Elbert v. Commissioner ( 1943 )

Robert G. Elbert and Marian Bourne Elbert (Husband and Wife), Petitioners, v. Commissioner of Internal Revenue, Respondent

Elbert v. Commissioner

Docket No. 110499

United States Tax Court

2 T.C. 892; 1943 U.S. Tax Ct. LEXIS 39;

October 18, 1943, Promulgated

---

Decision will be entered under Rule 50.

On the facts, held that this Court has no jurisdiction to allow as recoupment against the deficiency in income tax determined against petitioners for the taxable year the amount of an erroneous payment by them of gift tax in a prior year which was not due and for which a claim for refund was barred by the statute of limitations. Held, further, that if this Court had such jurisdiction the claimed recoupment is not allowable because of the provisions of sections 608 and 609 (b) of the Revenue Act of 1928.

James H. Purdy, Jr., Esq., for the petitioners.

Walt Mandry, Esq., for the respondent.

Tyson, Judge.

---

TYSON

The respondent has determined a deficiency of $ 40,072.15 in the income of petitioners for the taxable year ending October 31, 1938. The pleadings raise the following issues: (1) whether the respondent erred in failing to allow as a deduction in computing taxable net income, office expenses of $ 23,634.09 representing ordinary and necessary expenses incurred and paid by the petitioners; and (2) whether the respondent erred in failing to allow a gift tax paid by one of the petitioners in 1936 in the amount of $ 18,600 as a credit by way of recoupment, against the deficiency determined herein by reason of the disallowance of interest in the amount of $ 35,760 in computing taxable net income for the taxable year.

The parties have settled the first issue and it is stipulated that the correct income tax liability is $ 30,638.46 without giving effect to petitioners' claim for a credit of $ 18,600 against such liability. Effect to this stipulation will be given under Rule 50.

The second issue is the only one left to be decided.

The proceeding has been submitted upon the pleadings and a stipulation of facts. The stipulated facts not set forth herein are included by reference.

FINDINGS OF FACT.

The petitioners are husband and wife and filed a joint return for the period here involved with the collector for the third district of New York.

On December 31, 1935, petitioner Marian Bourne Elbert executed a trust instrument in favor of her daughter, with her husband and herself as trustees and, on that date, delivered to the trustees her check in the amount of $ 300,000 as the principal of the trust.

On January 3, 1936, the trustees gave to Marian Bourne Elbert their check for $ 298,000 and received therefor her unsecured note for $ 298,000, with interest at 6 percent.

On March 16, 1936, Marian Bourne Elbert filed a gift tax return based on the gift of $ 300,000 and at that time paid the collector of internal revenue a gift tax of $ 18,600. She did not file a claim for refund of that gift tax and the time for the filing of such claim expired March 16, 1939. The notice of deficiency herein was mailed to petitioners on January 13, 1942, and the petition herein was filed on April 11, 1942.

On October 8, 1936, Marian Bourne Elbert paid the trustees $ 13,410 as interest on her note of $ 298,000 from January 3, 1936, to October 3, 1936, and took as a deduction in her separate income tax return for the year ending on the latter date the amount of that interest. The respondent in a notice of deficiency dated August 4, 1939, disallowed the claimed deduction and determined a deficiency of $ 13,431.80. On November 12, 1941, the United States Board of Tax Appeals (now The Tax Court of the United States) promulgated a decision in , based on the notice of deficiency of August 4, 1939, approved the determination of the respondent in disallowing the claimed deduction, and held that the purported gift of $ 300,000 was not a real gift for tax purposes.

On October 29, 1938, Marian Bourne Elbert paid $ 35,760 to the trustees as interest on the note of $ 298,000 from October 3, 1936, to October 3, 1938, and took as a deduction in the petitioners' joint income tax return for the year ending October 31, 1938, the amount of the interest so paid. This deduction was disallowed by respondent in his notice of deficiency for the taxable year involved. The only other adjustments made by respondent in his notice of deficiency were the disallowance of deductions of office expenses in the amount of $ 23,634.09 and of taxes in the amount of $ 226.65. All these disallowances resulted in the determination of the deficiency of $ 40,072.15. Because of the decision in the proceeding above referred to, the petitioners have raised no question as to the disallowance of the $ 35,760 of interest.

OPINION.

The sole question presented is whether petitioners should be allowed, by way of equitable recoupment, a credit of the $ 18,600 paid by Marian Bourne Elbert as a gift tax on March 16, 1936, against the deficiency determined herein by the respondent. The statute of limitations had run against the filing of a claim for refund of that amount at the times of the filing of the petition herein and of the mailing of the deficiency notice upon which the petition was based.

The petitioners contend: (1) that this Court has jurisdiction of the claimed recoupment; (2) that the matters involved in the deficiency assessment and the matters involved in the gift tax mistakenly paid arise out of the same transaction; and (3) that, the statute of limitations having run against the filing of a refund of the gift tax paid in 1936, they are entitled to the claimed recoupment. The position taken by the respondent is diametrically opposed to these contentions.

In many cases, among the later ones being , and , we have held, broadly, (without differentiating a claimed recoupment arising out of the same transaction as the deficiency against which it is claimed from one that did not) that we have no jurisdiction to allow recoupment, against a determined deficiency, for taxes overpaid or erroneously paid in years prior to the year for which the deficiency is determined, and following those holdings we also hold, as to the first contention of petitioners, that we have no jurisdiction to allow the $ 18,600 as recoupment against the deficiency involved herein. Cf. .

The petitioners in support of their first contention that this Court has such jurisdiction cites , and ; certiorari to the United States Supreme Court granted June 1943.

We do not think that the Dixie Margarine Co. case supports petitioners' first contention. In that case, neither in the proceeding before the Circuit Court nor in the proceeding before us in , from which petition for review was taken to that Court, was the question of whether or not this Court had jurisdiction of recoupment decided. The sole question decided was whether or not the claimed recoupment grew out of the same transaction as did the determined deficiency against which the recoupment was sought. It does not appear from either the opinion of the Circuit Court or our own that the question of this Court's jurisdiction of a claim in recoupment was raised. We can not therefore regard either the opinion of the Circuit Court, or our own, as passing on this question.

In , the Circuit Court of Appeals for the Eighth Circuit, by a divided court, held that this Court had jurisdiction of recoupment so as to allow an overpayment of tax made by the taxpayer in prior years to be recouped against the deficiency determined in the taxable year where the statute of limitations barred the filing of a claim for refund of that overpayment. Notwithstanding the high esteem in which we hold that Court and the profound respect we have for its pronouncements, we feel impelled to adhere to our position on this question as taken in , and , and in other cases cited in Helmuth Heyl.

None of the other cases cited by petitioners are pertinent to their first contention, since they originated in either the Court of Claims or a Federal District Court and therefore have no pertinency to the question of whether or not this Court has jurisdiction of claims in recoupment.

Assuming, however, that this Court has jurisdiction of the claimed recoupment for the gift tax mistakenly paid, the petitioners would nevertheless not be entitled to that recoupment because of the provisions of section 608 and section 609 (b) of the Revenue Act of 1928. ^{*47 The pertinent part of section 608 states that "A refund of any portion of an internal-revenue tax * * * shall be considered erroneous -- (a) if made after the expiration of the period of limitation for filing claim therefor," and the pertinent part of section 609 (b) states that "A credit of an overpayment in respect of any tax shall be void if a refund of such overpayment would be considered erroneous under section 608." (Italics supplied.)}

The statute of limitations for the filing of a claim for refund of the gift tax here sought to be recouped having expired, a refund of that tax would be considered erroneous under section 608 and, by the same token, a credit of the overpayment represented by that gift tax against the deficiency for the taxable year would be void.

In , there was an income tax due from but not assessed against the taxpayer for the year 1928 which exceeded the amounts of overpayments of income tax made by him for the years 1929, 1930, and 1931. The taxpayer sued a collector of internal revenue of the United States in a Federal District Court to recover the amount of the overpayments after claim for the tax for 1928 was barred. The Government sought recoupment of the unpaid tax for 1928, but the Court, although assuming that in the circumstances equitable principles would allow the recoupment in the absence of any statutory provision requiring a different result, held that there was not such an absence of statutory provision, since Congress had limited the right of the Government to the recoupment sought by sections 607 and 609 (a) of the Revenue Act of 1928, thereby precluding the Government from such recoupment. To like effect was the holding in . These holdings are apposite here, since sections 607 and 609 (a), applicable to a claim in recoupment by the Government, are complementary to sections 608 and 609 (b), applicable to a claim in recoupment by a taxpayer; and if recoupment by the Government is precluded by sections 607 and 609 (a), recoupment by the taxpayer is likewise precluded by sections 608 and 609 (b), cf. , page 7, and for the same reason, i. e., that the provisions of statutes covering the situation preclude the application of the doctrine of recoupment.

In view of our above holding it is unnecessary to decide whether or not the matters involved in the deficiency assessment and the matters involved in the gift tax mistakenly paid arise out of the same transaction.

Decision will be entered under Rule 50.

---

Footnotes

• 1. SEC. 608. EFFECT OF EXPIRATION OF PERIOD OF LIMITATION AGAINST TAXPAYER.

  A refund of any portion of an internal-revenue tax (or any interest, penalty, additional amount, or addition to such tax) made after the enactment of this Act, shall be considered erroneous --

  (a) if made after the expiration of the period of limitation for filing claim therefor, unless within such period claim was filed; or

  (b) in the case of a claim filed within the proper time and disallowed by the Commissioner after the enactment of this Act, if the refund was made after the expiration of the period of limitation for filing suit, unless --

  (1) within such period suit was begun by the taxpayer, or

  (2) within such period, the taxpayer and the Commissioner agreed in writing to suspend the running of the statute of limitations for filing suit from the date of the agreement to the date of final decision in one or more named cases then pending before the United States Board of Tax Appeals or the courts.

  SEC. 609. ERRONEOUS CREDITS.

  * * * *

  (b) Credit of barred overpayment↩. -- A credit of an overpayment in respect of any tax shall be void if a refund of such overpayment would be considered erroneous under section 608.