1. Moneys received by a deceased partner's estate as his share
of profits earned by the firm before he died, are taxable as his
income and also are to be included as part of his estate in
computing the federal estate tax. P.
295 U. S.
254.
2. Where the articles of a personal service partnership having
no invested capital provide that, in the event of a partner's
death, the survivors, if his representative does not object, shall
be at liberty to continue the business for a year, the estate in
that case to share the profits or losses as the deceased partner
would if living, the profits coming to the estate from such
continuation of the business are not to be regarded as the fruits
of a sale of any interest of the deceased to the survivors, but are
income of the estate, taxable as such; they are no part of the
corpus of the estate left by the decedent upon which the federal
estate tax is to be computed. P.
295 U. S.
255.
3. Retention by the Government of money wrongfully exacted as
taxes is immoral, and amounts in law to a fraud on the taxpayer's
rights. P.
295 U. S.
261.
4. A claim for recovery of money so held may not only be the
subject of a suit in the Court of Claims, but may be used by way of
recoupment and credit in an action by the United States arising out
of the same transaction, and this even though an independent suit
against the Government to enforce the claim would be barred by the
statute of limitations. P.
295 U. S. 261.
5. 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. P.
295 U. S.
262.
Page 295 U. S. 248
6. The Government wrongfully collected and retained an estate
tax on moneys earned for and paid to an estate in partnership
transactions after the decedent's death, and which were not part of
the corpus of the estate and were properly taxable only as income
of the estate. Before the time allowed for claiming reimbursement
had elapsed, the Government proceeded to assess and collect an
income tax on the identical moneys.
Held:
(1) That the taxpayer was entitled to recoup from the amount of
the income tax the amount of the unlawful estate tax by suit for
the difference in the Court of Claims, although suit to recover the
unlawful tax independently had become barred. Pp.
295 U. S.
261-262.
(2) A complaint by which the taxpayer prayed judgment in the
alternative, either for the amount of the income tax or for what
should have been credited against it on account of the estate tax,
was sufficient to put in suit the right to recoupment. P.
295 U. S.
263.
7. The Court of Claims is not bound by any special rules of
pleading; all that is required is that the petition shall contain a
plain and concise statement of the fact relied on and give the
United States reasonable notice of the matters it is called upon to
meet. P.
295 U. S.
263.
79 Ct.Cls. 133, 6 F. Supp. 141, reversed.
Certiorari, 294 U.S. 704, to review a judgment rejecting a claim
for money unlawfully exacted as taxes.
Page 295 U. S. 251
MR. JUSTICE ROBERTS delivered the opinion of the Court.
Archibald H. Bull died February 13, 1920. He had been a member
of a partnership engaged in the business of ship-brokers. The
agreement of association provided that, in the event a partner
died, the survivors should continue the business for one year
subsequent to his death, and his estate should "receive the same
interests, or participate in the losses to the same extent," as the
deceased partner would, if living,
"based on the usual method of ascertaining what the said profits
or losses would be. . . . Or the estate of the deceased partner
shall have the option of withdrawing his interest from the firm
within thirty days after the probate of will . . . , and all
adjustments of profits or losses shall be made as of the date of
such withdrawal."
The estate's representative did not exercise the option to
withdraw in thirty days, and the business was conducted until
December 31, 1920, as contemplated by the agreement.
The enterprise required no capital, and none was ever invested
by the partners. Bull's share of profits from January 1, 1920, to
the date of his death, February 13, 1920, was $24,124.20; he had no
other accumulated profits,
Page 295 U. S. 252
and no interest in any tangible property belonging to the firm.
Profits accruing to the estate for the period from the decedent's
death to the end of 1920 were $212,718.79, $200,117.90 being paid
during the year and $12,601.70 during the first two months of
1921.
The Court of Claims found:
"When filing an estate tax return, the executor included the
decedent's interest in the partnership at a value of $24,124.20,
which represented the decedent's share of the earnings accrued to
the date of death, whereas the Commissioner, in 1921, valued such
interest at $235,202.99, and subjected such increased value to the
payment of an estate tax, which was paid in June and August, 1921 .
The last-mentioned amount was made up of the amount of $24,124.20
plus the amount of $212,718.79 hereinbefore mentioned. The estate
tax on this increased amount was $41,517.45. [
Footnote 1]"
"April 14, 1921, plaintiff filed an income tax return for the
period February 13, 1920, to December 31, 1920, for the estate of
the decedent, which return did not include, as income, the amount
of $200,117.09 received as the share of the profits earned by the
partnership during the period for which the return was filed. The
estate employed the cash receipts and disbursement method of
accounting."
"Thereafter, in July, 1925, the Commissioner determined that the
sum of $200,117.09 received in 1920 should have been returned by
the executor as income to the estate for the period February 13 to
December 31, 1920, and notified plaintiff of a deficiency in income
tax due from the estate for that period of $261,212.65, which was
due in part to the inclusion of that amount as taxable income and
in part to adjustments not here in controversy.
Page 295 U. S. 253
No deduction was allowed by the Commissioner from the amount of
$200,117.09 on account of the value of the decedent's interest in
the partnership at his death."
6 F. Supp. 141, 142.
September 5, 1925, the executor appealed to the Board of Tax
Appeals from the deficiency of income tax so determined. The Board
sustained the Commissioner's action in including the item of
$200,117.99 without any reduction on account of the value of the
decedent's interest in the partnership at the date of death,
[
Footnote 2] and determined a
deficiency of $55,166.49, which, with interest of $7,510.95, was
paid April 14, 1928.
July 11, 1928, the executor filed a claim for refund of this
amount, setting forth that the $200,117.99, by reason of which the
additional tax was assessed and paid, was corpus; that it was so
originally determined by the Commissioner and the estate tax
assessed thereon was paid by the executor, and that the subsequent
assessment of an income tax against the estate for the receipt of
the same sum was erroneous. The claim was rejected May 8, 1929.
September 16, 1930, the executor brought suit in the Court of
Claims, and in his petition, after setting forth the facts as he
alleged them to be, prayed judgment in the alternative: (1) for the
principal sum of $62,677.44, the amount paid April 14, 1928, as a
deficiency of income tax unlawfully assessed and collected; or (2)
for the sum of $47,643.44 on the theory that, if the sum of
$200,117.99 was income for the year 1920 and taxable as such, the
United States should have credited against the income tax
attributable to the receipt of this sum the overpayment of estate
tax resulting from including the amount in the taxable estate --
$34,035, [
Footnote 3] with
interest thereon.
Page 295 U. S. 254
The Court of Claims held that the item was income, and properly
so taxed. With respect to the alternative relief sought, it
said:
"We cannot consider whether the Commissioner correctly included
the total amount received from the business in the net estate of
the decedent subject to estate tax, for the reason that the suit
was not timely instituted."
Judgment went for the United States. [
Footnote 4] Because of the novelty and importance of
the question presented, we granted certiorari. [
Footnote 5]
1. We concur in the view of the Court of Claims that the amount
received from the partnership as profits earned prior to Bull's
death was income earned by him in his lifetime and taxable to him
as such, and that it was also corpus of his estate and as such to
be included in his gross estate for computation of estate tax. We
also agree that the sums paid his estate as profits earned after
his death were not corpus, but income received by his executor, and
to be reckoned in computing income tax for the years 1920 and 1921.
Where the effect of the contract is that the deceased partner's
estate shall leave his interest in the business and the surviving
partners shall acquire it by payments to the estate, the
transaction is a sale, and payments made to the estate are for the
account of the survivors. It results that the surviving partners
are taxable upon firm profits, and the estate is not. [
Footnote 6] Here, however, the
survivors have purchased nothing belonging to the decedent, who had
made no investment in the business and owned no tangible property
connected with it. The portion of the profits paid his estate was
therefore income, and not corpus, and this is so whether we
consider the executor a member of the old firm for the
remainder
Page 295 U. S. 255
of the year, or hold that the estate became a partner in a new
association formed upon the decedent's demise.
2. A serious and difficult issue is raised by the claim that the
same receipt has been made the basis of both income and estate tax,
although the item cannot in the circumstances be both income and
corpus, and that the alternative prayer of the petition required
the court to render a judgment which would redress the illegality
and injustice resulting from the erroneous inclusion of the sum in
the gross estate for estate tax. The respondent presents two
arguments in opposition, one addressed to the merits and the other
to the bar of the statute of limitations.
On the merits, it is insisted that the government was entitled
to both estate tax and income tax in virtue of the right conferred
on the estate by the partnership agreement and the fruits of it.
The position is that, as the contract gave Bull a valuable right
which passed to his estate at his death, the Commissioner correctly
included it for estate tax. And the propriety of treating the share
of profits paid to the estate as income is said to be equally
clear. The same sum of money in different aspects may be the basis
of both forms of tax. An example is found in this estate. The
decedent's share of profits accrued to the date of his death was
$24,124.20. This was income to him in his lifetime and his executor
was bound to return it as such. But the sum was paid to the
executor by the surviving partners, and thus became an asset of the
estate; accordingly, the petitioner returned that amount as part of
the gross estate for computation of estate tax and the Commissioner
properly treated it as such.
We are told that, since the right to profits is distinct from
the profits actually collected, we cannot now say more than that
perhaps the Commissioner put too high a value on the contract right
when he valued it as equal to the amount
Page 295 U. S. 256
of profits received -- $212,718.99. This error, if error it was,
the government says is now beyond correction.
While, as we have said, the same sum may in different aspects be
used for the computation of both an income and an estate tax, this
fact will not here serve to justify the Commissioner's rulings.
They were inconsistent. The identical money -- not a right to
receive the amount, on the one hand, and actual receipt resulting
from that right on the other -- was the basis of two assessments.
The double taxation involved in this inconsistent treatment of that
sum of money is made clear by the lower court's finding we have
quoted. The Commissioner assessed estate tax on the total obtained
by adding $24,124.20, the decedent's share of profits earned prior
to his death, and $212,718.79, the estate's share of profits earned
thereafter. He treated the two items as of like quality, considered
them both as capital or corpus, and viewed neither as the measure
of value of a right passing from the decedent at death. No other
conclusion may be drawn from the finding of the Court of
Claims.
In the light of the facts, it would not have been permissible to
place a value of $212,718.99 or any other value on the mere right
of continuance of the partnership relation inuring to Bull's
estate. Had he lived, his share of profits would have been income.
By the terms of the agreement, his estate was to sustain precisely
the same status
quoad the firm as he had, in respect of
profits and losses. Since the partners contributed no capital and
owned no tangible property connected with the business, there is no
justification for characterizing the right of a living partner to
his share of earnings as part of his capital, and if the right was
not capital to him, it could not be such to his estate. Let us
suppose Bull had, while living, assigned his interest in the firm,
with his partners' consent, to a third person for a valuable
consideration, and, in making return of income, had valued or
capitalized the right to profits which
Page 295 U. S. 257
he had thus sold, had deducted such valuation from the
consideration received, and returned the difference only as gain.
We think the Commissioner would rightly have insisted that the
entire amount received was income.
Since the firm was a personal service concern and no tangible
property was involved in its transactions, if it had not been for
the terms of the agreement, no accounting would have ever been made
upon Bull's death for anything other than his share of profits
accrued to the date of his death -- $24,124.20 -- and this would
have been the only amount to be included in his estate in
connection with his membership in the firm. As respects the status
after death, the form of the stipulation is significant. The
declaration is that the surviving partners "are to be at liberty"
to continue the business for a year, in the same relation with the
deceased partner's estate as if it were in fact the decedent
himself still alive and a member of the firm. His personal
representative is given a veto which will prevent the continuance
of the firm's business. The purpose may well have been to protect
the goodwill of the enterprise in the interest of the survivors,
and to afford them a reasonable time in which to arrange for their
future activities. But no sale of the decedent's interest or share
in the goodwill can be spelled out. Indeed, the government
strenuously asserted, in supporting the treatment of the payments
to the estate as income, that the estate sold nothing to the
surviving partners, and we agree. An analogous situation would be
presented if Bull had not died, but the partnership had terminated
by limitation on February 13, 1920, and the agreement had provided
that, if Bull's partners so desired, the relation should continue
for another year. It could not successfully be contended that, in
such case, Bull's share of profit for the additional year was
capital.
We think there was no estate tax due in respect of the
$212,718.79 paid to the executor as profits for the period
subsequent to the decedent's death.
Page 295 U. S. 258
The government's second point is that, if the use of profits
accruing to the estate in computing estate tax was wrong, the
statute of limitations bars correction of the error in the present
action. So the Court of Claims thought. We hold otherwise.
The petitioner included in his estate tax return, as the value
of Bull's interest in the partnership, only $24,124.20, the profit
accrued prior to his death. The Commissioner added $212,718.79, the
sum received as profits after Bull's death, and determined the
total represented the value of the interest. The petitioner
acquiesced and paid the tax assessed in full in August, 1921. He
had no reason to assume the Commissioner would adjudge the
$212,718.79 income and taxable as such. Nor was this done until
July, 1925. The petitioner thereupon asserted, as we think
correctly, that the item could not be both corpus and income of the
estate. The Commissioner apparently held a contrary view. The
petitioner appealed to the Board of Tax Appeals from the proposed
deficiency of income tax. His appeal was dismissed April 9, 1928.
It was then too late to file a claim for refund of overpayment of
estate tax due to the error of inclusion in the estate of its share
of firm profits. [
Footnote 7]
Inability to obtain a refund or credit, or to sue the United
States, did not, however, alter the fact that, if the government
should insist on payment of the full deficiency of income tax, it
would be in possession of some $41,000 in excess of the sum to
which it was justly entitled. Payment was demanded. The petitioner
paid April 14, 1928, and, on June 11, 1928, presented a claim for
refund, in which he still insisted the amount in question was
corpus, had been so determined and estate tax paid on that basis,
and should not be classified for taxation as income. The claim was
rejected May 8, 1929, and the present action instituted September
16, 1930.
Page 295 U. S. 259
The fact that the petitioner relied on the Commissioner's
assessment for estate tax, and believed the inconsistent claim of
deficiency of income tax was of no force, cannot avail to toll the
statute of limitations, which forbade the bringing of any action in
1930 for refund of the estate tax payments made in 1921. As the
income tax was properly collected, suit for the recovery of any
part of the amount paid on that account was futile. Upon what
theory, then, may the petitioner obtain redress in the present
action for the unlawful retention of the money of the estate?
Before an answer can be given, the system of enforcing the
government's claims for taxes must be considered in its relation to
the problem.
A tax is an exaction by the sovereign, and necessarily the
sovereign has an enforceable claim against everyone within the
taxable class for the amount lawfully due from him. The statute
prescribes the rule of taxation. Some machinery must be provided
for applying the rule to the facts in each taxpayer's case in order
to ascertain the amount due. The chosen instrumentality for the
purpose is an administrative agency whose action is called an
assessment. The assessment may be a valuation of property subject
to taxation, which valuation is to be multiplied by the statutory
rate to ascertain the amount of tax. Or it may include the
calculation and fix the amount of tax payable, and assessments of
federal estate and income taxes are of this type. Once the tax is
assessed, the taxpayer will owe the sovereign the amount when the
date fixed by law for payment arrives. Default in meeting the
obligation calls for some procedure whereby payment can be
enforced. The statute might remit the government to an action at
law wherein the taxpayer could offer such defense as he had. A
judgment against him might be collected by the levy of an
execution. But taxes are the lifeblood of government, and their
prompt and certain availability an imperious need. Time out of
mind, therefore, the sovereign has resorted to more drastic
Page 295 U. S. 260
means of collection. The assessment is given the force of a
judgment, and if the amount assessed is not paid when due,
administrative officials may seize the debtor's property to satisfy
the debt.
In recognition of the fact that erroneous determinations and
assessments will inevitably occur, the statutes, in a spirit of
fairness, invariably afford the taxpayer an opportunity at some
stage to have mistakes rectified. Often an administrative hearing
is afforded before the assessment becomes final; or administrative
machinery is provided whereby an erroneous collection may be
refunded; in some instances, both administrative relief and redress
by an action against the sovereign in one of its courts are
permitted methods of restitution of excessive or illegal exaction.
Thus, the usual procedure for the recovery of debts is reversed in
the field of taxation. Payment precedes defense, and the burden of
proof, normally on the claimant, is shifted to the taxpayer. The
assessment supersedes the pleading, proof, and judgment necessary
in an action at law, and has the force of such a judgment. The
ordinary defendant stands in judgment only after a hearing. The
taxpayer often is afforded his hearing after judgment and after
payment, and his only redress for unjust administrative action is
the right to claim restitution. But these reversals of the normal
process of collecting a claim cannot obscure the fact that, after
all, what is being accomplished is the recovery of a just debt owed
the sovereign. If that which the sovereign retains was unjustly
taken in violation of its own statute, the withholding is wrongful.
Restitution is owed the taxpayer. Nevertheless, he may be without a
remedy. But we think this is not true here.
In a proceeding for the collection of estate tax, the United
States through a palpable mistake, took more than it was entitled
to. Retention of the money was against morality and conscience. But
claim for refund or credit
Page 295 U. S. 261
was not presented, or action instituted for restitution, within
the period fixed by the statute of limitations. If nothing further
had occurred, congressional action would have been the sole avenue
of redress.
In July, 1925, the government brought a new proceeding arising
out of the same transaction involved in the earlier proceeding.
This time, however, its claim was for income tax. The taxpayer
opposed payment in full by demanding recoupment of the amount
mistakenly collected as estate tax and wrongfully retained. Had the
government instituted an action at law, the defense would have been
good. The United States, we have held, cannot, as against the claim
of an innocent party, hold his money which has gone into its
treasury by means of the fraud of their agent.
United States v.
State Bank, 96 U. S. 30. While
here the money was taken through mistake without any element of
fraud, the unjust retention is immoral, and amounts in law to a
fraud on the taxpayer's rights. What was said in the
State
Bank case applies with equal force to this situation.
"An action will lie whenever the defendant has received money
which is the property of the plaintiff, and which the defendant is
obliged by natural justice and equity to refund. The form of the
indebtedness or the mode in which it was incurred is immaterial. .
. . In these cases [cited in the opinion] and many others that
might be cited, the rules of law applicable to individuals were
applied to the United States."
Pp.
96 U. S. 35-36.
[
Footnote 8] A claim for
recovery of money so held may not only be the subject of a suit in
the Court of Claims, as shown by the authority referred to, but may
be used by way of recoupment and credit in an action by the United
States arising out of the same transaction.
United
States v. Macdaniel, 7 Pet. 1,
32 U. S. 16-17;
United States v.
Ringgold, 8 Pet. 150,
33 U. S.
163-164. In the
Page 295 U. S. 262
latter case, this language was used:
"No direct suit can be maintained against the United States; but
when an action is brought by the United States, to recover money in
the hands of a party, who has a legal claim against them, it would
be a very rigid principle, to deny to him the right of setting up
such claim in a court of justice, and turn him round to an
application to congress. If the right of the party is fixed by the
existing law, there can be no necessity for an application to
congress, except for the purpose of remedy. And no such necessity
can exist when this right can properly be set up by way of defence,
to a suit by the United States. [
Footnote 9]"
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 therefor. 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. [
Footnote 10]
The circumstance that both claims, the one for estate tax and
the other for income tax, were prosecuted to judgment and execution
in summary form does not obscure the fact that, in substance, the
proceedings were actions to collect debts alleged to be due the
United States. It is
Page 295 U. S. 263
immaterial that in the second case, owing to the summary nature
of the remedy, the taxpayer was required to pay the tax and
afterwards seek refundment. This procedural requirement does not
obliterate his substantial right to rely on his cross-demand for
credit of the amount which, if the United States had sued him for
income tax, he could have recouped against his liability on that
score.
To the objection that the sovereign is not liable to respond to
the petitioner the answer is that it has given him a right of
credit or refund, which, though he could not assert it in an action
brought by him in 1930, had accrued and was available to him, since
it was actionable and not barred in 1925 when the government
proceeded against him for the collection of income tax.
The pleading was sufficient to put in issue the right to
recoupment. The Court of Claims is not bound by any special rules
of pleading; [
Footnote 11]
all that is required is that the petition shall contain a plain and
concise statement of the facts relied on and give the United States
reasonable notice of the matters it is called upon to meet.
[
Footnote 12] And a prayer
for alternative relief, based upon the facts set out in the
petition, may be the basis of the judgment rendered. [
Footnote 13]
We are of opinion that the petitioner was entitled to have
credited against the deficiency of income tax the amount of his
overpayment of estate tax with interest, and that he should have
been given judgment accordingly. The judgment must be reversed, and
the cause remanded for further proceedings in conformity with this
opinion.
Reversed.
[
Footnote 1]
It will be noted there is an error in the figures set out in
this finding, the total of the two smaller sums being $236,842.99,
but the discrepancy is not material to any issue in the case.
[
Footnote 2]
Bull v. Commissioner, 7 B.T.A. 993.
[
Footnote 3]
As appears from the quoted finding, the Court of Claims found
the overpayment was $41,517.45.
[
Footnote 4]
6 F. Supp. 141.
[
Footnote 5]
294 U.S. 704.
[
Footnote 6]
Hill v. Commissioner, 38 F.2d 165;
Pope v.
Commissioner, 39 F.2d 420.
[
Footnote 7]
Revenue Act of 1924, §§ 1012 and 281, 43 Stat. pp. 342 and 301;
Revenue Act of 1926, §§ 1112 and 319, 44 Stat. pp. 115 and 84.
[
Footnote 8]
See also McKnight v. United States, 98 U. S.
179,
98 U. S.
186.
[
Footnote 9]
See also The Siren, 7
Wall. 152,
74 U. S.
154.
[
Footnote 10]
Williams v. Neely, 134 F. 1;
Conner v. Smith,
88 Ala. 300, 7 So. 150;
Stewart v. Simon, 111 Ark. 358,
163 S.W. 1135;
Beecher v. Baldwin, 55 Conn. 419, 12 A.
401;
Blackshear v. Dekle, 120 Ga. 766, 48 S.E. 311;
Aultman & Co. v. Torrey, 55 Minn. 492, 57 N.W. 211;
Kaup v. Schinstock, 88 Neb. 95, 129 N.W. 184;
Campbell
v. Hughes, 73 Hun. 14, 25 N.Y.S. 1021.
[
Footnote 11]
United States v.
Burns, 12 Wall. 246,
79 U. S. 254;
District of Columbia v. Barnes, 197 U.
S. 146,
197 U. S.
153-154.
[
Footnote 12]
Merritt v. United States, 267 U.
S. 338,
267 U. S. 341.
[
Footnote 13]
United States v. Behan, 110 U.
S. 338,
110 U. S. 347.