The opinion of the court was delivered by: BRENNAN
In this action plaintiff seeks to recover unpaid income taxes for the year 1947. An appropriate judgment is sought against the executor of the estate of the deceased taxpayer and several legatees under his will to whom moneys have been paid by the executor from the assets of the estate.
The facts are substantially undisputed. The applicability of statutory provisions limiting the time, within which a tax assessment may be made and an action to recover the assessed deficiency may be commenced, are the sole problems involved herein and briefed by the litigants. A summary of the factual background is set out below.
Kenneth L. Shepard, a businessman, residing in Onondaga County, New York, filed his 1947 federal income tax return on April 15, 1948. His return showed a taxable income and the tax, as computed by the taxpayer, was paid. On March 14, 1951, a so-called ninety day letter, asserting a tax deficiency for the taxable year of 1947 in the amount of $ 2,577.01, was mailed to the taxpayer. This notice was apparently received on March 15, 1951. Same contained the usual information as to the right of the taxpayer to dispute the amount of the deficiency by filing a petition with the Tax Court within a ninety day period. It appears that the asserted deficiency for the most part arises by reason of the addition of $ 5,000 to the income of each of two business ventures in which the taxpayer was engaged. On May 7, 1951 and within the ninety day period, the taxpayer petitioned the Tax Court for a review of the deficiency, above referred to. On September 13, 1951, the taxpayer died, leaving a last will and testament which was admitted to probate on November 16, 1951 and defendant, Milo J. Shepard, was appointed executor thereof by the Surrogate's Court of Onondaga County. On May 20, 1952 apparently as the result of a re-audit, above referred to, the tax deficiency was recomputed and determined in the amount of $ 3,243.60 and the executor executed Form No. 903 which in its language waived the restrictions provided in Section 272(a) of the Internal Revenue Code, 26 U.S.C. § 272(a) and consented to the immediate assessment and collection of the deficiency in the amount last above mentioned. The amount of the deficiency at the above time being disputed in the Tax Court, an official of the Internal Revenue Bureau on May 26, 1952 wrote to the executor advising him in effect that the above waiver would not accomplish the closing of the matter in the Tax Court and enclosed stipulations for the signature of the executor to be filed in the Tax Court. On June 12, 1952, the stipulation was signed by the executor and a representative of the Bureau of Internal Revenue. The stipulation provided that the Tax Court may enter its decision finding a deficiency in the 1947 tax return of the taxpayer in the amount of $ 3,243.60. The stipulation further provided 'that effective upon the entry of the Court's decision, petitioner waives the restrictions, if any, contained in the applicable internal revenue act or acts, on the assessment and collection of said deficiency, plus interest as provided by law.' On August 28, 1952 the Tax Court entered its decision, pursuant to the stipulation, finding the deficiency in the above amount. On October 24, 1952, an assessment was made in accordance with the order of the Tax Court for the amount of the deficiency plus interest. Exh. 3. Notices of the assessment and demands for payment were thereafter given to and made upon the executor and a copy of a claim was filed with the executor on May 14, 1953. A duplicate of said claim was filed with the Clerk of the Surrogate's Court of Onondaga County. On October 23, 1958 this action was commenced.
Prior to the commencement of this action, the United States commenced a proceeding in the Surrogate's Court of Onondaga County seeking an accounting by the executor of the estate of the deceased taxpayer, and to compel the payment by the executor of the unpaid tax above referred to. On June 26, 1958, the Surrogate made his decision, finding in effect that the claim, involved herein, was valid; was not barred by any statute of limitations and directed that payment thereof be made on or before August 14, 1958. Payment has not been made and further action in the Surrogate's Court has been withheld pending a decision in this action.
It is sufficient to say that viewing the evidence and records in a most charitable light that the administration of the estate of the taxpayer has been badly handled. The assets of the estate exceeded in a substantial amount the liabilities thereof. The estate is now and has been insolvent and no assets remain therein. During the course of the administration of the estate, the following payments from the assets thereof have been made by the executor to the legatees in the amounts and as named below.
Norman J. Shepard $ 4500.
Carl P. Shepard 2500.
Raymond F. Shepard 2000.
Milo J. Shepard 4500.
Elsie M. Shepard 1500.
There is some evidence that the payment to Elsie M. Shepard, as above, was made to her as a creditor rather than a legatee but her liability would seem to be unchanged.
This action seeks judgment against the defendants upon the theory that the moneys, received by each, constituted a trust find subject to the payment of the unpaid taxes.
It is the court's understanding that the plaintiff no longer seeks a judgment against defendant Carli Flo Shepard, who received the amount of $ 13,500 and accordingly the complaint is considered as withdrawn as against this defendant.
Both parties agree that the provisions of the Internal Revenue Act of 1939 must be applied in the determination of the dispute arising here. 26 U.S.C. § 7851(b)(1) and (d), 1954 I.R.Code. The statutory citations herein therefore refer to the 1939 Act unless otherwise indicated. A better understanding of the issue involved may be had by first stating defendant's contentions.
As understood, defendants contend that the assessment made October 24, 1952 is beyond the three year limitation period provided by 26 U.S.C. § 275(a) which is applicable. They conclude that the alleged assessment is invalid. They further conclude that this action is barred by the expiration of the limitation period provided in 26 U.S.C. § 276(c).
Plaintiff's contentions may be summarized as follows.
(1) That the assessment of October 24, 1952 is valid and was within the three year limitation period provided in 26 U.S.C. § 275(a) after giving effect to the time periods during which the running of the statute of limitation was suspended according to the provisions of 26 U.S.C. § 277. (2) That the five year statute of limitations upon assessment provided in 26 U.S.C. § 275 (c) is applicable. (3) That the executor is estopped from disputing the validity of the assessment by the proceedings had in the Surrogate's Court of Onondaga County or that same is res judicata insofar as the executor is concerned. (4) That the unexpired portion of the limitation period on assessment remaining at the time of the mailing of the notice of deficiency should be carried over and added to the sixty day period after the decision of the Tax Court becomes final or to the sixty day period after the filing of the waiver of restrictions on assessment.
Since the litigants appear to stress the application or the non-application of the three year limitation period, it would seem advisable to first dispose of that controversy.
The taxpayer's return was filed April 15, 1948. The notice of deficiency was mailed March 14, 1951 so that two years, ten months and twenty-nine days of the three year limitation period had expired. All litigants agree that the deficiency notice suspended the running of the limitation statute from its date until the filing of the taxpayer's petition in the Tax Court on May 7, 1951 and further suspended the statute at least until the filing of the taxpayer's waiver on May 20, 1952. 26 U.S.C. § 277. At this point, the litigants disagree. The defendant contends that the executor's waiver of May 20, 1952 permitted and required the immediate assessment of the agreed deficiency. The plaintiff contends that the waiver was ineffective to reinstate the running of the limitation statute according to the express language that the waiver was ineffective to that the plaintiff is right.
No reported decision is found which can be termed as an authority upon the problem involved. Defendant's contention, that the right to file the waiver as provided in 26 U.S.C. § 272(d) is unqualified as to time, is undoubtedly correct but it must be an effective waiver. The taxpayer, having once submitted the dispute as to the amount of the deficiency to the Tax Court, the plaintiff has a definite interest therein since the amount of the deficiency may be raised or lowered by Tax Court action. The taxpayer may not unilaterally oust the Court from jurisdiction which, once invoked, remains unimpaired until it decides the controversy. Main-Hammond Land Trust v. C.I.R., 17 T.C. 942, affirmed 6 Cir., 200 F.2d 308. To hold that the Commissioner has an obligation to assess in any amount designated in the waiver while the Tax Court retains jurisdiction to determine the amount thereof would be unrealistic in its application. Successive waivers authorizing assessments in different amounts might be filed, thus complicating the dispute, while the purpose of a waiver is to settle it. While the controversy is in the Tax Court, the Government has a definite stake in the matter of the running or suspension of the limitation statute. Here there is no agreement that the limitation period should again begin to run upon the filing of the waiver or within thirty days thereafter which is the customary period within which an assessment is made. There is no doubt but that a purpose of the waiver is to stop the running of interest, United States v. Price, 361 U.S. 304, 80 S. Ct. 326, 4 L. Ed. 2d 334, but a valid waiver contemplates that the amount due is liquidated and that the controversy is at an end. In Moore v. Cleveland Ry. Co., 6 Cir., 108 F.2d 656 at page 659, cited by the taxpayer, we find that the ...