations of the Internal Revenue Agent in Charge, dated January 26, 1934, with respect to the income tax liability of the above-named taxpayer for the period January 1, 1931, to March 11, 1931, as follows:
"1. Exception is taken to the finding in said report of additional income in the amount of $2,369,796.80, by reason of the application of section 44(d), Revenue Act of 1928, 26 U.S.C.A. Int.Rev. Acts, page 364 on the ground that such finding is erroneous as matter of fact and as matter of law and on the ground that said section 44(d) has no application to the transmission of installment obligations by death, and that if section 44(d) be construed to apply to the transmission of installment obligations by death, the section is in violation of the Fifth and Sixteenth Amendments to the Constitution of the United States, and is void and of no force or effect.
"2. Exception is taken to the finding in said report that the said claimed additional income should be taxed as ordinary income instead of capital gain on the ground that such finding is erroneous as matter of fact and as matter of law, and contrary to the determination of the Board of Tax Appeals in the case of Provident Trust Co. v. Commissioner, 29 B.T.A. 374.
"3. Exception is taken to the proposed assessment of an additional tax in the amount of $587,597.88, or in any amount, for the reasons and on the grounds hereinbefore set forth.
"In connection with the assessment of the proposed deficiency, I wish to call to your attention the circumstance that the decisions of the Board of Tax Appeals in the cases of Provident Trust Co. v. Commissioner, 29 B.T.A. 374, and Ross v. Commissioner, 29 B.T.A. 227, relied on in the aforesaid report as authority for the proposed assessment under section 44(d) are, I am informed, in process of appeal in the United States Courts. Since the final decision in those cases will govern the question of the taxability or nontaxability of the taxpayer in this case, I beg to request that, pursuant to the consent extending the period of limitation upon assessment to June 30, 1935, which I have signed and filed, the sending of a notice of deficiency in this case be withheld during that period until the final judicial determination of the questions presented in the Osborne and the Ross cases."
7. March 7, 1935, plaintiff, as executrix of the Estate of Melodia B. Jones, filed a claim for refund of estate taxes in the amount of $129,560.93. That claim asserted, among other things, the following grounds therefor:
"The amount of $8,952,646.31 determined to be the value of decedent's net estate by the final audit is excessive due to the failure to reduce the value of the mortgage executed by Forest Oil Corporation on July 15, 1926, by $132,185.04, the amount which deponent permitted the Forest Oil Corporation to deduct from its obligations under said mortgage because of shortage of acreage, failure of warranty of title, etc., the details of which more fully appear in the rider in re Estate of Melodia B. Jones hereto attached and made a part hereof. Deponent therefore claims that the value of said mortgage as reflected by the final audit should be reduced by the amount of $132,185.04. Deponent also claims that in the event it is finally determined that the unpaid balance of said mortgage at the date of decedent's death is to be added as taxable income to the return for the period January 1, 1931, to March 11, 1931, under the provisions of section 44(d), Revenue Act of 1928, the net estate should be reduced by the amount of income tax so determined to be due, the details of which said claim are more fully set out in said rider hereto attached and made a part hereof."
8. May 3, 1935, the Bureau of Internal Revenue notified plaintiff that after review of the report of the revenue agent referred to in finding 4 a deficiency in the income tax liability of the decedent for the period January 1 to March 11, 1931, had been determined in the amount of $295,800.73 instead of the deficiency of $587,597.88 determined by the revenue agent. In that determination the Bureau computed the same profit on account of the value of the installment obligations as was used by the revenue agent, $2,369,796.80, but treated it as capital net gain instead of ordinary income in computing the decedent's tax liability for that period. May 14, 1935, plaintiff filed a waiver of restrictions on assessment and collection of the deficiency of $295,800.73 referred to above. On his May 1935 special list, the Commissioner assessed against plaintiff, as executrix of the Estate of Melodia B. Jones, the sum of $295,800.73 together with interest in the amount of $56,299.39 for the period January 1 to March 11, 1931. Following the issuance of notice and demand by the collector dated May 18, 1935, plaintiff on that day paid the total assessment of $352,100.12.
9. March 16, 1937, plaintiff, as executrix of the Estate of Melodia B. Jones, filed a claim for refund for the total amount of income tax which had been paid as shown in the preceding finding and assigned the following grounds therefor:
"Said amount of $352,100.12 was collected from deponent as income tax and interest thereon for the period January 1, 1931, to March 11, 1931 (date of death of decedent), under the provisions of Section 44(d) of the Revenue Act of 1928, on the theory that taxable income in the amount of $2,369,796.80 was realized by virtue of the transmission at her death of certain unpaid installment obligations owned by decedent. Deponent claims (1) that said Section 44(d) is unconstitutional; (2) the installment obligations being unpaid at the date of death of the decedent, no taxable income was received or realized by anyone; (3) said installment obligations constituted capital; and (4) the transaction which gave rise to said installment obligations having occurred prior to the enactment of said Section 44(d), the provisions of said Section cannot be retroactively applied to said transaction; (5) deponent further claims that in any event said estate is entitled to a refund of approximately $20,000.00 of said amount representing income tax and interest thereon overpaid on said installment obligations because the Commissioner of Internal Revenue overvalued said installment obligations remaining unpaid at the time of decedent's death in the amount of $132,185.04, which has heretofore been admitted by the Commissioner of Internal Revenue in determining the Estate Tax due from the estate of said decedent."
10. May 17, 1937, the Commissioner advised plaintiff of his proposed denial of the first four issues set out in the claim for refund of income tax filed March 16, 1937, and referred to in finding 9, and the allowance of the fifth issue in that claim, such letter reading in part as follows:
"Reference is made to your claim for the refund of $352,100.12, individual income taxes for the taxable year ended December 31, 1931.
"The basis of the claim is as follows:
"1. That section 44(d) of the Revenue Act is unconstitutional.
"2. That the installment obligations being unpaid at the date of death of the decedent, no taxable income was received or realized by anyone.
"3. That said installment obligations constituted capital.
"4. That the transaction which gave rise to said installment obligations having occurred prior to the enactment of said section 44(d), the provisions of said section cannot be retroactively applied to said transaction.
"5. That the estate is entitled to a refund of approximately $20,000.00 of said amount representing income tax and interest thereon due to a revaluation of the installment obligations remaining unpaid at the time of the decedent's death.
"Issue 5 has been conceded.
"In connection with issues 1 to 4, inclusive, you are advised that while it is true that the sale in question was made prior to the enactment of the Revenue Act of 1928 still Income Tax Ruling 2515, Cumulative Bulletin IX-1, page 125 (1930) provides as follows:
"`The decedent died subsequent to the enactment of the Revenue Act of 1928, owning installment obligations received in connection with the sale of real estate, the profit from which he had elected to return on the installment basis and on which he has reported only a portion to be realized. Upon his death the installment obligations were transmitted to the executor of his estate.
"`Held, the provisions of section 44(d) of the Revenue Act of 1928 are applicable to the transmission of the installment obligations upon the death of the decedent. The gain or loss resulting from the transmission of the installment obligations, computed in accordance with the method prescribed in the foregoing section, should be included in the decedent's return for the taxable year in which his death occurred.'
"Your attention is also invited to the decision of the United States Board of Tax Appeals in the case of Crane v. Commissioner, 30 B.T.A. 29, affirmed by the United States Circuit Court of Appeals for the Second Circuit, 76 F.2d 99. In its decision the Court held that where a taxpayer, who died on April 16, 1930, had sold real estate in 1929, taking payment in cash and a purchase, money, bond and mortgage, and had elected to return the profit therefrom on the installment basis, as allowed by section 44(b) of the Revenue Act of 1928, the installment obligations were `transmitted' upon the death of the taxpayer, and gain resulted in 1930 to the extent provided by section 44(d) of the Act. That section is not unconstitutional on the ground that it includes `unrealized' gains as income.
"[Then followed a recomputation of plaintiff's tax liability in which effect was given to a reduction of $132,185.04 in the value of the installment obligations at the decedent's death as claimed under the fifth issue of the claim for refund.]"
11. May 21, 1937, plaintiff's attorney advised the Commissioner as follows in regard to the action proposed in the Commissioner's letter of May 17, 1937:
"In response to your letter dated May 17, 1937 (Bureau Symbols IT:A:2-KVN) addressed to Mrs. Grace Jones Stewart, Executrix of the Estate of Melodia B. Jones, deceased, you are advised that your action covering Issue 5 of the claim for refund of $352,100.12 filed by said Estate for the period January 1, 1931, to March 11, 1931, reflecting an overassessment of $19,706.78 is satisfactory to the taxpayer. As to Issues 1, 2, 3, and 4 of said claim for refund which you propose to disallow, you are advised that the taxpayer does not desire a hearing, nor to file a brief. Accordingly, you are requested to issue a certificate of overassessment for the amount of $19,706.78 as indicated in your said letter and to issue official notice covering the disallowance of items 1-4, inclusive, in accordance with Section 1103(a) of the Revenue Act of 1932, at your earliest convenience.
"It is noted that your first paragraph states `Reference is made to your claim for the refund of $352,100.12, individual income taxes for the taxable year ended December 31, 1931.' This, of course, is in error because the claim for refund covers only the period from January 1, 1931, to March 11, 1931 (the date of death of decedent)."
12. May 26, 1937, the Commissioner made the following reply to the letter referred to in the preceding finding:
"Receipt is acknowledged of your letter dated May 21, 1937, written in reference to the partial disallowance of the claim for refund filed by the Estate of Melodia B. Jones, deceased, for the taxable year ended December 31, 1931.
"You invite attention to the fact that the claim for refund was filed for the period January 1, 1931, to March 11, 1931. In reply you are advised that in accordance with the provisions of article 371, page 114, Regulations 74, the return of the decedent for the year in which she died is a return for twelve months and not for a fractional part of a year. Therefore, the claim for refund is really for the return filed for the taxable year ended December 31, 1931, on which was reported income for the period January 1, 1931, to March 11, 1931.
"A certificate of overassessment has been prepared and will reach the executrix through the office of the collector of internal revenue for the district in which the return was filed."
13. Pursuant to his letter of May 17, 1937, referred to in finding 10, the Commissioner issued a certificate of overassessment in favor of the plaintiff showing a total overassessment for the taxable year ended December 31, 1931, of $19,706.88. A part of the overassessment in the amount of $2,333.80 was offset against a proposed deficiency for 1934, and the net overassessment, $17,373.08, with interest of $2,214.47, was paid to plaintiff June 8, 1937.
August 12, 1937, the Commissioner advised plaintiff of his formal rejection of the claim for refund of income tax referred to in finding 9 to the extent not allowed by the certificate of overassessment referred to above.
14. August 30, 1937, the Commissioner advised plaintiff's representative as follows:
"Reference is made to your call at this office under date of August 30, 1937, at which time you furnished a letter of August 26, 1937, from Mr. J.E. Gordon, 100 Central Park, South, New York, New York, together with enclosures mentioned therein, relative to interest of $2,214.47 computed on the principal of $17,373.08 certificate of overassessment, in favor of the above-named taxpayer for the year 1931.
"You are advised that the total overassessment as shown in the body of the certificate is $19,706.88, of which $16,555.83 represents tax and $3,151.05 represents deficiency interest. From this amount $2,333.80 was withheld in connection with proposed deficiency for the year 1934, leaving a net overassessment of $17,373.08. The proportional part of the net overassessment of tax and interest would be $14,595.20 (principal) and $2,777.88 (interest).
"The interest of $2,214.47 was computed by this office on the net overassessment of $17,373.08 from May 18, 1935, the date of overpayment, to March 7, 1937, the date preceding the date of the refund check by not more than thirty days as provided by Section 614, Revenue Act of 1928, 26 U.S.C.A. Int.Rev. Acts, page 463.
"With regard to Section 1103(a), Revenue Act of 1932, 26 U.S.C.A. Int.Rev. Acts, page 652, you are advised that official notice relative to the rejected portion of the claim was sent by registered mail to Mrs. Grace Jones Stewart, Executrix, 100 Central Park, South, New York, New York, under date of August 12, 1937."
September 15, 1937, the Commissioner advised plaintiff's representative further as follows:
"Reference is made to Paragraph 3 of Bureau letter addressed to you under date of August 30, 1937, with regard to interest of $2,214.47 computed on the principal of $17,373.08, certificate of overassessment, Schedule IT:60433, in favor of the above-named taxpayer for the year 1931, which reads as follows:
"`The interest of $2,214.47 was computed by this office on the net overassessment of $17,373.08 from May 18, 1935, the date of overpayment, to March 7, 1937, the date preceding the date of the refund check by not more than thirty days as provided by Section 614, Revenue Act of 1928.'
"You are advised that the statement showing interest computed to March 7, 1937 is erroneous. The correct date to which interest was computed is July 3, 1937 Please correct your records accordingly."
15. Pursuant to the subject matter of the letters to plaintiff's representative as set out above, the Commissioner issued a certificate of overassessment in favor of plaintiff for the taxable year ended December 31, 1931, in the amount of $2,333.80. That amount together with interest of $361.20 was credited to a deficiency of plaintiff for the year 1934 on December 17, 1937.
This income tax case comes before the Court on defendant's plea in bar. It raises a single issue, the sufficiency of a claim for refund. In her petition plaintiff seeks recovery on the ground that she should be permitted to revalue certain assets involved in a sale in 1926 for the purpose of reducing the profit derived from such sale. The gravamen of the plea is that the claim for refund did not give the Commissioner notice of any such issue.
The facts upon which the plea is based are not in controversy, and are briefly stated as follows:
In 1926 plaintiff's decedent disposed of certain property for $3,200,000 which had been acquired by her more than two years prior thereto, and received a cash payment thereon of $500,000. She computed a profit on the sale and, in accordance with Section 212(d) of the Revenue Act of 1926, 26 U.S.C.A. Int.Rev. Acts, page 162, elected to report the profit on the installment basis, and continued to report in that manner until her death in 1931. After the decedent's death, plaintiff filed an income tax return for the decedent for the period January 1, to March 11, 1931, the date of decedent's death, and in that return did not report any income on account of the installment obligations remaining unpaid at that time. Upon an examination of that return, the Commissioner held that the outstanding installment obligations must be considered as having matured at the decedent's death pursuant to the provisions of Section 44(d) of the Revenue Act of 1928, 26 U.S.C.A. Int.Rev. Acts, page 364, and that, accordingly, any profit on the sale in 1926 which had not previously been accounted for through the installment basis accrued at that time for income tax purposes. As a result of such determination, the Commissioner assessed a deficiency which plaintiff paid May 18, 1935.
March 16, 1937, plaintiff filed the claim for refund which she contends is sufficient as a basis for this suit. It contains five grounds, namely, (1) that Section 44(d) of the Revenue Act of 1928 is unconstitutional; (2) that since the installment obligations were unpaid at the date of the death of the decedent, no taxable income was received or realized by anyone; (3) that the "installment obligations constituted capital;" (4) that it was improper to give a retroactive effect to Section 44(d) and make it applicable to a transaction which occurred prior to its enactment; and (5) that in any event the Commissioner had incorrectly valued the installment obligations remaining unpaid at the time of decedent's death. The Commissioner denied the claim as to the first four grounds, but conceded plaintiff's contention as to the fifth ground, and made a refund accordingly.
Plaintiff concedes that items one, two and four which were denied do not provide a basis for this suit, and that item five was allowed by the Commissioner. Her sole contention is that the allegation under the third item in the claim, "installment obligations constituted capital," properly put the Commissioner on notice that she was claiming a revised cost or value of the assets involved in the 1926 sale. At no time do we find where plaintiff or her decedent questioned the Commissioner's determination of the cost or value of property which was sold. When the Commissioner examined the decedent's returns in 1930 for the years 1926 and 1928, and computed the total profit to be realized from the sale, he fixed a cost or value for this property, and when he came to determine the profit which had not yet been reported on the outstanding installment obligations, he did not disturb his previous determination as to the amount of profit realized on the sale in 1926. The record does not disclose any protest on account of this feature in either determination.
The Commissioner's regulations in force at the time required that "The claim 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. [Regulations 86, Art. 322-3.]"
The Supreme Court, in passing upon the requirement that a claim for refund must be filed as a prerequisite to a suit, not only upheld a regulation similar to the one just quoted but also stated that "quite apart from the provisions of the Regulation, the statute is not satisfied by the filing of a paper which gives no notice of the amount or nature of the claim for which the suit is brought, and refers to no facts upon which it may be founded." United States v. Felt Tarrant Mfg. Co., 283 U.S. 269, 51 S.Ct. 376, 377, 75 L.Ed. 1025. Here we have merely the general statement "installment obligations constituted capital" without any allegation of facts upon which it is founded or anything which would suggest the nature of the claim as consistent with that now contended for by plaintiff.
The contention that the expression in question should receive the interpretation requested by plaintiff by reason of the attitude taken by plaintiff in an earlier protest not only is without merit but also serves to show the opposite. What plaintiff asked in the protest insofar as here material was that the Commissioner withhold his final determination until two cases which had been decided by the Board of Tax Appeals became final through further judicial determinations. In neither of those cases was any question raised which related to the acquisition basis of the assets but rather whether Section 44(d) was constitutional and whether under that section installment obligations were transmitted at death. The Board held contrary to this plaintiff's position on both issues. One of these decisions became final without appeal and the other was affirmed on appeal. Provident Trust Company of Philadelphia v. Commissioner, 3 Cir., 76 F.2d 810.
Apparently what plaintiff meant by the words "installment obligations constituted capital" was that at the moment of decedent's death such obligations became corpus or capital assets subject to a Federal estate tax and therefore no taxable income could be realized from the collection of such obligations except the amount which exceeded their value at decedent's death. Cf. Moore v. United States, 10 F. Supp. 143, 80 Ct.Cl. 842, certiorari denied 296 U.S. 583, 56 S.Ct. 94, 80 L.Ed. 412. That, however, is very different from using the words as a basis of notice to the Commissioner that plaintiff desired to have redetermined the cost or value of assets which were sold in 1926.
The language of the present claim for refund is too general, indefinite, and unsupported by details to have put the Commissioner on notice that plaintiff desired the assets involved in the sale made in 1926 to be revalued. The profit from this sale had been determined by the Commissioner in 1930, during the life of plaintiff's decedent. No question was raised by the decedent during her life time or plaintiff that this determination was incorrect. After all these years have expired the plaintiff now for the first time seriously contends that the value should have been redetermined by the Commissioner under the general assertion in the refund claim which did not comply with the law or regulations in clearly indicating to the Commissioner that a revaluation of the 1926 assets was desired. It is too late now to make such a claim.
The plea is sustained and the petition is dismissed. It is so ordered.
MADDEN, WHITAKER, and LITTLETON, Judges, concur.
JONES, Judge, took no part in the decision of this case.