KOELSCH, Circuit Judge.
These are actions combined in this court to review two decisions of the Tax Court sustaining the Commissioner's determination that the petitioners are liable as transferees for unpaid estate taxes, pursuant to sections 827(b) and 900 of the Internal Revenue Code of 1939. (26 U.S.C. §§ 827(b), 900 (1952 ed.)).
Upon the death of William P. Baker in 1951, his will was duly admitted to probate in California, the state of his residence, and his widow, Melba Baker (now Schuster), was appointed executrix. On October 7, 1952, Schuster filed an estate tax return to which she attached a copy of a trust agreement, executed between the decedent and the petitioner Bank. This agreement, dated September 12, 1941, designated Baker's daughter, Patricia Baker Englert, as beneficiary, and provided that the trust was to terminate and the property to be distributed to her on June 28, 1955, when she reached 30 years of age. It also contained the provision, which Baker had not invoked, permitting him to revoke the trust during his lifetime. The executrix reported the trust for disclosure purposes only, as she did not deem the corpus to be part of the decedent's estate. The then Commissioner, T. Coleman Andrews, concurred with the executrix but determined certain deficiencies in estate tax, which she paid out of the estate.
Shortly before the trust terminated, the beneficiary's husband advised the Bank that all gift taxes applicable to the trust and all estate taxes had been paid. Thereupon, the Bank distributed all the trust property and closed its file.
Andrews was succeeded as Commissioner by Russell C. Harrington. He decided the trust corpus constituted an asset of the decedent's estate for tax purposes, and that a deficiency accordingly existed. But although the estate was not finally distributed, and had assets in excess of the claimed deficiency, proceedings against it for collection was barred by the three-year statute of limitations provided by section 874(a). (26 U.S.C. § 874(a) (1952 ed.)).
However, section 827(b) provides that if an estate tax is not paid when due, then the "spouse, transferee, trustee, surviving tenant * * * or beneficiary," among others, who receives or has on the date of decedent's death property "included in the gross estate" is "personally liable" for its payment. And section 900 provides that the Commissioner might proceed against a "transferee" to collect the tax in the same way he might proceed against the estate. The section also allows a proposed assessment against a "transferee * * * within one year after the expiration of the period of limitation for assessment against the executor," or four years after the filing of the return. Finally, the section defines "transferee" as "a person who, under section 827(b), is personally liable for any part of the tax."
Acting pursuant to these sections, the Commissioner, on September 6, 1956, mailed deficiency notices to the Bank, as trustee, to Schuster, as surviving tenant, and to Englert, as transferee. Each of
The Tax Court held that Englert was not liable,
It is petitioners' position that their substantive liability for the estate tax deficiency depends on state law, and that they are not liable under the law of the appropriate state, California. Their basic premise is that there is no federal law which establishes their substantive liability. They assert that section 900, under which the Commissioner is permitted to assess and collect deficiencies from transferees, does not establish the transferee's liability, but is merely a procedural statute which enables the Commissioner to proceed against the transferee as he might against the estate. According to the Conference Committee which reported this statute,
(Conference Committee Report, H.R. Rep.No.356, 69th Cong., 1st Sess., 1939-1 Cum.Bull. (Part 2) 371). The petitioners point out that a provision similar to section 900 governs the Commissioner's right to enforce the liability of transferees for the transferor's deficiency in income taxes. (26 U.S.C. § 311 (1952 ed.)). In Commissioner of Internal Revenue v. Stern, 357 U.S. 39, 78 S.Ct. 1047, 2 L.Ed.2d 1126 (1958), the Supreme Court held that this provision does not impose substantive liability on transferees, but merely refers this question to the law of the appropriate state. See also Phillips v. Commissioner, 283 U.S. 589, 51 S.Ct. 608, 75 L.Ed. 1289 (1931); 6 Mertens, Fed. Gift & Estate Taxation § 47.04 (1958 ed.); 1 Paul, Fed. Estate & Gift Taxation § 13.46 (1942). The petitioners argue that the rule of the Stern decision should be applied in determining a transferee's liability for a deficiency in estate taxes, and thus that their liability depends on the application of state law. In California, the general rule is that a transferee's liability for the debts of the transferor is secondary,
We disagree with the petitioners' major premise that there is no federal law which establishes their substantive liability. It is true, as the petitioners argue, that section 900 is merely a procedural statute which authorizes the enforcement of a liability which is created elsewhere. But it does not follow that this liability is created by the authority of state rather than federal law. To the contrary, section 827(b) makes transferees "personally liable" for an estate tax deficiency due from an estate. This statute has consistently been regarded as the source of such a transferee's substantive liability, and the courts have developed a uniform body of federal law defining the nature and effects of this liability. See Sharpe v. Commissioner, 107 F.2d 13 (3d Cir. 1939); cf. Mississippi Valley Trust Co. v. Commissioner, 147 F.2d 186, 187 (8th Cir. 1945); Baur v. Commissioner, 145 F.2d 338 (3d Cir. 1944); Fletcher Trust Co. v. Commissioner, 141 F.2d 36 (7th Cir.), cert. denied 323 U.S. 711, 65 S.Ct. 36, 89 L.Ed. 572 (1944); LaFortune v. Commissioner, 263 F.2d 186, 187 (10th Cir. 1958); Moore v. Commissioner, 146 F.2d 824 (2d Cir. 1945); Equitable Trust Co. v. Commissioner, 13 T.C. 731 (1949);
We conclude that the transferee's liability for estate tax deficiencies, under federal law, is essentially a primary, not a secondary, obligation. Section 827(b) specifically imposes some limitations on the liability of such a transferee, for it requires that a deficiency be due from the estate, and that his liability therefor is limited to the value of the estate corpus which he received. But no other limitations were imposed, and there is nothing to suggest that others were intended. Therefore, it seems axiomatic that the transferee's liability for an estate tax deficiency is not conditioned on the Commissioner's remedies against the estate, except as the statute provides otherwise, and is in the nature of a direct and primary obligation independent of the obligation of the estate. As the court declared in the Mississippi Valley Trust case, in connection with a comparable statute relating to gift tax deficiencies,
Indeed, the petitioners' argument that their liability is conditioned on the estate's insolvency is difficult to reconcile with the purpose of section 826(b), which gives the transferee the right of reimbursement against the undistributed portions of the estate. (26 U.S.C. § 826 (b) (1952 ed.)). This right presupposes a solvent estate at the time the transferee seeks reimbursement, and this condition would presumably be the same as when the deficiency was originally assessed against him. See Equitable Trust Co. v. Commissioner, supra. We conclude that the petitioners are not absolved from liability because of the Commissioner's failure to take timely action against the estate, or the estate's solvency. See Scharpe v. Commissioner, supra; cf. Mississippi Valley Trust Co. v. Commissioner, supra; Baur v. Commissioner, supra; Fletcher Trust Co. v. Commissioner, supra; LaFortune v. Commissioner, supra; Moore v. Commissioner, supra; Equitable Trust Co. v. Commissioner, supra.
The petitioners contend that their liability is limited to the "property of the decedent" which is in their possession, as that phrase is used in section 900. Both petitioners contend that the property which gives rise to their liability did not belong to the decedent at his death. The Bank points out that the decedent transferred the trust corpus to the Bank prior to his death. Schuster asserts that in California, the interest of the surviving tenant in joint tenancy property is derived from the original grant, not from the deceased tenant.
We see little merit to the petitioners' argument. It proceeds from the premise that section 900 defines the nature of their liability under federal law and, as we have previously indicated, this premise is clearly wrong. The petitioners' liability is based on section 827(b), which was amended after the enactment of section 900 to make transferees liable for property "included in the gross estate" of the decedent. The petitioners have conceded that their property was includable in the decedent's gross estate. Significantly, the amendment specifically included "surviving tenants" and "trustees" within the group upon whom liability is imposed. Congress obviously meant to establish a uniform system of liability for such persons, rather than vary their liability in accordance with the anomalies of state law. Accordingly, we conclude that the petitioners' tax liability is not conditioned on the decedent's proprietary interest in the property under state law.
Schuster urges that she is not liable for the estate tax because the joint tenancy property is deductible as an interest passing to the decedent's surviving spouse, and therefore not includable in the net estate. (See 26 U.S.C. § 812(e) (1952 ed.)). But as we have already indicated, section 827(b) makes the transferee taxable on any property which is included in the decedent's "gross estate." There is no indication that Congress intended to limit her liability to property which is part of the decedent's net estate. Schuster argues that because of the deducibility of the property, it should not be considered as part of the substantive gross estate. Aside from the fact that this construction ignores the plain language of the statute, it overlooks
The petitioners contend that the Commissioner is estopped from asserting liability because of his earlier determination that they were not liable for the tax deficiency.
We recognize the force of the proposition that estoppel should be applied against the Government with utmost caution and restraint, for it is not a happy occasion when the Government's hands, performing duties in behalf of the public, are tied by the acts and conduct of particular officials in their relations with particular individuals. (See Couzens v. Commissioner, 11 B.T.A. 1040, 1050 (1928)). Estoppel has been applied against the Commissioner in limited situations, but they have usually arisen where the Commissioner's act involved matters of a purely administrative nature. (See H.S.D. Co. v. Kavanagh, 191 F.2d 831 (6th Cir. 1951); Woodworth v. Kales, 26 F.2d 178 (6th Cir. 1928)). Indeed the tendency against Government estoppel is particularly strong where the official's conduct involves questions of essentially legislative significance, as where he conveys a false impression of the laws of the country. Obviously, Congress's legislative authority should not be readily subordinated to the action of a wayward or unknowledgeable administrative official. Accordingly, the general proposition has been that the estoppel doctrine is inapplicable to prevent the Commissioner from correcting a mistake of law. See Automobile Club v. Commissioner, 353 U.S. 180, 77 S.Ct. 707, 1 L.Ed.2d 746 (1957);
But we regard this proposition as one of general application, not as embracing the concept that the Commissioner might always correct a legal mistake regardless of the injustice which will result. It is conceivable that a person might sustain such a profound and unconscionable injury in reliance on the Commissioner's action as to require, in accordance with any sense of justice and fair play, that the Commissioner not be allowed to inflict the injury. It is to be emphasized that such situations must necessarily be rare, for the policy in favor of an efficient collection of the public revenue outweighs the policy of the estoppel doctrine in its usual and customary context. But as long as the concept of estoppel retains any validity, it is conceivable that such situations might arise.
The Commissioner takes the position that an estoppel cannot arise because he did not commit any act on which the Bank could have relied. But the Tax Court found that the Commissioner "audited the Federal estate tax return * * * and determined that the trust was not taxable." This involved a sufficiently affirmative act on the Commissioner's part. The determination was conveyed to the trust beneficiary, whose husband, a lawyer, relayed the information to the Bank. The Commissioner points out that the information reached the Bank indirectly, rather than directly, from the Commissioner. But he surely anticipated that the results of the audit would be communicated to the Bank. The Tax Court appropriately found that the Bank's reliance on the information was "reasonable." Therefore, we conclude that the Commissioner, although not precluded from asserting Schuster's liability, is estopped from asserting the liability of the Bank.
The petitioners have contended that sections 900 and 827 deprive the petitioners of property without due process of law, and therefore are violative of the standards contained in the Fifth Amendment. The violation occurs, it is argued, if the statutes are interpreted to make transferees liable for the taxes of the estate, to extend the statute of limitations for proceeding against transferees, to subject the transferee to liability when the estate is solvent, and to impose liability on a transferee who has property subject to the marital deduction.
As the Supreme Court declared in Helvering v. City Bank Farmers Trust Co., 296 U.S. 85, 90, 56 S.Ct. 70, 73, 80 L.Ed. 62 (1930):
We do not believe the provisions for transferee liability are inappropriate or unreasonably harsh. The concept of due process does not prevent the imposition of primary liability, up to the value of the estate property in his possession, on a transferee for the tax deficiency due from the estate. Detroit Bank v. United States, 317 U.S. 329, 63 S.Ct. 297, 87 L.Ed. 304 (1943). Nor is it an infringement on constitutional guarantees to provide for more extended periods of limitation in suits against transferees than against the estate; it is easily conceivable that the Commissioner might need the additional time in order to determine the identity and whereabouts of the holders of the estate corpus. There is nothing beyond the power of Congress in allowing the Commissioner to proceed against the transferee when the estate is
The final question involves the Commissioner's cross-petition, asserting that the Tax Court erred in failing to provide for interest on the deficiencies.
The decision of the Tax Court is affirmed as to Melba Schuster, and reversed as to the United California Bank.
Section 827(b) provides:
"If the tax herein imposed is not paid when due, then the spouse, transferee, trustee, surviving tenant, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent's death, property included in the gross estate under section 811(b), (c), (d), (e), (f), or (g), to the extent of the value, at the time of the decedent's death, of such property, shall be personally liable for such tax." * * *
Section 900 provides:
"(a) Method of collection. The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this subchapter (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):
"(1) Transferees. The liability, at law or in equity, of a transferee of property of a decedent, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed by this subchapter.
"(b) Period of limitation. The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows:
"(1) Within one year after the expiration of the period of limitation for assessment against the executor.
"(e) Definition of `transferee'. As used in this section, the term `transferee' includes heir, legatee, devisee, and distributee, and includes a person who, under section 827(b), is personally liable for any part of the tax."