Before Friendly and Hays, Circuit Judges, and Anderson, District Judge.*fn*
Petitioners seek review of decisions of the Tax Court of the United States, 39 T.C. 170 (1962), holding (I) that the mitigation provisions of Sections 13111314 of the Internal Revenue Code of 1954 permit the assessment of certain deficiencies that would otherwise be barred by the statute of limitations, and (II) that petitioner Elaine Yagoda (formerly Elaine Drechsler) is liable as transferee of a trust for the benefit of Elaine Drechsler.
During the taxable years in question, 1944 and 1945, Gus Drechsler and petitioner Lena Drechsler were husband and wife. Gus Drechsler died on January 12, 1946 and Lena as executrix filed Gus's income tax return for 1945. Petitioner Elaine Yagoda is the daughter of Gus and Lena Drechsler.
Gus Drechsler was one of three stockholders in T. Frederick Jackson, Inc., a corporation engaged in the business of electrical contracting. On October 26, 1944, the corporation assigned certain contracts to a partnership, T.F. Jackson Company, formed that day by Gus and the other two shareholders. Gus then created two irrevocable trusts, one for the benefit of Lena and one for the benefit of Elaine, and gave to each trust a 27% partnership interest, retaining a 6% interest in his own name. On April 9, 1945, Lena, by terminating the trust for her benefit in accordance with the provisions of the trust and receiving all the property of the trust, became a partner in her own right. The partnership terminated its business and existence on August 31, 1945, but thereafter such actions were taken as were necessary to wind up its affairs and make final distribution of its assets.*fn1 This litigation is occasioned by the attempt of the Commissioner to correct certain errors in the allocation of the income of the T.F. Jackson Company partnership.
On the partnership tax returns for 1944 and 1945, Gus, the trust for the benefit of Lena (in 1945, Lena), and the trust for the benefit of Elaine were shown as entitled to 6 percent, 27 percent and 27 percent, respectively, of the partnership's distributable net income. These proportionate shares of partnership income were reported in the respective 1944 and 1945 income tax returns for the trusts and the individual partners.
The income tax returns of the partnership, Gus, and the two trusts for 1944 and 1945 and the individual return of Lena for 1945 were examined as a unit by the Commissioner. The Commissioner refused to recognize either the two trusts or Lena, individually, as bona fide partners of T.F. Jackson Company during 1944 or 1945 and treated their respective shares of the partnership income as income to Gus. As a result, deficiencies of $47,927.11 and $42,258.90 were determined against the estate of Gus Drechsler for the years 1944 and 1945. These deficiencies were paid in full with interest on November 19, 1948, payment being effected in part by the Commissioner's crediting against the deficiencies overassessments with respect to the trusts and Lena Drechsler.
On August 9, 1949, Lena Drechsler, as executrix of the estate of Gus Drechsler, filed claims for refund of the deficiencies. During Internal Revenue Service consideration of the claims, the revenue agent assigned to the case was advised by counsel for the estate that the government should take the necessary steps to protect its position with regard to the trusts and Lena. The agent replied that it was not necessary to send out deficiency notices to these other taxpayers, since any refund to the estate could not exceed the cash payment made by the estate, exclusive of the overassessments credited to the trusts and Lena. The Commissioner disallowed the refund claims and the estate brought suit in the United States District Court for the Southern District of New York. On April 18, 1958, the district court rendered judgment, 161 F. Supp. 319 (1958), for the estate in the entire amount of the deficiencies, inclusive of the overassessments. That determination became final on September 19, 1958, when the notice of appeal filed by the United States was dismissed by stipulation. By that time correction of the effect of the error of excluding, through crediting the overassessments, any share of partnership income from the returns of the trusts and Lena would have been prevented, absent Sections 1311-1314, by operation of the statute of limitations. Proceeding under these mitigation of limitations provisions, the Commissioner sent statutory notices of deficiency to the petitioners on June 5, 1959. Liability as partners is asserted against Lena (for 1945) and the trusts. Liability as transferees is asserted against Lena (for 1944) and Elaine.
Prior to the Revenue Act of 1938 a double advantage could accrue to the Commissioner or to a taxpayer who successfully maintained as to the treatment of a particular item in an open year a position inconsistent with an erroneous treatment of the same item in another year that could not be reopened because of the statute of limitations or some other rule of finality. In some cases the courts mitigated the resulting inequities through the application of the doctrines of estoppel or recoupment, but such decisions were neither uniform nor systematic. See S. Rep. No. 1567, 75th Cong., 3d Sess. 49 (1938), 1939-1 (Part 2) Cum. Bull. 779, 815 (1939). Section 820 of the 1938 Code which became Section 3801 of the 1939 Code and Sections 1311-1314 of the 1954 Code supplied more definitive guideposts for dealing with such situations. Sections 13111314 list certain "circumstances of adjustment," such as the double inclusion or exclusion of an item of gross income or the double allowance or disallowance of a deduction, and provide in general that for one year from the date of the final determination resulting in such a situation the closed year may be reopened as against the party who maintained the position adopted by the determination.
The parties are in agreement that this case satisfies the requirements set forth in section 1311(a), which states the general rule for the mitigation of the statute of limitations:
"(a) General rule. - If  a determination (as defined in section 1313) is  described in one or more of the paragraphs of section 1312 and,  on the date of the determination, correction of the effect of the error referred to in the applicable paragraph of section 1312 is prevented by the operation of any law or rule of law, * * * then  the effect of the error shall be corrected by an adjustment made in the amount and in the manner specified in section 1314." (1) The decision of the district court sustaining the estate's claim for a refund became final on September 19, 1958, at which time it was a "determination" within the meaning of section 1313(a) (1):
"(a) Determination. - For purposes of this part, the term 'determination' means -
"(1) a decision by the Tax Court or a judgment, decree, or other order by any court of competent jurisdiction, which has become final * *." (2) That determination presents the ...