ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND PLAINTIFFS' CROSS-MOTION FOR SUMMARY JUDGMENT
Plaintiffs are the trustees of the Jeanette Andersen Trust. In 1965, the trust sold stock, with payments to be made on notes in yearly installments from 1966 through 1980. The gain on the sale was distributed to Jeanette Andersen, the income beneficiary of the trust. She died in December 1968 and the total value of the trust, including the capital gain, was included in the estate and subjected to the estate tax. In an earlier tax refund suit for 1969 through 1972, this court held for taxpayers, ruling that under § 691 of the Internal Revenue Code the capital gains were "income in respect of a decedent," so that the trust was entitled to a deduction from the estate taxes that were attributable to the gains. Sun First National Bank of Orlando v. United States, 221 Ct.Cl. ___, 607 F.2d 1347 (1979).
The present case involves the same facts for the following year, 1973. On the trust's Fiduciary Income Tax return for 1973, a deduction was taken under § 691(c), for estate tax for income in respect of decedents. The Internal Revenue Service disallowed this deduction and assessed a deficiency of $49,330.37. After paying this sum, plaintiffs filed an administrative claim on August 20, 1975, seeking a refund alleging that the gain on the 1973 note was income in respect of a decedent and that a deduction of a proportion of the estate tax attributable to such gain was allowable under § 691. This claim was rejected by the Service on January 14, 1977. All this was before our decision for the earlier year, supra.
On March 24, 1978, plaintiffs filed a second claim for refund arguing that, if the gain did not fall under § 691, then, because the installment notes had been included in the estate they should be valued for capital gain purposes at the value used for estate tax purposes, a stepped up basis under Code § 1014, 26 U.S.C. § 1014 (1976). This second claim for 1973 was disallowed on June 1, 1978. That notice of disallowance provided in relevant part:
In a letter, taxpayer claimed that the untimeliness basis for disallowance was clearly incorrect and sought to have the Service review the case further because the disallowance was wrong. No response was received.
Taxpayer then brought this action (on May 29, 1980) challenging the Service determinations for 1973 under § 691 and § 1014.
All admit that, if the suit under § 691 must rest on the first refund claim for 1973, it is far beyond the two-year limit. The only real issue is whether the second disallowance founded another claim under § 691 which can now be vindicated because this suit came less than two years after that second denial of a refund. Our rulings are that (1) taxpayers and the court can and should reasonably view the second disallowance as incorporating a reconsideration of the § 691 claim previously rejected, and (2) a formal reconsideration and disallowance of this type begins a new period of limitations for suit.
1. It is plain to us that, at the very best for the Government, the second allowance was extremely ambiguous. The second paragraph, supra, appears to reject the claim, which was squarely based on § 1014, because it was not timely filed with the Service.
Accordingly, we find with taxpayers that the Service did reconsider and deny the § 691 claim in the second notice of disallowance.
2. The next question is whether this reconsideration had any effect on the time for filing this action. The Government's argument is that the Internal Revenue Code provides that reconsiderations do not extend the statute of limitations, IRC § 6532(a)(4), and that any extensions of time must be formally agreed to by the parties, using an IRS Form 907, IRC § 6532(a)(2). See U.S.C. § 6532(a)(2), (4) (1976).
These statutory provisions have recently been construed by this court in Heath v. United States, 219 Ct.Cl. 582 (1979), and we are bound by the court's decision there.
Two principles may be gleaned from Heath and Miller. First, a reconsideration which results in a formal disallowance by the Service can extend the period within which suit can be brought. To that end, § 6532 should be construed flexibly. Beardsley v. United States, 126 F.Supp. 775, 777 (D.C.D.Conn.1954) (construing a similar predecessor provision); see DeGregory v. United States, 395 F.Supp. 171, 175 (D.C.E.D.Mich.1975). Second, the time for filing should be extended when the claimant is understandably confused by a second notice of disallowance, and acts reasonably. Both components are present here in full force.
The principal cases relied on by defendant are inapposite. Kelson v. United States, 503 F.2d 1291 (10th Cir. 1974), did not involve a formal reconsideration by the Service of the original claim. 503 F.2d at 1293. In Einson-Freeman Co. v. Corwin, 112 F.2d 683 (2nd Cir.), cert. denied, 311 U.S. 693, 61 S.Ct. 75, 85 L.Ed. 449 (1940), the taxpayer tried to extend the statute of limitations by filing a second claim on grounds substantially similar to those used in the first claim. 112 F.2d at 684. See Union Commerce Bank v. United States, 463 F.Supp. 842, 843 (D.C.N.D.Ohio 1978), aff'd, 638 F.2d 962, 963 (6th Cir. 1981); Harvard Trust Co. v. United States, 262 F.Supp. 860, 862 (D.C.D.Mass.1967). As noted in Miller, "[C]ases holding that a taxpayer cannot extend the statute by filing successive claims ... [do not apply where] it was not the taxpayers' unilateral filing of a second claim, but rather the Commissioner's error in sending the unnecessary disallowance notice that arguably extended the critical deadline." 500 F.2d at 1010. Here, the Commissioner's inclusion of the extraordinary third paragraph, supra, created the same reasonable belief as the unnecessary notice in Miller and the corrected notice in Heath.
Even if we could disavow the rationale of Heath, we are not persuaded by the legislative history of § 6532 that Congress intended absolutely to prohibit extension of the time via a formal reconsideration and disallowance. The problem being addressed by Congress when it enacted subsection 6532(a)(4)
Defendant cites the discussion in the House Report as proof of Congress' intention that any reconsideration should not result in an extension of the deadline.
Defendant says, too, that all extensions of time must comply with § 6532(a)(2) which, it alleges, requires a formal extension agreement between the parties, calling for the signing of a Form 907. The simplest answer is that the second disallowance notice giving plaintiffs two years from its mailing date to bring suit was, in essence, an agreement to extend the time deadline; it is clear from Heath and Miller that an extension need not be given only through Form 907. The reconsideration notice here, as in Heath, was so unclear as to create a wholly reasonable belief in plaintiffs' minds as to the extended filing deadline. In such a case where it is reasonable to believe there has been a reconsideration followed by a formal disallowance notice, and where the notice seems to extend the statute of limitations, a claimant is entitled to act on its reasonable view without forfeiting its right to bring suit.
3. On the merits of the § 691 claim there is no contest and defendant attempts none; our Sun First National Bank decision, supra, is fully controlling. Plaintiffs must prevail.
On these grounds, we deny defendant's motion for summary judgment, grant plaintiffs' cross-motion, and hold that the latter are entitled to recover. The case is remanded to the Trial Division under Rule 131(c) to determine the amount of recovery.
NICHOLS, Judge, concurring:
I concur in the result. It seems to me, if one reads the unhappy IRS letter of June 1, 1978, as its author probably meant it, it would be a refusal to reconsider, not a reconsideration. To translate it into the vernacular: "I decided this claim against you before. You are a day late and a dollar short. Now stop bugging me about it. If you don't like what I have done, sue me!" Had he addressed anyone but a law firm, he would probably have been so understood. But I agree defendant ought not to get away with its defense, inequitable as it is. Had I been assigned the delivery of the court's opinion, I might have propounded something that seemed to other members of the panel as strained as this seems to me. There is also to be said: the more completely the court misconstrues the IRS's letter, the more educational our decision will be to the IRS to write better ones in the future, or to pay some attention to taxpayers who, as here, write in for clarification. To an official letter like this, the court will assign whatever meaning it deems requisite to do justice in the premises, within the range of
"(4) Reconsideration after mailing of notice. — Any consideration, reconsideration, or action by the Secretary of his delegate with respect to such claim following the mailing of a notice by certified mail or registered mail or disallowance shall not operate to extend the period within which suit may be begun."
26 U.S.C. § 6532(a)(2):
"(2) Extension of time. — The 2-year period prescribed in paragraph (1) shall be extended for such period as may be agreed upon in writing between the taxpayer and the Secretary or his delegate."
"Section 208 amends section 3225 of the Revised Statutes and is designed to permit further consideration or action by the Commissioner of Internal Revenue, in connection with a claim for refund after he has once disallowed it, without extending the period within which a suit for recovery of the refund may be brought. Existing law now requires that a taxpayer brings suit within 2 years after the Commissioner has disallowed his claim for refund. The courts have held that if the Commissioner reconsiders a claim after he has disallowed it, the 2-year period does not begin to run until a second decision has been made. It is obviously in the interest of the taxpayer that the Commissioner should reconsider claims for refund, and thus permit the taxpayer to have an opportunity to secure a refund administratively without resort to court action. Under existing court decisions, there is so much uncertainty as to what constitutes reconsideration of a claim, that the Bureau of Internal Revenue is reluctant to take action with respect to a claim after it has once been disallowed, because of the fear that the case may be reopened indefinitely and thus result in further administrative expense with respect to such claim. It is felt that when the Bureau answers letters of inquiry and extends to taxpayers the courtesy of investigating into closed files, it should not be compelled to do so at the risk of indefinitely prolonging the period of limitations. The proposed amendment it is felt will permit a more liberal treatment on the part of the Bureau of Internal Revenue in reconsidering claims for refund once they have been rejected, and will eliminate the confusion now existing as to just what constitutes reconsideration of a claim so as to extend the period of limitations."
H.Rep.No.2818, 74th Cong., 2d Sess. 11 (1936) (emphasis added).