of estate tax upon decedent's estate, despite the fact that the statute of limitations bars the assessment and collection of any further gift tax from the decedent for the year 1924.
The United States strongly urges that the estate tax, the refund of which is being sought by the plaintiffs, and the gift tax which it is seeking to set off against that refund both arose out of different features of the same transaction, namely, the trust fund set up by the decedent, and consequently it is entitled to recoup the gift tax out of the overpayment of estate tax notwithstanding the bar of the statute of limitations.
Bull v. United States, 295 U.S. 247, 55 S. Ct. 695, 700, 79 L. Ed. 1421, is relied on as authority for the proposition just stated. In that case Bull, a member of a partnership, died February 13, 1920. Profits from the partnership accruing to his estate after his death to December 31, 1920, were $212,718.79 of which amount $200,117.09 was paid to the estate in 1920. For the purpose of the estate tax, the Commissioner included the latter amount in the decedent's gross estate and subjected it to estate tax, which the executors paid. The Commissioner in considering the income tax liability of the estate for the year 1920 held that the same sum was income and assessed an income tax thereon. The executors paid the income tax under protest and brought suit to recover it back, claiming that, conceding the said sum of $200,117.09 to be income, the United States should have credited against the income tax levied thereon the overpayment of estate tax which resulted from including the same sum in the decedent's taxable estate. The Supreme Court held that the United States should have allowed credit for the estate tax erroneously paid notwithstanding the fact that a claim for a refund thereof was barred by the statute of limitations; consequently the executors were entitled to set up the claim for the estate tax erroneously paid by way of recoupment to offset the government's claim to the income taxes. Mr. Justice Roberts said:
"If the claim for income tax deficiency had been the subject of a suit, any counter demand for recoupment of the overpayment of estate tax could have been asserted by way of defense and credit obtained, notwithstanding the statute of limitations had barred an independent suit against the government therfor. This is because recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiff's action is grounded. Such a defense is never barred by the statute of limitations so long as the main action itself is timely."
I think it is clear that if the two taxes here involved arose out of different phases of the same transaction, the defendant is entitled to recoup the gift tax out of the overpaid estate tax under the authority of the Bull Case and judgment must be entered for the defendant. While the procedural situation was quite different in that case, the doctrine of recoupment there applied would be equally applicable here. The question for consideration is, therefore, narrowed to whether the two taxes here involved did arise out of phases of the same transaction. I think they did. In the Bull Case the transaction, as to different phases of which the two taxes attached, was the receipt of cash by the estate from the partnership. This cash was subjected to the estate tax on the theory that it was a part of the decedent's gross estate and to the income tax upon the theory that it was a part of the estate's income. In the present case the transaction which is at the base of the two tax exactions likewise concerns a single fund, that is the trust fund set up by the decedent on January 27, 1923, for the benefit of his wife, himself, and his son. The gift tax was upon a life estate irrevocably carved out of that fund by the decedent in 1924, while the estate tax was assessed in respect of the remainder interest in favor of decedent's son in the identical fund, which the Board of Tax Appeals and the Circuit Court of Appeals held must be included in his gross estate and subjected to estate tax. Indeed this case would seem clearer than the Bull Case since, as the Supreme Court said in Burnet v. Guggenheim, supra:
"That tax upon gifts is closely related both in structure and in purpose to the tax upon those transfers that take effect at death. What is paid upon the one is in certain circumstances a credit to be applied in reduction of what will be due upon the other, 43 Stat. 315, § 322, 26 U.S.C. § 1134 [ 26 U.S.C.A. § 413 note]. The gift tax is part 2 of title 3 of the Revenue Act of 1924 [43 Stat. 253]; the estate tax is part 1 of the same title. The two statutes are plainly in pari materia."
On the other hand there is no such close relationship between the income tax and the estate tax, the taxes involved in the Bull Case. Nor do I believe that the present case is distinguishable from the Bull Case because in that case one individual, Bull's executor, paid both taxes involved, whereas here the gift tax was payable by the decedent, while the estate tax was paid by his executors. The executors in each case were acting only as fiduciaries and the real party in interest in each case was the decedent, his estate merely succeeding to his rights and liabilities.Under such circumstances, the doctrine of recoupment is applicable. White v. Stone (C.C.A.) 78 F.2d 136; United States ex rel. Girard Trust Co. v. Helvering, 66 App.D.C. 64, 85 F.2d 230.
I see no escape from the conclusion that under the rule of the Bull Case the United States is entitled to recoup its gift tax from the admitted overpayment of estate tax unless it arises from the action of the decedent and the other parties in interest on December 30, 1927, in revoking the trust originally set up in 1923 and immediately creating a new trust. When these transactions are examined, however, it will be seen that the net result of them was to make the trust revocable by the joint action of the decedent and his wife only, the joinder of his son no longer being necessary, and to provide, in case of the death of the son prior to the termination of the life estate, that the remainder interest should pass to his appointees by will and only in case he made no appointment to his next of kin under the intestate laws. The transactions effected no change whatever in the life estates or in the remainder to the son in case he survivied. The same individual continued as trustee. The stock which composed the corpus of the trust before December 30, 1927, continued to constitute the corpus of the trust after that date and for all that appears it remained continuously in the possession of the trustee.
It must be borne in mind that this suit is essentially one for money had and received. It is to be governed by equitable principles and is subject to any defense which shows that in equity and good conscience the plaintiff should not recover. United States v. Jefferson Electric Co., 291 U.S. 386, 54 S. Ct. 443, 78 L. Ed. 859. Considered from an equitable standpoint and looking through the legal form to the substance, I cannot say that the transactions of December 30, 1927, in fact broke the continuity of the trust fund which the decedent set up in 1923. I accordingly conclude that the defendant is entitled in defense of this action to recoup out of the sum admittedly due the plaintiffs the gift tax for the year 1924 and interest thereon aggregating the amount of the plaintiffs' claim, and I, therefore, come to the following conclusions of law:
The United States is entitled to recoup against the plaintiffs' claim for the refund of $67,836.43, the gift tax due by plaintiffs' decedent for the year 1924, with interest thereon, in the sum of $67,836.43.
The defendant is entitled to judgment in its favor against the plaintiffs with costs.
The parties have submitted to me certain requests for conclusions of law. Plaintiffs' request No. 1 is affirmed. Their requests Nos. 2 and 3 are refused. Defendant's requests Nos. I and III to VIII, inclusive, are affirmed. Its request No. II is refused.
Defendant's motion for judgment in its favor is granted and judgment may be entered accordingly.
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