UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
May 2, 1955
Estate of Lester FIELD, Deceased, Barnett Hollander, Temporary Administrator and Executor, Plaintiff,
UNITED STATES of America, Defendant
The opinion of the court was delivered by: MURPHY
On this motion, the government seeks dismissal of the complaint pursuant to Rule 12(b), Federal Rules of Civil Procedure, 28 U.S.C.A. The motion is based upon two sections of the Internal Revenue Codes of 1939 and of 1954, one being a statute of limitations,
the other a provision that where a taxpayer applies to the Tax Court to review a deficiency determined by the Commissioner of Internal Revenue, he cannot bring an action in the District Court for refund.
A third ground for the motion, added later,
is the time bar of Section 207(b) of the Technical Changes Act of 1953.
Plaintiff's claim arises out of proper valuation of the corpus of an inter vivos trust under § 302(c) of the Revenue Act of 1926.
The decedent, Lester Field, died on November 16, 1937, in Paris, France, as a citizen of the United States. On June 8, 1922, the decedent transferred to a trustee certain assets valued at the time of his death at $ 157,452.82. The material portions of the trust and events have been thus summarized:
'1. The trust was to continue for the joint lives of two nieces and the life of the survivor of them unless terminated earlier under 4, infra.
'2. The income was to be paid to the decedent for his life unless the trust terminated before his death.
'3. If the decedent died prior to the termination of the trust leaving issue, the trust property was to be held in trust for the children or their issue, subject to decedent's right to reduce or cancel the amounts of the gifts by will or written instrument. Provisions were also made for a $ 150,000 trust for the widow which is not in issue in this case.
'4. During the continuance of the trusts the income was to be paid to the beneficiary named and upon the death of the beneficiary during the continuance of the trust the corpus was to be paid to the beneficiary's issue surviving, but if there be none, to the issue of the decedent surviving; if none, then to decedent's brother or sister or their issue.
'5. Upon termination of the trust before the death of the decedent the corpus was to be paid over to decedent.
'6. Upon termination of the trust after the death of the decedent but during the existence of any trust the corpus was to be paid to the life beneficiary.
'The decedent at no time had any issue. At his death in 1937 at the age of 52, he was survived by the two nieces whose lives were to measure the maximum life of the trust. These nieces were then aged 18 and 25 respectively. He was also survived by his widow, a sister and issue of a deceased brother.'
Various deficiencies were assessed against the estate of Lester Field because of plaintiff's failure to include in its estate tax returns the assets covered by the deed of 1922. Plaintiff petitioned the Tax Court for review. An adverse determination there
was reversed by the Court of Appeals, which remanded the case to the Tax Court with directions to include in the gross estate only $ 24,930.76 -- the value at time of death of a remainder of $ 157,452.82 payable at all events upon death of the survivor of two females, aged 18 and 25 respectively.
The Supreme Court reversed, thus affirming the Tax Court, observing:
'The trust here was limited in duration to the lives of the decedent's two nieces. But if both nieces died before the decedent, the corpus would have been paid to the decedent rather than to the beneficiaries named in the trust instrument (in this instance the decedent's sister and the issue of his deceased brother). Thus until decedent's death it was uncertain whether any of the corpus would pass to the beneficiaries or whether it would revert to the decedent. Decedent retaining a string attached to all the property until death severed it, the entire corpus was swept into the gross estate and was taxable accordingly.'
This claim is based on Section 607 of the Revenue Act of 1951, 26 U.S.C.A. § 811 note, which provides:
'Transfers conditioned upon survivorship. In the case of property transferred by a decedent dying after March 18, 1937, and before February 11, 1939, the determination of whether such property is to be included in his gross estate under section 302(c) of the Revenue Act of 1926 (44 Stat. 70) as a transfer intended to take effect in possession or enjoyment at or after his death shall be made in conformity with Treasury Regulations in force at the time of his death.'
The government concedes that, for purposes of this motion, plaintiff's claim would be allowable under the 'Treasury Regulations in force at the time of his death.'
According to plaintiff's complaint, a claim for refund of $ 25,811.95 was made on June 30, 1952, denied by the Commissioner of Internal Revenue on October 20, 1952, and this action commenced on October 11, 1954. On this motion, plaintiff contends in substance that Section 607 of the Revenue Act of 1951 was a pro tanto repeal of prior statutes cited by the government as barring plaintiff's claim (notes 1, 2, ante), and that the subsequent statute enacted in 1953 (note 3, ante) has no relation to the Act of 1951 upon which plaintiff bases its claim.
We deal first with the government's claim that the action is barred by provisions of the Internal Revenue Code of 1939 (notes 1 and 2, ante). On this, the nature of the problem and the legislative history of the measure designed to deal with it are relevant in ascertaining congressional intent.
At the time of decedent's death, (1937) under the estate tax regulations then in effect (note 10, ante), the existence of a possibility of reverter probably did not subject the transfer of property to estate tax. Following the enactment of the Internal Revenue Code of 1939, the Commissioner took a contrary position and after a course of litigation in which many cases were decided, it was ultimately held that the existence of a possibility of reverter of any kind and of any value, no matter how nominal, would subject the transfer to estate tax even where, as in the instant case, administrative regulations in effect at the time of decedent's death provided otherwise.
To alleviate what it considered to be the injustice of such a rule, Congress enacted the Technical Changes Act of 1949. Relief granted was limited in scope to a class of cases narrower than that encompassed by the court decisions. The statute in § 7(b) relieved from taxability possibilities of reverter which were excluded from the gross estate where they existed merely by operation of law of where, if the reversionary interest was express, it was valued immediately before the decedent's death at not more than 5 percent of the total value of the assets transferred. The class of cases covered was also limited in time to those of decedents who died on or after February 11, 1939, the effective date of the Internal Revenue Code of 1939. Finally, a time limitation of one year for assertion of a claim for refund was added in Section 7(c) of the statute.
An additional class of claims barred by court decisions and not covered by the Technical Changes Act of 1949 were included in Section 607 of the Revenue Act of 1951, supra, upon which plaintiff relies in this action. This statute covered decedents who died after March 18, 1937 and before February 11, 1939. It also differed from the Technical Changes Act of 1949 in adopting the test of the Treasury Regulations in force at the time of decedent's death, instead of that of valuation at not more than 5 percent of the total value of assets transferred employed in the 1949 Act. Finally, unlike the 1949 Act, no provision for time limitation for assertion of claims for refunds was included. Whether this omission was inadvertent or intentional is not clear from the legislative history of Section 607. What is clear from the report of the Senate Finance Committee,
the supplemental report of that Committee
and the Statement of the Managers on the Part of the House after conference with the Senate Committee,
is that the measure was designed to provide refunds for transfers such as that involved in the Field Estate in 1937.
If the prohibition of the Internal Revenue Code of 1939 (note 2, ante) against a taxpayer bringing an action in a district court for refund where he has applied to the Tax Court to review a deficiency, remains unaffected by the measures of relief under the 1949 and 1951 Technical Changes Act, then of course judicial consideration of such claims is precluded. But the clear intent of Congress to alleviate what it deemed abuses in these cases might well operate as a partial repeal of this preexisting bar.
Indeed, even where statutes explicitly preclude judicial consideration of administrative action, federal courts have assumed jurisdiction.
To hold otherwise with respect to the statute on which this action is based would render the measure an empty gesture.
With respect to omission of a time limitation for assertion of claims under the Act of 1951 and its inclusion in the Act of 1949, it may be, as the government suggests, that Congress intended to carry over the limitation of the 1949 Act into the 1951 Act without explicitly doing so. If this is the case, it is by no means clear that the instant action is barred. The complaint alleges -- and these allegations must be taken as true for purposes of this motion -- that claim for refund was made with the Commissioner of Internal Revenue on June 30, 1952, within any one-year period after enactment of Section 607 of the Technical Changes Act of 1951. The instant action was brought within the prescribed
two-year period after denial of the claim by the Commissioner.
The alleged bar of Section 207(b) of the Technical Changes Act of 1953 (note 4, ante), applies to the instant situation of plaintiff insofar as the date of death of the decedent is involved. Its scope otherwise, however, is not the same as Section 607 upon which plaintiff relies, nor does this statute purport to modify this section. Its effect -- unlike that of Section 607 -- is to apply the 5 percent exclusion test of the Technical Changes Act of 1949 to estates of all decedents who died since the enactment of the Revenue Act of 1926 and before February 11, 1939, without regard to any treasury regulations in effect at the times of death of such decedents. The Act of 1953 is primarily concerned with estates where taxability is based on retention of a life interest in income; Section 607 is concerned primarily with taxability based upon possibilities of reverter without regard to retention of income rights.
Accordingly, defendant's motion is denied.
This is an order. No settlement is necessary.