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JOYCE v. UNITED STATES

October 13, 1964

Mary Pauline McKenney JOYCE, Aloysius G. Casey and Gerard A. McDonough, executrix and executors under the Will of M. Pauline Casey, Deceased, Plaintiffs,
v.
The UNITED STATES, Defendant



The opinion of the court was delivered by: NEALON

The plaintiffs have moved for summary judgment under Rule 56 of the Federal Rules of Civil Procedure.

The material facts, as stipulated by both parties, are as follows:

 Andrew J. Casey and Patrick J. Casey were partners in a business consisting mainly of holding real estate for rent. On the death of each partner the trustee of that partner's residuary estate became a partner. In 1946, both partners having died, the partnership business was being conducted by the trustees of the estates of Andrew J. Casey and Patrick J. Casey. During the year 1946 the taxpayer, M. Pauline Casey, *fn1" was the sole income beneficiary of the trust created under the Will of Andrew J. Casey. Although the taxpayer herself was not engaged in the trade or business of renting real estate during the year 1946, the partnership was so engaged, and, in that year, the partnership sold a business property located at 520-522 Lackawanna Avenue at a loss in the amount of $ 39,340.18. The loss was charged against the capital account of the partnership and was not reported as a loss on the fiduciary return of Andrew J. Casey. On the fiduciary return for 1946 of the Patrick J. Casey Trust a loss of $ 19,670.09 was reported, but no deduction was taken on that return.

 In 1955 the partnership was terminated and the fiduciary return filed by the Andrew J. Casey Trust for that year reported a substituted basis of $ 805,970.67 67 for its interest in the partnership and the properties distributed in liquidating the partnership. In computing the basis of the partnership property the trust did not deduct the loss on the sale in 1946 of the property located at 520-522 Lackawanna Avenue in the amount of $ 19,670.09 which had been charged against the capital account of the partnership on its books and records. As a part of the audit of the fiduciary returns the books and records of the partnership were inspected. The loss on the sale of the property located at 520-522 Lackawanna Avenue which was charged against the partnership's capital account was deducted in order to compute the substituted basis. The reduction in basis resulted in a lower basis for the property in the hands of the trustee. This lower basis produced a smaller amount of depreciation deduction with the resulting higher income and tax. The taxpayer filed a timely petition to the Tax Court of the United States for a redetermination of the deficiencies of $ 4,260.24 for 1955 and $ 10,131.28 for 1956. In the trial of that case before the Tax Court of the United States, the taxpayer stipulated to the correctness of decreasing the basis of the partnership property by deducting the loss on the sale of the property located at 520-522 Lackawanna Avenue in 1946.

 The Tax Court deduced that there was no deficiency in taxes for the year 1955 and a deficiency of $ 3,250.77 for the year 1956. The decision of the Tax Court became final on October 16, 1962. On May 10, 1963, the taxpayer filed a claim for refund for the year 1946 in the amount of $ 11,301.60 plus interest from March 15, 1947. No action was taken on the claim for refund and on November 26, 1963, this action was commenced.

 The main issue to be decided is whether or not the deceased taxpayer's estate is entitled to a refund on her 1946 income tax under Sections 1311-1315 of the Internal Revenue Code.

 Plaintiffs contend that the deceased taxpayer is entitled to a refund on her 1946 income tax return, arguing that the partnership's 1946 distributive net income was overstated in its return by $ 39,340.18, one-half of which, or $ 19,670.09, was included in the deceased taxpayer's return for that year. As a result of this overpayment of taxes the plaintiffs request that a refund be granted under Sections 1311 to 1315 of the Internal Revenue Code.

 The defendant, on the other hand, asserts that the plaintiffs are not entitled to a refund because it is not a proper case for relief under Sections 1311-1315 of the Internal Revenue Code and is, therefore, barred by the statute of limitations.

 'Sections 1311-1315 create a mechanism of relief, designed in general to operate when a formal determination validates an inconsistent position so as to cause an apparent injustice.'

 The requirements under Section 1311 which must exist before a closed taxable year can be reopened are (a) the 'maintenance of an inconsistent position' by the Commissioner *fn2" in case the amount of the adjustment would be credited or refunded in the same manner as an overpayment, and (b) a 'determination' which adopts the position maintained by the Commissioner and is inconsistent with an error, e.g., an erroneous inclusion, exclusion, omission, allowance, disallowance, recognition or nonrecognition, as the case may be, occurring in the determination of the taxpayer's tax liability for a prior taxable year. Moreover, one of the seven types of error enumerated under Section 1312 must also be present.

 The defendant contends that Section 1311 does not apply because (a) the Commissioner has not maintained a position of 'active inconsistency', and (b) the 'determination' is not one described in Section 1312 as required. Finally, defendant argues that this case does not fall under any of the circumstances of adjustment provided for under Section 1312.

 As for the first element under Section 1311 concerning the 'maintenance of an inconsistent position', it is the contention of the plaintiffs that the $ 19,670.09 adjustment in 1955 'was initiated by a revenue agent and embodied in a statutory notice of deficiency which plaintiff challenged in her petition to the Tax Court by appropriate assignment of error which the Commissioner denied in his answer. By thus invoking the prescribed Tax Court procedure for defining issues to be tried, the Commissioner 'maintained' the correctness of his adjustment * * *'

 The defendant replies that the Commissioner must maintain a position of 'active inconsistence' in order for the Section 1311 to apply and that he has not done so in this case. A similar argument was rejected in Yagoda v. ...


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