Bull v. United States
295 U.S. 247 (1935)
U.S. Supreme Court
Bull v. United States, 295 U.S. 247 (1935)
Bull v. United States
No. 649
Argued April 9, 1935
Decided April 29, 1935
295 U.S. 247
CERTIORARI TO THE COURT OF CLAIMS
Syllabus
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.
