The opinion of the court was delivered by: BYERS
The only question for decision is whether the plaintiff's claim for relief in the sum of $ 3,108.67, overpayment of Federal Estate tax, and $ 358.00 overpayment in interest, making together $ 3,466.67, with interest from December 1, 1939, the date of payment of both items, can be defeated by the matters pleaded by the Government by way of avoidance.
The facts are stipulated, and may be briefly summarized as follows:
James O'Connor died October 4, 1936, owning 20% of the stock of Canobie Corporation (namely, 7,000 shares), a company organized under the laws of Delaware, to hold the properties and assets of five brothers who were equal owners of the stock. That company was the record owner of sundry corporate stocks and bonds, and received and disbursed the income therefrom according to the corporate purpose and practice.
The Executors of James O'Connor elected to return the value of his shares, for the purposes of the estate tax, as at the anniversary of his death (according to the applicable provisions of the Revenue laws) at 85% of the book value thereof. An estate tax was paid on January 4, 1938, of $ 36,390.34, which was computed on that valuation, plus income received during the twelve months which elapsed after the decedent's death, the gross estate so returned for taxation being $ 402,839.20 which included the Canobie stock owned by James and one-quarter of that which had been owned by his brother Charles and devolved upon the former. This subject will be referred to later.
The items of post-mortem income included in that figure were $ 15,625.00 and $ 3,423.64, amounting together to $ 19,048.64.
The plaintiffs seek a refund for overpayment of tax on that income item, which income is computed at $ 18,639.99. The difference between these two figures of $ 408.65 does not require explanation for present purposes.
The basis of the plaintiffs' claim is the improper inclusion of the post-mortem income as a sum added to the valuation to be attributed to the decedent's Canobie stock at the date of his death. That sum was required to be included in the return according to Article 11 of Treasury Regulations 80 (1937) which was approved in Saks et al. v. Higgins, 2 Cir., 111 F.2d 78, decided April 8, 1940, affirming the decision of the District Court, 29 F.Supp. 996 dated October 27, 1939.
The tax payment based upon the return as filed, which included the item in question, must therefore be deemed to have been made under compulsion.
The 85% valuation of the Canobie stock was not acceptable to the Bureau of Internal Revenue, which insisted upon a valuation of 100% according to the market values of the securities owned by the corporation; thus an additional levy of $ 9,640.05 was laid as a deficiency assessment.
Since the issue so raised applied as well to the stock standing in the name of James as to that belonging to Charles (of which James inherited one-quarter), it will be seen that, in connection with the estate tax to be paid on Charles' stock, the question was appropriate for litigation, and so the matter was pending in the Board of Tax Appeals, Charles having predeceased James. In that controversy, the same issue was presented as to whether the Canobie stock should be valued at 100% or 85%. Settlement of that controversy was agreed to as the result of negotiation, upon a fifty-fifty basis, and valuation at 92 1/2% was thereby sanctioned, according to a stipulation dated November 20, 1939, which was the basis of an order of the Board of Tax Appeals dated December 6, 1939.
It was further agreed, between the Bureau and the attorney who appeared for the personal representatives of both Charles and James, that the valuation so mutually consented to should govern not only the stock which James inherited from Charles, but also the stock which James had owned in his own right. To this extent the estate tax proceedings in the two estates were interwove and necessarily uniform in result so far as the valuation of the Canobie stock was concerned.
Since the return in the estate of Charles was based upon a valuation fixed at the date of his death, February 12, 1936 (nearly eight months prior to that of James), no question there arose concerning post-mortem income. It is a fair inference therefore, that the agreement to value the Canobie stock at 92 1/2% in both estates reflected a recognition by the Bureau that the figures representing post-mortem income in the return made for James' estate had to do with an element of value that was apart from the agreed valuation of the stock itself. That understanding would have been entirely compatible with the Supreme Court decision later to be noticed.
This means that, if it had been intended to argue (should the occasion arise in the then future) that the possible elimination of that separate item from the taxable property of James would affect the 92 1/2% valuation, the occasion would have been appropriate to impose upon the Executors of James an undertaking not to seek any recovery for an alleged overpayment in that connection, in the waiver next to be discussed. Such an agreement would have been in line with the practice disclosed in Castell v. United States, 2 Cir., 98 F.2d 88. The absence of such a provision from this waiver will be seen to establish a line of demarcation between that case and this.
The negotiated settlement in this case fixing the valuation of Canobie stock at 92 1/2% resulted in the execution by plaintiffs of a waiver of restriction against immediate assessment, etc., on November 13, 1939, in the following form:
'Waiver of Restriction Against Immediate Assessment and Collection of Deficiency in Estate Tax