661 F.2d 194 | Ct. Cl. | 1981
delivered the opinion of the court:
These cases are before the court on cross-motions for partial summary judgment. There is no issue of material fact. We hold in defendant’s favor after hearing oral argument.
During his life, Charles I. Kaplan (Charles) participated in numerous business undertakings with others. According to a Stipulation of Facts filed by the present parties, these enterprises were actively engaged in the business of operating and managing, through independent property management firms, apartment house complexes, commercial office buildings, shopping centers, and other rental properties. The principal assets of these enterprises were, with only two minor exceptions,
Taxpayers Edward H. Kaplan (Edward), Jerome A. Kaplan (Jerome), and Joan L. Gindes (Joan)
Charles’ estate tax return was filed on April 27,1965. The partnership interests held at death were included as assets of the gross estate, but the partnership interests transferred to the inter vivos trusts were not. Upon audit, the Internal Revenue Service (IRS) determined in August 1967 that certain of the partnership interests held at the time of death had been valued too low
In March 1968 the estate filed a timely petition in the Tax Court seeking a redetermination of the deficiency. In its petition, the estate contested only one of the new valuations, but asserted any estate inclusion of the interests transferred to the inter vivos trusts was incorrect. Eventually, the Government conceded the original valuation of the contested interest had been correct while the estate conced
Thereafter, plaintiffs apparently became aware that if a proper election was made by each partnership under I.R.C. § 754
No I.R.C. § 754 elections, however, were in effect on the date of Charles’ death. Moreover, no I.R.C. § 754 elections were made with the partnership returns for the period in 1964 in which Charles’ death occurred.
Thereafter, these plaintiffs filed refund claims for various years based on added depreciation allowances allegedly passed to them through the trusts. Edward filed refund claims for 1961,1962,1963,1964, and 1965 on July 30,1969; for 1966 on October 28,1971; for 1967 on May 10, 1974; and for 1968 on October 17,1974. Edward’s refund theories were bottomed on larger personal depreciation deductions in 1964, 1965, 1966, 1967, and 1968. The larger deductions in 1964 and 1965 allegedly gave rise to net operating losses in
The parties are apparently in agreement that the literal language of I.R.C. §6511
Moreover, even to the extent that I.R.C. § 6511 does not bar or limit these actions, the Government contends these petitions have further problems. Treas. Reg. § 1.754 — 1(b)(1), supra, requires, says the Government, that the I.R.C. § 754 election be made by the partnership "with the partnership return for the taxable year during which the distribution or transfer occurs.” As the "transfer” of all interests included in Charles’ estate occurred for federal tax purposes on Charles’ death in 1964, the argument goes, only an I.R.C. § 754 election filed with each partnership return for 1964 could allow the I.R.C. § 743(b) adjustments. Thus, the Government concludes, once the partnerships failed to elect
In reply, plaintiffs advance two general arguments. Plaintiffs argue that Treas. Reg. § 1.754 — 1(b)(1) as amended in 1972 should not apply to them or is invalid and that the doctrine of equitable recoupment excuses the failures to file timely refund claims and I.R.C. § 754 elections.
Plaintiffs assert a variety of theories why Treas. Reg. § 1.754-l(b)(l) is inapplicable or invalid. We considered and rejected these arguments in Jones v. United States, 213 Ct. Cl. 529, 553 F. 2d 667 (1977). Jones of course binds us, see, e.g., Alabama Hospital Association v. United States, ante at 184-85, 656 F. 2d 606, 611-12 (1981), and even if it did not, we would similarly reject these arguments upon de novo consideration today. For example, plaintiffs assert that Treas. Reg. § 1.754-l(b)(l) as amended in 1972 is unfairly retroactive when applied to Charles’ 1964 death. A former version, admittedly in effect in 1964, left unclear when the I.R.C. §754 election was to be made. As Jones recognized, however, such an argument ignores I.R.C. § 7805(b), which provides that Treasury Regulations are to be retroactive absent a limitation on retroactivity. Retroactive regulations are clearly the rule under the Code, and as no limitation is provided within Treas. Reg. § 1.754-l(b)(l), we must apply it in that manner.
Plaintiffs also assert, as did their counterpart in Jones, that requiring the I.R.C. §754 election with the next partnership return after a death allows inadequate time for an "informed” election. We leave aside other familiar examples when the Code requires elections before one knows with absolute certainty that the particular election will be of benefit. It is clear here, as it was in Jones, that adequate information was available on which each partnership could evaluate the benefits of an I.R.C. § 754 election. The partnership returns for 1963 disclosed that these partnerships held assets on which substantial depreciation had been taken. We observed in Jones that circumstance should have indicated the potential benefits of I.R.C. § 754
Nor do we think the present plaintiffs are aided, any more than the Jones plaintiff was, by the subsequent I.R.C. §754 elections filed in 1969 by nine of Charles’ former partnerships. See note 10, supra. Both I.R.C. § 754, supra note 7, and Treas. Reg. § 1.754-l(a) are clear that such elections apply to all distributions of partnership property and to all transfers of partnership interests during the election year of the partnership and all subsequent years. The 1969 elections, therefore, can have no impact on the transfer of interests occasioned by the death of Charles, even as to the interests first included in 1969. The Code and the Regulations speak not of the year when inclusion occurs but, rather, of when the transfer of the interest takes place. Whatever vestiges of ownership Charles retained sufficient to cause inclusion in his estate after the partnership interests were placed in the inter vivos trusts, those vestiges of his ownership clearly terminated upon his death. Thus, within the meaning of I.R.C. § 754 and Treas. Reg. § 1.754-l(a), the latest the "transfer” of the interests held by the inter vivos trusts could have occurred was upon Charles’ death in 1964.
At one time it appeared that a broad scope should be accorded the doctrine of recoupment as a means of mitigating the abbreviated limitations period applicable to tax litigation. See Bull v. United States, 295 U. S. 247 (1935); Stone v. White, 301 U. S. 532 (1937). Nine years after Stone v. White, however, the Supreme Court held in Rothensies v. Electric Storage Battery Co., 329 U. S. 296 (1946), that the doctrine had a far more circumspect application to tax cases:
* * * The essence of the doctrine of recoupment is stated in the Bull case: "recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiffs action is grounded.” 295 U. S. 247, 262. It has never been thought to allow one transaction to be offset against another, but only to permit a transaction which is made the subject of suit by a plaintiff to be examined in all its aspects, and judgment to be rendered that does justice in view of the one transaction as a whole.
The application of this general principle to concrete cases in both of the cited decisions is instructive as to the limited scope given to recoupment in tax litigation. In both cases a single transaction constituted the taxable event claimed upon and the one considered in recoupment. In both, the single transaction or taxable event had been subjected to two taxes on inconsistent legal theories, and what was mistakenly paid was recouped against what was correctly due. In Bull v. United States, the one taxable event was receipt by executors of a sum of money. An*643 effort was made to tax it twice — once under the Income Tax Act as income to the estate after decedent’s death and once under the Estate Tax Act as part of decedent’s gross estate. This Court held that the amount of the tax collected on a wrong theory should be allowed in recoupment against an assessment under the correct theory. In Stone v. White, likewise, both the claim and recoupment involved a single taxable event, which was receipt by an estate of income for a period. The trustees had paid the income tax on it but this Court held it was taxable to the beneficiary. Assessment against the beneficiary had meanwhile become barred. Then the trustees sued for a refund, which would inure to the beneficiary. The Court treated the transaction as a whole and allowed recoupment of the tax which the beneficiary should have paid against the tax the Government should not have collected from the trustees. Whatever may have been said indicating a broader scope to the doctrine of recoupment, these facts are the only ones in which it has been applied by this Court in tax cases. [Id. at 299-300. Emphasis supplied; footnote omitted.]
The critical inquiry, of course, is whether a "single transaction or taxable event [has] been subjected to two taxes on inconsistent legal theories, * * *” and we have so held in a succession of cases since Electric Storage Battery was decided. See, e.g., Ford v. United States, 149 Ct. Cl. 558, 276 F. 2d 17 (1960); Brigham v. United States, 200 Ct. Cl. 68, 470 F. 2d 571 (1972), cert. denied, 414 U. S. 831 (1973); Arthur E. Evans Trust v. United States, 199 Ct. Cl. 98, 462 F. 2d 521 (1972); Wilmington Trust Co. v. United States, 221 Ct. Cl. 686, 610 F. 2d 703 (1979). See also Ellard v. United States, post at 815. Plaintiffs’ somewhat confused legal theory is that the 1969 inclusion is part of the same transaction as plaintiffs’ non-deduction of added depreciation and has been inconsistently treated. Plaintiffs’ contentions are wide of the mark. Plaintiffs’ non-deductions stem from the failure of the partnerships to elect under I.R.C. § 754, not from the inclusions of assets within Charles’ gross estate. Plaintiffs are clearly correct that there is a relationship between these elements, viz., a properly made I.R.C. § 754 election would have led to an I.R.C. § 743(b) adjustment based on inclusion within Charles’ estate and ultimately greater depreciation deductions to these plaintiffs. But that is a far cry from labeling these as components of an integral
We conclude therefore that there was no single transaction which was treated inconsistently.
Plaintiffs’ further arguments are of but little merit. Plaintiffs now argue that these enterprises were not partnerships. Plaintiffs’ theory is apparently that the trusts owned the depreciable assets directly and thus under I.R.C. § 1014 would receive a step-up in basis as a result of inclusion of the assets within Charles’ estate. The partnerships’ failures to elect under I.R.C. § 754 would therefore be irrelevant. Plaintiffs could supposedly claim greater depreciation in all open years,
Based on the foregoing, we conclude that defendant’s motions for partial summary judgment should be and are hereby granted, with the petitions dismissed to that extent. Plaintiffs’ cross-motions for partial summary judgment should be and are hereby denied. The matter is remanded
Two of the 19 partnerships we discuss infra held only unimproved realty.
Under the scheme of Subchapter K of the Internal Revenue Code of 1954 (Code), 26 U.S.C. (I.R.C.) §§ 701 etseq., partnerships are required to file informational returns but are not taxed on their income. Instead, each partner takes a distributive share of income or loss and of any separately stated items. Thus, the individual partner is taxed. Where a partnership interest is owned by an entity which is not itself subject to taxation, as for example another partnership or certain kinds of trusts, the distributive share is generally passed through the intermediate level without taxation. Ultimately, some person (whether individual or corporate) will receive the distributive share. Aberrations from the normal taxing pattern may occur due to the tiering, however, as where interposition of a trust may "trap” partnership losses. See, e.g., I.R.C. §§ 652(a) and 662(a).
Of the 19 enterprises involved in this litigation, two date from the 1940’s, four from the 1950’s, eight from 1960 or 1961, and three from 1962 or 1963. The court has no information as to when the remaining two enterprises commenced business.
Deena L. Kaplan and Samuel T. Gindes are parties in these actions only because each filed a joint return with their respective spouses, Jerome and Joan.
The partnership interests given by Charles to the inter vivos trusts were as follows:
The partnership interests reported in the 1965 return were valued as follows:
I.R.C. § 754 provides as follows:
"If a partnership files an election, in accordance with regulations prescribed by the Secretary, the basis of partnership property shall be adjusted, in the case of a distribution of property, in the manner provided in section 734 and, in the case of a transfer of a partnership interest, in the manner provided in section 743. Such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable year with respect to which such election was filed and all subsequent taxable years. Such election may be revoked by the partnership, subject to such limitations as may be provided by regulations prescribed by the Secretary.”
The relevant portion of Treas. Reg. § 1.754-l(b)(l), as amended in 1972, provides the manner of making the I.R.C. § 754 election:
"(b) Time and method of making election.
"(1) An election under section 754 and this section to adjust the basis of partnership property under sections 734(b) and 743(b), with respect to a distribution of property to a partner or a transfer of an interest in a partnership, shall be made in a written statement filed wth the partnership return for the taxable year during which the distribution or transfer occurs. For the election to be valid, the return must be filed not later than the time prescribed by paragraph (e) of § 1.6031-1 (including extensions thereof) for filing the return for such taxable year (or before August 23, 1956, whichever is later). * * *”
Thus, as the partnerships were with but one exception calendar year taxpayers, the elections were required with the partnership returns due April 15, 1965, Le., the returns for the taxable period in which Charles’ death occurred. The remaining partnership, Cathedral Parkway Associates, was changing at the time to a fiscal year ending September 30. Under I.R.C. § 442 and I.R.C. § 443, Cathedral Parkway Associates’ return for the period covering Charles’ death was due on January 15, 1965. Thus, under Treas. Reg. § 1.754-l(b)(l), its election was to be made at that time.
The taxpayers here, as did those in Jones v. United States, 213 Ct. Cl. 529, 553 F. 2d 667 (1977), dispute the application of this regulation as amended in 1972 to Charles’ 1964 death as unfairly retroactive and otherwise invalid.
I.R.C. § 743(b) and its cousin, I.R.C. § 734(b), provide exceptions to the general rule that transactions affecting the partner's basis in the partnership (known to practitioners in the field as the "outside basis”), such as partnership distributions or transfers of an interest, do not alter the partnership’s bases in partnership assets (the "inside bases”). I.R.C. § 743(b) and I.R.C. § 734(b) may be two-edged swords, however, for if an I.R.C. § 754 election is in effect, those provisions may on appropriate facts require a downward adjustment to the inside bases and, thus, lower depreciation allowances. Not surprisingly, the election under I.R.C. § 754 (which brings both I.R.C. § 743(b) and I.R.C. § 734(b) into play) is styled an "optional election,” to be made at the partnership’s peril. Once made, the I.R.C. § 754 election is revocable only for business reasons and only with the Service’s permission. See Treas. Reg. § 1.754-l(c).
The parties do not dispute that on the present facts a valid I.R.C. § 754 election would provide, through I.R.C. § 743(b), increased depreciation deductions to these taxpayers. Thus, we have not set out I.R.C. § 743(b).
Nine partnerships filed I.R.C. § 754 elections with their 1969 tax returns. These nine included six of the seven partnerships listed in note 5, supra, in which the inter vivos trusts held interests.
Although the Stipulation of Facts, petitions, and this record are hardly models of clarity, it appears some of the testamentary trusts filed schedules on their 1965,1966, and 1967 fiduciary returns reflecting the 1965 gross estate inclusions and a presumed concomitant increase in the partnerships’ inside bases per I.R.C. § 743(b). This was apparently done even though no I.R.C. § 754 elections were then in effect and even though the partnerships’ depreciation schedules did not show this added depreciation. The benefits of the added allowances, however, were never passed to the beneficiaries. The testamentary trusts during this period apparently reflected the added allowances as net losses from the partnerships and did not pass those net losses on to the individual beneficiaries. If anything, the listing of this added depreciation in the fiduciary returns for 1965, 1966, and 1967 reinforces our conclusion infra that requiring the I.R.C. § 754 elections to be made by the close of the partnerships’ 1964 taxable years is reasonable. Adequate information was apparently present in 1965 on which the partnerships could have determined the efficacy of the election. As the record is not precisely clear, however, we rest our decision infra only in part of this basis.
In relevant part, I.R.C. § 6511(a) and (b)(1) provides:
"§ 6511. Limitations on credit or refund
"(a) Period of limitation on filing claim
"Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. Claim for credit or refund of an overpayment of any tax imposed by this title which is required to be paid by means of a stamp shall be filed by the taxpayer within 3 years from the time the tax was paid.
"(b) Limitation on allowance of credits and refunds
"(1) Filing of claim within prescribed period
"No credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in subsection (a) for the filing of a claim for credit or refund, unless a claim for credit or refund is filed by the taxpayer within such period.”
Jerome’s and Edward’s claims for 1964 (and related carryback years) do not appear to be the only claims the plaintiffs assert which are barred by I.R.C. § 6511. However, the parties have neither briefed nor argued other applications of I.R.C. § 6511 and we need not, for purposes of these cross motions, rule further.
I.R.C. § 6511(b)(2)(B) provides:
"(B) Limit where claim not filed within 3-year period
"If the claim was not filed within such 3-year period, the amount of the credit or refund shall not exceed the protion of the tax paid during the 2 years immediately preceding the filing of the claim.”
Jerome filed his 1966 return on April 15, 1967. A deficiency for that year and interest thereon were assessed on June 4, 1971, totaling $1.919.68. The assessments were partially satisfied by a credit of $700.32 (which arose April 15, 1971). Jerome filed a refund claim for 1966 on November 2, 1973. Thereafter, the balances of the assessments, $1,219.36, were satisfied by a payment of $1,470.66 on December 13, 1973. The overpayment of $251.30 was credited to Jerome’s other tax liabilities.
Neither party has discussed whether the $700.32 credit should be considered paid against the 1966 deficiency when the credit arose, April 15, 1971, or when the deficiency was asserted, June 4,1971. Assuming arguendo the date most favorable to the taxpayer, June 4, 1971, is correct, the credit of $700.32 was still not paid against the 1966 deficiency within 2 years of the November 2, 1973 refund claim. As to the $1,219.36 of the December 13, 1973, payment which was used to satisfy the 1966 deficiency, we note that payment to be after the 1966 refund claim was filed. Thus, strictly speaking, no tax was paid within the 2 years "immediately preceding” the refund claim. The Government, however, rejects this Draconian view of I.R.C. § 6511(b)(2)(B) and concedes Jerome may recover up to the $1,219.36 paid on December 13,1973, against the 1966 taxes.
With the exception of Cathedral Parkway Associates, these partnerships had almost 15 months from Charles’ death to elect. Cathedral Parkway Associates had just under 12 months to elect. See note 8, supra. The Jones partnerships had approximately 6 months.
Indeed, as note 11, supra, discusses, at least some of the testamentary trusts filed schedules with their 1965, 1966, and 1967 fiduciary returns which apparently reflected additional depreciation attributable to an assumed I.R.C. § 743(b) adjustment in light of Charles’ death and the original estate return.
Indeed, it might be argued based solely on I.R.C. § 754 and Treas. Reg. § 1.754-1(a) that the "transfer” occurred when Charles placed the interests in the inter vivos trusts. The Government does not make such an argument, no doubt based on Treas. Reg. § 1.743-l(a) which seems to limit "transfers” to dispositions by sale or exchange and to circumstances where the partner dies.
One possible explanation for the shift in direction taken by the Court lies with the passage during the intervening years of Code provisions specifically mitigating the effect of the limitations provisions. Those provisions, presently I.R.C. §§ 1311-1314, are among the most arcane and technical in the Code. Although not articulated in Electric Storage Battery. the Court might well have thought broad application of recoupment inappropriate once Congress detailed rather specific instances in which the limitations provisions could be set aside.
Boyle v. United States, 355 F. 2d 233 (3d Cir. 1965), on which plaintiffs rely, is not to the contrary. That case presents a classic application of recoupment, as dividend arrearages were included improperly within an estate, and thereafter, when the
I.R.C. § 6511, supra note 12, would for example bar Jerome’s and Edward’s claims for 1964 and related carryback years.