
    461 F. 2d 1304
    TRUST U/W LIDA R. TOMPKINS, THE RIGGS NATIONAL BANK OF WASHINGTON, D.C., JAMES SHERIER AND ALLAN D. HENRY, TRUSTEES v. THE UNITED STATES
    [No. 315-66.
    Decided June 16, 1972]
    
      
      Stanley Worth, attorney of record, for plaintiff. Hamel, Parle, McOabe & Sawnders, of counsel.
    
      Ira Mark Bloom, with, whom was Acting Assistant Attorney General Fred, B. Ugast, for defendant. Philip R. Miller and Theodore D. Peyser, Jr., of counsel.
    Before Cowen, Chief Judge, Dureee, Senior Judge, Davis, Skelton, Nichols, Kashiwa, and Kunzig, Judges.
    
   Per Curiam :

This case was referred to Trial Commissioner Saul Kichard Gamer with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Eule 134(h). The commissioner has done so in an opinion and report filed on September 27, 1971. Exceptions to the commissioner’s opinion, findings of fact and recommended conclusion of law were filed by plaintiff, defendant requested the court to adopt the findings of fact and conclusion of law and the case has been submitted to the court on oral argument of counsel and the briefs of the parties. Since the court agrees with the commissioner’s opinion, findings of fact and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Therefore, plaintiff is not entitled to recover and the petition is dismissed.

OPINION OP COMMISSIONER

Gamer, Commissioner: Lida E. Tompkins, a resident of Washington, D.C., died in 1958. As vice-president and treasurer, and a 36 percent stockholder, she had been active with her husband, Charles H. Tompkins, in the construction business carried on by the Chas. H. Tompkins Company, a firm organized and controlled by her husband. In addition, she owned substantial real and personal property, including life insurance policies, various stocks and bonds, and interests in commercial properties producing rental income. The commercial properties were held jointly with her husband.

By her will, Mrs. Tompkins (sometimes herein referred to as “the decedent”) created a trust to which all of her real estate interests passed upon her death. She designated her husband as the executor of her estate and as the sole trustee of the testamentary trust.

In 1954, her husband, as executor, filed the federal estate tax return. The return showed a net estate of over $1,230,000, and a tax thereon of over $379,000, which amount was then paid.

Mr. Tompkins, as executor, filed his final estate account in January 1956. Upon approval thereof by the probate court in July of that year, all remaining assets of the estate, consisting of principal and income account balances aggregating over $1,000,000, were distributed to the trust (Charles H. Tompkins, as executor, distributing the assets to Charles H. Tompkins, as trustee).

However, tbe following year the Commissioner of Internal Eevenne, by a notice dated May 24,1957, asserted a deficiency in the federal estate tax in the amount of over $2,160,000. The Commissioner felt that certain of the stocks, life insurance policies, and real estate listed in the estate tax return had been undervalued.

As stated, by this time the estate had been closed. Furthermore, Charles H. Tompkins had died the previous December. Under the provisions of decedent’s will, two individuals and the Eiggs National Bank of Washington, D.C., had become successor trustees of the testamentary trust. The will also named the same three as successor executors in the event the appointment of such successors became necessary.

The successor executors concluded that the deficiency asserted by the Commissioner should be contested. However, the trust did not have the cash with which to pay such large assessed amount, plus interest, as a basis for a refund suit in the United States Court of Claims or a United States District Court, nor did the executors consider that it would be prudent to raise the necessary amount by borrowings (assuming it would be possible to do so) or by sales of the real properties in the trust at what they felt would amount to forced liquidation prices. Accordingly, they decided that the best course to follow would be to contest the deficiency in the Tax Court of the United States, thereby making it unnecessary to make such a large payment at that time. Accordingly, upon their petition, the probate court took the necessary action to reopen the estate, to designate the three parties as successor executors, and to authorize them to contest the asserted federal estate tax liability, following which, as such executors, they filed, on August 21,1957, a petition in the Tax Court for redetermination of the asserted deficiency.

Since all of the trust property came from the estate, the trustees recognized the trust’s responsibility, as transferee, for any increased estate tax liability. Consequently, as both trustees and executors, they considered it unnecessary, upon the reopening of the estate, to go through the mechanics of transferring the trust property back to the estate.

Prior to the trial in the Tax Court, the parties were able to arrive at an agreement settling all of the disputed issues, with one exception. That exception involved the value of 186 shares of common stock of a close corporation called the H Street Building Corporation, all of the outstanding 650 shares of such stock being owned by members of the Tompkins family. The agreement of the parties was set forth in a stipulation filed in the Tax Court in September 1959.

The partial settlement was in itself sufficient to increase the estate’s net assets by over $878,000, on which basis alone there was an agreed deficiency in estate tax of over $390,000.

Thereupon, the trustees, to halt the further accumulation of interest on such part of the agreed deficiency, decided to pay it, plus the interest thereon. Certain profitable sales of real estate in which the trust had an interest had been effected by the successor trustee-executors, and the trust was then in a sufficiently liquid position to be able to make such payment. Accordingly, in June 1960, August 1960, and May 1961, the trustees so paid $270,000, $95,000, and $185,250, respectively, totaling $550,250, designating $197,100, $68,500, and $130,000, respectively, or a total of $395,600, as applicable to the deficiency, and $72,900, $26,500, and $55,250, respectively, or a total of $154,650, as applicable to interest.

After they became successor trustees following the death of Mr. Tompkins in 1956, the trustees annually filed fiduciary income tax returns of the trust. For the calendar year 1959, they paid a tax of $485.63. The return for the calendar year 1960 was filed on April 14,1961, and for such year the trustees paid a tax of $19,923.22. Although, as shown, they had made during such year two payments on account of the deficiency in the estate tax, of which $99,400 was allocated to interest, the return indicated no interest deductions at all for such year (nor did the return for the calendar year 1961 show any such deduction for interest, although, as indicated, $55,250 of the $185,250 payment with respect to the deficiency made during that year was allocated to interest).

Thereafter, the Tax Court, by an opinion filed on December 22,1961, determined the sole issue upon which the parties had been unable to agree. It decided that the value of the 186 shares of common stock of the H Street Building Corporation was $1,023,000, or $5,500 per share (instead of $155,193, or $834.32 per share, as set forth in the estate tax return). This finding, which was accepted by the parties, served to increase the estate tax deficiency by an amount of over $410,500. This indebtedness, plus interest, as adjusted by a credit for local taxes, was liquidated by two payments made in 1962 totaling over $418,000, of which $139,347.23 was allocated to interest. These payments too were made by the trustees of the testamentary trust out of trust funds. By 1962, as a result of further profitable sales of real estate which the decedent had jointly owned with her husband, there was only one income producing property left in which the trust had such an interest.

In March 1963, the trustees filed their federal fiduciary income tax return for the calendar year 1962. This time they did take an interest deduction with respect to the interest they had paid on the estate tax deficiency. However, although, as stated, they had paid almost $140,000 in such interest during the year, they took a deduction of only $35,168.12 (such computation not being explained in the return). In any event, the return indicated no taxable income and no tax liability.

The following year, the plaintiff trust received a letter dated August 25, 1964, from the District Director of the Internal Eevenue Service at Baltimore, Maryland, which must have been a pleasant surprise. It informed plaintiff that, upon an examination of the fiduciary income tax returns it had filed for the five years 1957, 1959, 1960, 1961, and 1962, it was concluded that the entire aforementioned amounts of $485.63 and $19,923.22 which it had paid for 1959 and 1960, respectively, constituted overpayments. The report of the revenue agent who had made the examination was enclosed with the letter and explained the various changes made which produced this result. The report showed that such 1959 and 1960 overpayments stemmed from drastic changes, to the trust’s benefit, which the agent made with respect to 1962. For such year, instead of an interest deduction of only $35,168.12 with respect to the estate tax deficiency which the trust had taken, the agent allowed the full amount of $358,921.47 in interest which plaintiff had paid in 1960,1961, and 1962. The agent felt that the interest payments made in 1960 and 1961 did not constitute proper deductions for those years (as shown, plaintiff had not in fact claimed them as deductions in those years) because “no indebtedness is recognized for contested tax deficiencies” (i.e., the estate’s petition for redetermination of the asserted deficiency was still pending during those years). Accordingly, he concluded that “the interest payments made during 1960 and 1961 must be grouped with the 1962 payment and only deductible during 1962” (the Tax Court’s final decision pursuant to its previous opinion having been entered on May 10, 1962, and the deficiency resulting therefrom having been completely liquidated in that year). Although, as against no taxable income for 1962, as the trust had reported in its return, the agent concluded that the trust had in fact realized over $78,000 of such income, the large interest deduction which he allowed nevertheless served again to produce no tax liability. Furthermore, such large interest deduction resulted in an excess of deductions over income in the amount of over $245,000 which the agent allowed as a net operating loss carryback (plaintiff had claimed no such operating loss carryback). It was this carryback first to 1959 and then to 1960 which served to eliminate the above-mentioned tax liabilities for such years (the large increases in taxable income for such years which the agent calculated over the amounts the trust reported in its returns still being insufficient to overcome the loss carry-backs to such years).

As a result, the amounts of $485.63 and $19,923.22 which the trust had paid for its 1959 and 1960 income taxes were refunded, plus interest.

Some five months later, however, the trust received another letter, dated March 9,1965, from the District Director which contained less felicitous tidings. It informed plaintiff that its previous letter of August 25, 1964, and the revenue agent’s report enclosed therewith, on the basis of which plaintiff had received the refunds, contained an important error. This letter too was accompanied by a report of the same revenue agent. This time the agent concluded that the $358,921.47 in interest paid by plaintiff in 1960,1961, and 1962 attributable to the federal estate tax deficiency, and which was all deductible in 1962, could not nevertheless properly be considered as contributing to a net operating loss. This was so, he reasoned, because, under Section 172(d) (4) of the Internal Revenue Code of 1954, the only deductions allowable to an individual taxpayer (i.e., not a corporation) which could enter into the computation of a net operating loss were those “attributable to a taxpayer’s trade or business.” The estate tax deficiency was, he concluded, in no way related to any business operation in which the trust was engaged, and the interest expense attributable to such deficiency was similarly to be deemed to constitute a nonbusiness expenditure. Accordingly, the excess of deductions over income for 1962 (previously allowed as an operating loss carryback) did not, he decided, serve to create an allowable net operating loss which could be carried back.

Consequently, the District Director concluded that the amounts of $485.68 (plus interest) for 1959, and $19,923.22 (plus interest) for 1960, which had been refunded to plaintiff, were due and owing after all, and assessed deficiencies against plaintiff in said amounts, plus interest. On April 28, 1965, plaintiff paid such deficiencies, plus interest, but on February 10,1966, filed refund claims therefor. The basis for the claims was that “[a]ll of” the trust’s “activities * * * were devoted to the handling of the investments constituting the corpus of the trust * * *” and that “ [s]uch activities were the taxpayer’s trade or business, as were its activities in contesting the asserted deficiency in estate tax * * Plaintiff pointed out tbat “[p] ending tbe said decision of the Tax Court the taxpayer had full control and use of the investment properties, and the income produced by those properties, in the furtherance of its business activities.” It therefore contended that “[t]he interest ultimately paid * * * in 1962, in connection with the deficiency in Federal estate tax, was ‘attributable’ to its trade or business, and accordingly does not constitute a nonbusiness deduction within the meaning of § 172 (d) (4) of the 1954 Code.” The claims were disallowed on May 27,1966, and this suit followed. Plaintiff here contends that the Internal Eevenue Service was correct in its first ruling that the 1962 deficit constituted a proper net operating loss carry-back which served to eliminate any income taxes owed by the trust for 1959 and 1960, while defendant contends that the Service’s contrary second ruling was the correct one.

It must be concluded that the second determination was the proper one since it is clear that the interest paid with respect to the deficiency in the decedent’s federal estate tax was not attributable to any trade or business in which the trust was engaged.

Net operating loss carrybacks are permitted by Section 172 of the Internal Eevenue Code of 1954. Such a loss is defined in subsection (c) as “the excess of the deductions allowed by this chapter over the gross income,” the “excess” to “be computed with the modifications specified in subsection (d).” One “modification,” set forth in paragraph (4) of such subsection, provides:

(4) Nonbusiness deductions of taxpayers other than corporations.
In the case of a taxpayer other than a corporation, the deductions allowable by this chapter which are not attributable to a taxpayer’s trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. * * *

There is no dispute with respect to the general rule allowing interest on indebtedness as a deduction. 26 U.S.C. § 163(a) (1958). Thus, the basic question to be determined is whether the payment by the trust of the estate tax deficiency and the interest thereon was “attributable to” any trade or business in which the trust was engaged. (The same answer would be applicable had the deficiency been paid by the estate itself rather than by the trust, since all of the trust’s assets came from the estate.)'

Defendant argues that the tax payment was not “attributable to” any trade or 'business of the plaintiff for the simple reason that plaintiff was in no way engaged in any trade or business. It asserts that the trust’s activities “were restricted to the management of investments,” and points to what it regards as the admission to such effect made by plaintiff itself in its claims for refund, wherein it stated that “[a] 11 of the activities of this testamentary trust were devoted to the handling of the investments constituting the corpus of the trust, collecting the income therefrom, and otherwise observing the provisions of the decedent’s testamentary trust.” Managing one’s own investments does not, defendant says, amount to engaging in a trade or business. On the other hand, plaintiff asserts that its various activities concerning its real estate holdings constituted a trade or business.

It is, however, not necessary to determine whether all or part of the trust’s real estate activities, such as “the handling of the investments” therein or “collecting the income therefrom” amounted to a trade or business because, even if they did, it would make no difference. This is so because it is not evident how an estate tax indebtedness is in any way related or attributable to the operation of any such trade or business. An individual (i.e., “a taxpayer other than a corporation”) engaged in a business may, of course, include interest on a business loan in his business expenses, and such an expense would qualify for inclusion in his net operating loss computation. Such interest grows out of or has its origin in an act related or attributable to the business operation. He could not, however, include in such computation interest incurred on a personal or nonbusiness loan. The trust, being an entity “other than a corporation,” is similarly circumscribed. An estate tax does not grow out of or have any origin in a business operation. It is not therefore “attributable to” any such business. Instead, the tax is based upon a death and the resulting transfer of property from the decedent to those designated to receive it. Hartley v. Commissioner, 72 F. 2d 352 (8th Cir.1934) (aff'd as to other issues, 295 U.S. 216 (1935)). In Hartley, the payment by an estate of the federal estate tax resulted in a net loss to the estate for the year, and the executor sought to carry forward the loss to subsequent years. The court held, however, that the federal estate tax was a non-business expense which should not be included in computing the net operating loss under the comparable provisions of Section 206(a) of the Revenue Act of 1924, ch. 234, 43 Stat. 260. It stated:

The executor properly concedes that the statute providing for carrying forward losses applies only to losses resulting from operation of a business by the taxpayer. * * * His contention is that the estate was carrying on a business and that the estate tax is an expense and loss of such business because it is a lien upon all the property of the estate and it is only by paying such tax that the estate and its business can be preserved. It may be conceded that this estate was carrying on a business within the meaning of the statute and that the preservation of the estate and of its business required payment of the tax but that does not meet the statutory requirement that the loss must arise from and out of the operation of the business * * *. An estate tax arises from passage of property from a decedent and is upon the privilege of such transfer. * * * It has no legal connection with the operation of a business and cannot arise from or out of such operation. The contention must be denied. * * * [72 F. 2d at 356-57]

Plaintiff attempts to bridge the “business” relationship gap by asserting that the delay gained in liquidating the estate tax deficiency resulting from the Tax Court proceeding, with respect to which delay a substantial part of the interest here in question accrued, enabled it to retain “its investment properties until the time was ripe for realizing a substantial gain,” and that such gains, which produced “substantial amounts of taxable income,” were “made possible by the fact that plaintiff was not required to pay its indebtedness for estate tax at or about the due date.” The “use of” the “money represented by the indebtedness during all of the intervening time for which it was liable for payment of interest at 6% per annum,” says plaintiff, “was in the same category as interest which would have been paid if the amount of deficiency had been borrowed from one or more banking institutions.” The contention cannot be accepted. The identical argument could be made by anyone, whether or not he is running a business, who finds he has to liquidate assets, or borrow funds, in order to pay an estate tax. The avoidance of such liquidation or borrowings by delaying payment of the tax until the estate becomes more liquid in due course cannot in itself serve to make the running of the estate’s affairs a “business,” in the sense that it is the “business” of the estate (or here, the trust), to delay payment of the tax to a more propitious time. This argument merely echoes the clearly untenable contention in plaintiff’s refund claims that the trust’s “activities in contesting the asserted deficiency in estate tax” constituted “the taxpayer’s trade or business” since “[p] ending the said decision of the Tax Court the taxpayer had full control and use of the investment properties, and the income produced by those properties * * *.”

Furthermore, even if, contrary to the holding in Hartley, the delay in the payment of the estate tax could be deemed to have a business relationship insofar as it helped to preserve a going business in which the trust was engaged, plaintiff does not show which part of its activities falls into such a “business” category, and what corresponding part of the interest or the estate tax deficiency could, therefore, be deemed to be “attributable to” its business activities. Plaintiff, arguing that “the activities of the testamentary trustees * * * were directly related to the conduct of business,” apparently regards all of the trust’s activities as constituting a “business.” As plaintiff argued in its claims for refund, “all of the activities” of the trust “were devoted to the handling of the investments constituting the corpus of the trust, collecting the income therefrom” and that “such activities were the taxpayer’s trade or business * * This contention is clearly unsupportable. A large part of the estate-trust consisted of stocks and bonds. Collecting the income therefrom does not amount to engaging in a “business.” Similarly, plaintiff’s interest in the H Street Building Corporation was as a stockholder. A stockholder’s activities with respect to the affairs of a corporation do not amount to the operation of a trade or business. Whipple v. Commissioner, 373 U.S. 193 (1963).

Plaintiff further attacks the second ruling of the Internal Eevenue Service on the ground that it was based on the holdings contained in a Revenue Ruling, No. 58-142, 1958-1 Cum. Bull. 147, and a case, Morse v. United States, 183 F. Supp. 847 (D. Minn. 1959), which the Service has now repudiated. The ruling and the case were specifically cited by the revenue agent in his second report in support of his conclusion that “interest expenses attributable to Federal Tax deficiencies’ payments are deemed to be nonbusiness expenditures.”

In Eevenue Euling 58-142, it was held that state income taxes, interest on state and federal tax deficiencies, and litigating expenses incurred in connection with such taxes, are not “attributable to a taxpayer’s trade or business” within the meaning of Section 172(d) (4) for the purpose of allowance as deductions in determining a net operating loss of a taxpayer other than a corporation (except to the extent of the amount of gross income not derived from the trade or business), and that this was so even though such expenditures were related to and grew out of the income which was derived from the trade or business carried on by the taxpayer. Morse similarly held that the taxpayer, who operated an apartment building, was not entitled to treat interest on prior years’ income tax deficiencies as a business expense for the purpose of calculating a net operating loss (which could be carried over) despite the fact that the taxpayer had no other source of income except from his business. The deficiencies (and the interest thereon) were considered as indebtednesses personal to the taxpayer and not as expenses or liabilities of the 'business. The Tax Court had also so held in similar situations. Guignard Maxcy v. Commissioner, 26 T.C. 526 (1956); Wilma Aaron v. Commissioner, 22 T.C. 1370 (1954). However, the Tax Court, on reconsideration, and other courts, commenced holding otherwise. Frank Polk v. Commissioner, 31 T.C. 412 (1958), aff'd 276 F. 2d 601 (10th Cir.1960) (penalty interest on an assessment of additional income taxes constituted a business expense which was deductible for the purpose of computing a net operating loss); Jacob Rubin v. United States, 60-2 TTSTC ¶ 9499 (E.D. Va. 1960) (interest on income tax deficiencies, and legal and accounting expenses incurred in settling the deficiencies dispute, were attributable to taxpayer’s business and therefore deductible for determining a net operating loss carryback, where the alleged unreported income was attributable only to the taxpayer’s business income); Elmer Reise v. Commissioner, 35 T.C. 571 (1961), aff'd 299 F. 2d 380 (7th Cir.1962) (state income taxes, as well as interest on deficiencies on such taxes and on federal income taxes, were deductions attributable to taxpayer’s business, includable in computing net operating loss carryback, Wilma Aaron v. Commissioner being specifically overruled); Clarence Wood v. Commissioner, 37 T.C. 70 (1961) (legal and accounting fees paid in contesting and settling income tax liability are expenses attributable to a business and in-cludable in computing net operating loss where asserted deficiencies related to adjustments on taxpayer’s business income); W. J. Winston v. United States, 62-1 USTC ¶ 9206 (S.D. Tex. 1962) (interest on deficiency in income tax due to increase in business income resulting from inventory adjustments was attributable to taxpayer’s business and was properly a part of the net operating loss deduction).

Ultimately, the Internal Eevenue Sendee, by Revenue Ruling 70-40,1970-1 Cum. Bull. 50, reconsidered Ruling 58-142 and, specifically noting the above-mentioned five cases, superseded it insofar as it held that state individual income taxes on net income from business profits, interest on deficiencies in state and federal income taxes arising from adjustments on business income, and litigating expenses incurred in connection with such deficiencies, were not allowable as deductions in determining a net operating loss. Such expenditures are now deemed to be “ ‘attributable to a taxpayer’s trade or business’ for purposes of section 172 (d) (4) of the Code and, provided they are otherwise deductible, are allowable deductions in determining the net operating loss deduction.” Id. at 51.

Thus, plaintiff is correct in pointing out that the authorities cited by the revenue agent in support of his conclusion are no longer considered as controlling by the Eevenue Service. This is, however, of no significant aid to plaintiff’s case because both the original and the superseding Eevenue Eulings, as well as the case {Morse) relied upon by the revenue agent and the five cases referred to in the new Eevenue Euling, all pertain to income taxes, whereas the instant case involves an estate tax, an entirely different kind of tax. The fundamental problem involved is whether an expenditure is “attributable to” a business. The Service and many courts now recognize that interest on assessed income tax deficiencies which are disputed (as well as legal and accounting expenses related to the dispute) is a business expense if it is shown that the income taxes had their origin in gross income derived from the operation of the taxpayer’s business. In such a case, the connection between the business and the interest is self-evident. But no such connection can be perceived with respect to an estate tax which does not have its origin in or arise from the operation of a business in which the taxpayer is engaged. Instead, it arises from a death and is based on the value of the property the decedent owned. Because of the basic difference between the two types of taxes, the revenue agent perhaps erred in citing income tax authorities when faced with an estate tax problem, and in construing Euling 58-142 and the Morse case as being broadly applicable to interest on all “Federal Tax deficiencies’ payments.” On the other hand, it is possible that he merely meant to cite those authorities as illustrative of the broad principle that expenses are not allowable for net operating loss purposes unless they are “attributable to” a business. In any event, plaintiff can gain no advantage from the fact that the agent may have relied on wrong (and subsequently repudiated) authorities in arriving at the correct result.

Finally, plaintiff argues that, with respect to the year 1960, it is entitled to recover on the alternate ground that, if the amount of the deficiency interest paid during’ that year ($99,400) were allowed as a deduction for such year, no tax would have been due anyway, so that no reliance need, therefore, 'be placed on any loss carryback from 1982. Plaintiff says the revenue agent should have allowed the interest paid in 1960 as a deduction for such year, thereby directly eliminating any such 1960 tax liability, instead of accruing, as he did, all the 1960 (and 1961) payments into 1962. The basis for such allowability is that, at the time the payments were made in 1960, there was, by reason of the partial settlement, no longer any doubt that the amounts of the deficiency and the interest thereon were due and owing, and that the payments were not, therefore, “being made on a contingent defi-ficiency being litigated” and not finally determined until 1962, as the agent stated in his report.

The assertion of this alternative claim with respect to the year 1960 (no deficiency payments, including interest, having been made in 1959) has its puzzling aspects. It will be recalled that plaintiff itself did not, on its return for that year, take a deduction for the interest in question. Yet it now assails the Service for not, in reviewing its return for such year, giving it such a deduction. It is supposed that one answer plaintiff would tender to this observation would be that it had not claimed any net operating carryback loss deduction for 1962 either, and yet the Service, upon review of its 1962 return, gave it such a deduction anyway. Thus, on this alternate claim, plaintiff is in effect contending that, if the carryback basis for its claim is improper, the Service should, in giving it something it never asked for, have selected a proper basis for the refund instead of an improper one.

In any event, this alternative basis for recovery, which was formally advanced for the first time by an amendment to plaintiff’s petition filed on March 9,1970, cannot be considered by the court because it was never asserted in any timely claim for refund. As shown, the only ground for refund of the 1960 tax which plaintiff asserted in the 1966 claim it filed with the Service was the alleged propriety of a net operating loss carryback deduction for 1962 based on the interest in question being, under Section 172(d)(4), “attributable to” its claimed business activities. The deduction now alternatively claimed would have to be based on the deductibility of the interest paid in 1960 under Section 163 of the Code pertaining to interest deductions. Thus, plaintiff not only failed to claim an interest deduction with respect to 1960 on its 1960 income tax return filed in 1961, but it also failed to assert such a claim as a basis for its refund claim filed in 1966. Apparently, it then agreed with the Service that the interest paid in 1960 (and 1961) was deductible only in 1962. A taxpayer “cannot present one ground for refund in its claim and a different ground in its petition * * Union Pacific R.R. Co. v. United States, 182 Ct. Cl. 103, 109, 389 F. 2d 437, 442 (1968). This rule “is designed both to prevent surprise and to give adequate notice to the Service of the nature of the claim and the specific facts upon which it is predicated, thereby permitting an administrative investigation and determination.” Id.

For the reasons indicated, plaintiff is not entitled to recover.

Nichols, Judge,

concurring in part, dissenting in part:

I fully agree with, tlie court and our Commissioner Gamer that the interest the trust paid with respect to a deficiency in federal estate tax was not attributable to a trade or business the trust carried on, and as a result, no net operating loss carryback is available with respect to such interest. Eespeot-fully, I differ as to the other stated issue. I think in the circumstances here involved, a claim for refund based according to its terms solely on a net operating loss carryback may be adequate notice of a claim based on a Section 163 interest deduction, when the item involved is the same in the real world, and the relief sought is the same.

I start with the statute. Sec. 6511 IRC of 1954, tells us when a claim for overpayment of any tax must be filed. Sec. 7422 tells us no suit for refund may be maintained unless preceded by a claim for refund or credit, according to law, and according to the Secretary’s regulations. § 301.6402-2 of the regulations thus referenced, tells us that the refund is not allowable except upon one or more of the grounds set forth in a timely claim.

(b) * * * (1) * * * The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof. * * *

The regulation says a claim not complying with this standard will not be considered for any purpose as a claim for refund or credit. This applies as much to a lawsuit as to administrative relief.

No one questions that we must interpret and apply this language as if it were statute law. The question is the meaning of “grounds.” The text indicates they are more than facts. I have no doubt that a claim for refund may fail to assert “grounds” even though it sets forth all the relevant facts directly or by reference, if the legal conclusions of the claimant, as stated in the claim, divert the Commissioner’s attention away from rather than directing it towards the true basis of the claim, under law, as afterwards asserted in court. Commercial Solvents Corp. v. United States, 192 Ct. Cl. 339, 427 F. 2d 749, cert. denied, 400 U.S. 943 (1970). On the other hand, it is not necessarily fatal if the legal theory of the claimant, as stated in the claim for refund, is subsequently perceived to be incorrect and is abandoned. Continental Foundry & Machine Co. v. United States, 141 Ct. Cl. 604, 159 F. Supp. 608 (1958). Judge Laramore in that case explained that the original theory, though incorrect, did not “present a different fact situation which would require the Commissioner to examine other matters not germane to the dispute such as occurred in United States v. Andrews, 302 U.S. 517.” 141 Ct. Cl. at 612, 159 F. Supp at 613. To the same effect he cites Harry Ferguson, Inc v. United States, 137 Ct. Cl. 137, 146 F. Supp 836 (1956).

United States v. Andrews, a 1938 case, appears to be the only instance where the Supreme Court has examined the meaning of “grounds” in the instant regulation, for I do not read Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945) as coming to grips with that definitional problem. In Andrews, the Court said at p. 524:

* * * Where a claim which the Commissioner could have rejected as too general, and as omitting to specify the matters needing investigation, has not misled him but has been the basis of an investigation which disclosed facts necessary to his action in making a refund, an amendment which merely makes more definite the matters already within his knowledge, or which, in the course of his investigation, he would naturally have ascertained, is permissible. On the other hand, a claim which demands relief upon one asserted fact situation, and asks an investigation of the elements appropriate to the requested relief, cannot be amended to discard that basis and invoke action requiring examination of other matters not germane to the first claim.

The facts in Andrews clearly fell in the second class, thus stated, and therefore the Court held for the Commissioner. I read the opinion, however, as sanctioning the distinction I derive from our own cases, cited supra, that is, whether the “grounds” asserted in the claim direct the Commissioner’s attention towards or away from the grounds relied on in court.

I would further add that our toleration of the incorrect claim in Continental Foundry & Machine Co. was, I think, much aided by the fact that, to prepare a correct claim, taxpayer would have had to foresee a subsequent change in the legal climate. So here. Defendant having itself put forward the idea that plaintiff could get its interest payment as a deduction from its 1960 gross income only by way of carry-back from 1962, now abandons its position and says it can be taken directly as a 1960 deduction and in no other way. I submit that when a change in legal climate takes place at 12th and Constitution Avenue, NW., defendant is under an obligation to give a broad and sympathetic reading to any claim for refund prepared in conformity to its known previous view. Any error so originating ought not to mislead or divert the Commissioner from his true duty, which is to ascertain whether the taxpayer has overpaid his taxes. United States v. Memphis Cotton Oil Co., 288 U.S. 62 (1933), (Cardozo, J.). Here the Commissioner perhaps perceived the sterling merit of his new position precisely because it differed from the theory of the refund claim, and therefore could, as he supposed, be espoused as an abstract proposition without generating the obligation to pay a refund in actual dollars.

The refund claim and the two revenue agent’s reports show all the facts necessary to sustain a direct 1960 deduction for the interest payment. The only apparent defect in the claim consists of the irrelevant facts and arguments adduced in an effort to satisfy the criteria the Commissioner himself had declared were controlling. When the Commissioner changed his position, he should have examined this and other like pending claims to see whether they set forth any justification for relief under his newly arrived at view. The taxpayers had not diverted the Commissioner, rather the Commissioner had diverted the taxpayers.

While no one doubts the good faith of the Internal Revenue officials, the fact remains that the court here sanctions the use of the Regulation by them, with their shifts of position, in effect to trick the plaintiff out of a valid refund claim. I do not think either the language of the Regulation or the decided cases necessitate a result that shocks the moral sense, and is a “legal extortion that should not be countenanced.” (Skelton, J., dissenting in National Newark & Essex Bank v. United States, 187 Ct. Cl. 609, 620, 410 F. 2d 789, 795 (1969).

To close this off, for I clo not favor long dissents, I need only add that I do not find in that case, nor in Union Pacific R.R. v. United States, 182 Ct. Cl. 103, 389 F. 2d 437 (1968) (the only one cited by Commissioner Gamer), anything in conflict with the view of the instant case here taken. I joined in both of them, and in Commercial Solvents, supra, and think they were correctly decided, bnt this case is different. If, as intimated in Union Pacific, there is something special and peculiar about a carryback claim, this was such a claim. While the decisions on “informal claims”, e.g., Newton v. United States, 143 Ct. Cl. 293, 163 F. Supp. 614 (1958) and cases cited, involve a different issue, I think they show the existence, or former existence, of a judicial approach to the claim for refund which I cannot reconcile in principle with the decision herein. Either the taxpayer must turn all the square comers and all the handsprings the Commissioner prescribes, or he need not. Either the Commissioner knows what he knows when he reads a claim for refund or he does not. The Supreme Court’s decision in United States v. Kales, 314 U.S. 186 (1941) thus will be an incongruous shelfmate with the instant case, and hard to view as a product of the same judicial system.

Skelton, Judge, joins in the foregoing opinion concurring in part and dissenting in part.

FiNdikgs os’ Fact

1. Plaintiff is a testamentary trust, created pursuant to the last will and testament of Lida E. Tompkins (hereinafter sometimes referred to as the “decedent”), a resident of the District of Columbia, who died on January 28, 1953. Decedent’s husband, Charles H. Tompkins, was designated in the will as the executor and sole trastee, but in the event of his death or if for any other reason he should be unable to completely discharge his duties, James Sherier, Allan D. Henry, and the Eiggs National Bank of Washington, D.C., were designated in the will to act in his place and stead as executors and trustees.

2. The last will and testament of Lida E. Tompkins was admitted to probate in the United States District Court for tbe District of Columbia, holding a probate court, and Charles H. Tompkins was appointed, and qualified, as executor of said estate in Administration No. 82744 on May 4, 1953. The real estate interests owned by the decedent passed at her death to her surviving husband as trustee, pursuant to the provisions in her will.

3. The federal estate tax return for the estate of Lida R. Tompkins was duly prepared on May 28, 1954, and timely filed with the District Director of Internal Revenue, Baltimore, Maryland, by Charles H. Tompkins as executor. Included in the return as part of the decedent’s gross estate was a Schedule A, “Real Estate,” containing one item, consisting of farm buildings and land in Virginia, valued at $86,000, and a Schedule B, “Stocks and Bonds,” under which 37 items were listed, totaling $1,260,375.59. Item 31 was 1,837 shares-of common stock of Chas. H. Tompkins Company of Washington, D.C., which shares were valued at $392,800. Item 32 was 186 shares of common stock of the H Street Building Corporation, a Delaware corporation with its principal office in Washington, D.C., which shares were valued at $155,193, and Item 33 was 540 shares of preferred stock of the same corporation, valued at $44,820. Assets listed on other schedules consisted of notes and cash, insurance, real estate owned with her husband as joint tenants and tenants by the entirety, and “Other Miscellaneous Property,” which included the cash value of life insurance policies, jewelry, furniture, fractional interests in producing oil and gas wells, farm equipment, livestock, and a one-half interest in a “Joint Account” with her husband, which account contained “Assets” consisting of cash, notes receivable, and 15 items of real estate, which “Assets” were jointly owned and held by the decedent and her husband as tenants in common. The return showed a total gross estate of $2,013,355.01, total deductions of $780,186.77, a net estate of $1,233,168.24, and a net estate tax payable of $379,207.90, which amount was paid at the time of filing the return.

4. Prior to her death in January 1953, Lida R. (Mrs. Charles H.) Tompkins had been active with her husband in the construction business carried on by the Chas. H. Tompkins Company, a firm organized and controlled by her husband. At the time of her death, she was vice-president and treasurer of the company and a 36 percent stockholder. Her duties included being in charge of personnel. She receive'd a salary from the corporation for the services she rendered.

5. Decedent and her husband each owned an undivided one-half interest in certain commercial properties from some of which they received rental income. The income from these properties was reflected during their lifetimes in partnership returns which they filed on Treasury Form 1065. The “partnership” consisted of investments of Mr. and Mrs. Tompkins, principally in said real estate. Prior to her death, decedent conferred with her husband in regard to assets owned by the partnership. Included in the leased properties so jointly owned with her husband at the date of decedent’s death were those in Washington, D.C., located at 15331 Street, N.W. (a parking garage and bowling alley); 901-903 16th Street, N.W. (two residences, used as offices, and land, sold in 1956); 721 Charming Place, N.E. (a warehouse building and land subsequently sold); 1923 New York Avenue, N.E. (a warehouse building and land, sold in 1958); 1943 New York Avenue, N.E. (a gasoline service station and land, sold in 1959); 900 and 908 Khode Island Avenue, N.E. (a garage building and land, and an alleyway, respectively, both sold in 1960). The partnership also owned various parcels of vacant land which did not produce income, decedent’s interest therein also being included in the federal estate tax return. The real estate held jointly by Mr. and Mrs. Tompkins was held in the form of a “partnership” for accounting purposes. Included in the “partnership” real estate was the home in which they lived.

6. For the years covering the existence of the estate, i.e., 1953 through 1956, there were filed, either by Charles H. Tompkins, as executor, or by successor executors, federal fiduciary income tax returns of the estate. The estate’s income included rents from real estate and gains from capital assets, resulting in part from sales of shares of stock and of the decedent’s one-half interest in real estate. The amount of the 1953 income tax was $60,709.52. The only reference in the 1953 return (the only one of such 1953-1956 returns in evidence) to a profit or loss from a trade or business was with respect to the farm hereinabove mentioned. The return reported a loss of $31,003.61 from the operation of the farm.

7. After the death of Mrs. Tompkins, the “partnership” continued in the form of Charles H. Tompkins individually and Charles H. Tompkins as trustee under the will of Lida E. Tompkins (the decedent’s interest in the real properties automatically passing to the trust on the date of her death), and partnership income tax returns continued to be filed by Charles H. Tompkins in such capacities during his lifetime.

8. The second and final account of Charles H. Tompkins as executor was filed on January 16,1956, and was approved by the probate court on or about July 19, 1956. Thereupon, pursuant to the provisions of decedent’s will, Charles H. Tompkins, as executor, distributed to Charles H. Tompkins, as trustee, the principal account balance of $1,019,801.59, and the income account balance of $14,909.93 shown as so distributable in the second and final account. All remaining assets of the estate thus passed into the trust.

9. (a) Charles H. Tompkins died on December 12, 195:6. Thereupon, under the provisions of decedent’s will, James Sherier, Allan D. Henry, and the Eiggs National Bank of Washington, D.C., became successor trustees of the 'testamentary trust.

(b) A testamentary trust was also established under the will of Charles H. Tompkins. The Eiggs National Bank was and is also a trustee of such trust.

10. On May 24, 1957, the Commissioner of Internal Eev-enue issued a statutory notice asserting a deficiency in federal estate tax due from the estate of Lida E. Tompkins in the amount of $2,160,256.47. The Commissioner felt that certain of the stocks listed in the federal estate tax return, including the stock of the H Street Building Corporation, had been undervalued and that there also had been undervaluations of various life insurance policies and of certain real estate listed in the joint account.

11. (a) Since the estate of Lida E. Tompkins had been closed and all remaining assets distributed to Charles H. Tompkins as trustee under the will of Lida R. Tompkins in July 1956 (no previous communication from the Commissioner proposing to assert a deficiency in federal estate tax having been received by the estate of Lida R. Tompkins or its executor), the deficiency asserted by the Commissioner required further steps to be taken in the probate court. Accordingly, upon the petition of the Riggs National Bank of Washington, D.C., Allan D. Henry, and James Sherier (who were named in decedent’s will as successor executors and trustees), letters testamentary d.b.n. were issued by the probate court to such parties as successor executors d.b.n., and they duly qualified on or about August 14, 1957, solely for the purpose of contesting the asserted federal estate tax liability.

(b) Pursuant to authorization by the probate court, the executors d.b.n., on August 21,1957, filed a petition with the Tax Court of the United States for redetermination of the asserted deficiency in federal estate tax, which petition was assigned Docket No. 69467. The executors d.b.n. (who were the same as the trustees under the will of Lida R. Tompkins) qualified under a nominal undertaking of $1,000.

12. On April 15,1958, the successor trustees filed a federal fiduciary income tax return (Form 1041) of the Lida R. Tompkins Trust for the calendar year 1957. Under the income item “Cross profit (or loss) from trade or business,” the return showed income of $289.56 from the operation of the farm. The farm was sold on August 23, 1957. The tax due (and paid) on the taxable income reported was $39,989.81.

13. On March 25, 1960, the successor trustees filed a fiduciary income tax return (Form 1041) of the Lida R. Tompkins Trust for the calendar year 1959. Under the income item “Cross profit (or loss) from trade or business” there was no entry. The return showed taxable income of $2,389.22. The tax due (and paid) on the taxable income reported was $485.63.

14. (a) Prior to the trial in the Tax Court, the parties settled by a stipulation filed September 18, 1959, all of the issues except the value of the common stock of the H Street Building Corporation. By the agreement, the value of the estate was increased over $650,000. It was agreed, however, that the value of the H Street Building Corporation stock would be litigated. This firm was a close corporation all of whose stock was owned by members of the Tompkins family.

(b) Thereafter, the plaintiff trust decided to pay the part of the deficiency, and the interest thereon, which resulted from the increased estate valuations agreed to in the stipulation, 'and for this purpose sent three checks to the District Director. The dates these payments were received by defendant and the amounts paid, with the breakdown of the tax deficiency and the interest thereon, in accordance with the letters by which the payments were made, were as follows:

Total Amount Date of Payment Tax Interest Paid
June 13, 1960_$197, 100 $72, 900 $270, 000
August 19, 1960_ 68, 600 26, 600 95, 000
May 26, 1961_ 130, 000 55, 250 185, 250
Totals_ 395, 600 154, 650 550, 250

At the time each of the foregoing payments were made, there was, by reason of the stipulation, no longer any contest or dispute concerning the liability for the amounts of tax and interest paid. As set forth in the letter dated June 9,1960, from the attorney for the executors and trustees to the District Director of Internal Eevenue, Baltimore, Maryland, transmitting the first payment, these payments were made by the plaintiff trust because the estate was without assets and because of the trust’s liability as the transferee of the estate. The letter stated in part:

Under the will of Lida E. Tompkins, deceased, her husband, Charles H. Tompkins, was named sole executor and also the sole trustee of the testamentary trust. Shortly after the Federal estate tax return was filed Mr. Charles II. Tompkins, as executor, filed in the Probate Court of the District of Columbia his Final Account showing distribution of all of the remaining assets to Charles H. Tompkins, Trustee u/w of Lida E. Tompkins. Mr. Tompkins cued in December 1956.
On May 24, 1957, the Commissioner issued his notice of deficiency asserting a deficiency in estate tax of $2,160,256.47. By reason thereof The Eiggs National Bank, Mr. Allan D. Henry and Mr. James Sherier were appointed executors d.b.n. of the Estate of Lida E. Tompkins. The same bank and the same individuals are also successor trustees u/w of Lida E. Tompkins.
An appeal was taken to the Tax Court of the United States in connection with the asserted deficiency in estate tax and was assigned Docket No. 69467. * * *
Prior to the trial in the Tax Court, which took place last fall * * * the petitioners and the respondent had settled by stipulation all issues but one. On the basis of the settled issues alone the Appellate Division has computed a deficiency of $394,567.46 * * *.
On November 19,1959, Jules G. Komer III and Stanley Worth, of this firm, called on * * * Mr. Eichard Cobb. We explained to Mr. Cobb that there was in contemplation the payment of all, or a portion, of the deficiency in estate tax which results from the stipulated settlement of certain issues, as aforesaid; that the estate, as such, was presently without assets by reason of the transfer to the testamentary trustees; that we recognized that in practical effect the testamentary trustees are transferees of the estate and that the funds necessary to pay any deficiency must come from that source; and, accordingly, we inquired whether payment might be made directly to you by the trustees rather than to route the payment through the estate. We were assured by Mr. Cobb * * * that it would be perfectly satisfactory for the trustees to make the payment directly to you. * * *
It has been decided by the trustees u/w of Lida E. Tompkins to make a payment at this time in the aggregate amount of $270,000.00 with the understanding that this amount includes both a partial payment of the deficiency and the interest on such partial payment from the due date of the estate tax return to the date of assessment thereof. * * *
I enclose check of The Eiggs National Bank of Washington, D.C. No. A-102006, dated June 9, 1960, payable out of Trust Funds, Trust Account 2-2813, payable to the order of the Internal Eevenue Service in the amount of $270,000.00, with the request that it be accepted and applied as aforesaid as partial payment of an uncontro-verted deficiency in estate tax due from the above named estate, together with interest, and that the necessary assessment to give effect thereto be made by you.
This letter is written, and the enclosed check is forwarded, with the full knowledge and consent of the executors of the Estate of Lida E. Tompkins and the Trustees u/w of Lida E. Tompkins, and may be deemed to be their request.

The other two letters were of similar effect.

15. As agreed to and stipulated by the parties in the Tax Court proceedings, as hereinabove set forth, the value of all the real estate interests owned by the decedent at the date of her death was $1,051,200, subject to liabilities of $374,498.

16. On April 14,1961, the successor trustees filed a federal fiduciary income tax return (Form 1041) of the Lida E. Tompkins Trust for the calendar year 1960. There were no entries for the items “Gross profit (or loss) from trade or business” under “Income,” and for “Interest” under “Deductions.” The return showed taxable income of $40,265.54. The tax due (and paid) on the taxable income reported was $19,923.22.

17. By its opinion filed December 22, 1961, the Tax Court determined that the value of the 186 shares of common stock of the H Street Building Corporation (650 shares of such common stock being outstanding) was $1,023,000 (or $5,500 per share) instead of $155,193 (or $834.32 per share) as set forth in the estate tax return.

18. On April 16,1962, the successor trustees filed a federal fiduciary income tax return (Form 1041) of the Lida E. Tompkins Trust for the calendar year 1961. There were no entries for the items “Gross profit (or loss) from trade or business” under “Income,” and for “Interest” under “Deductions.” The return showed taxable income of $78,064.78. The tax due (and paid) on the taxable income reported was $38,664.19.

19. On May 9,1962, the Commissioner of Internal Eevenue filed in the Tax Court action his “Computation For Entry of Decision.” Counsel for the petitioner estate agreed that the computation was in accordance with the opinion of the court. The “Computation Statement,” which was a part of the document, read in part as follows:

Deficiency witliout taking into consideration tlie assessments subsequent to the mailing of the deficiency notice on May 24, 1957- $808,113.59
Assessment:
June 23, I960 Paid_ $197,100.00
Aug. 23, 1960 Paid_ 68, 500. 00
May 31, 1961 Paid_ 130, 000. 00 395, 600. 00
Deficiency (to be assessed)_ 410, 513.59

20. On May 10, 1962, the Tax Court entered its decision whereby it adopted and incorporated verbatim the agreed computation of the tax liability filed by the parties.

21. The deficiency in federal estate tax to be assessed under the decision of the Tax Court, in the amount of $410,513.59, together with interest, less a credit for state taxes of $197,-747.30, was duly assessed in 1962. Part of the assessment was abated and the balance was satisfied by the following payments made by plaintiff:

Date of Payment Tax Interest Paid
September 7, 1962... $250, 000. 00 $125, 000. 00 $375, 000. 00
December 10, 1962... 27, 625. 53 14, 347, 23 43, 095. 96
Total-$277,625.53 $139,347.23 $418,095.96

The payments were made by the trustees under the will of Lida E. Tompkins out of trust funds.

22.The following table shows the assets, owned individually and in joint tenancy, in contest in the Tax Court proceedings, with the values reported in the estate tax return, the values agreed to by stipulation or reached by litigation, and the resultant increase in the estate. Schedule A is an analysis of all of the changes in value, and Schedule B is an analysis of the joint account.

23. The insurance policies subject to the Tax Court litigation were as follows:

1. Sun Life Assurance Company on decedent’s life in the amount of $40,000, payable to decedent’s children.
2. A life insurancepolicy with the Northwestern Mutual Life Insurance Company on the life of Charles H. Tompkins. The premiums on this policy were paid by
3. Two life insurance policies on the life of Charles H. Tompkins with the Travelers Insurance Company. The premiums on these policies were paid by decedent.

24. On March 29,19.63, the successor trustees filed a federal fiduciary income tax return (Form 1041) of the Lida E. Tompkins Trust for the calendar year 1962. There was no entry for the item “Gross profit (or loss) from trade or business” under “Income.” For the item of “Interest” under “Deductions,” there was entered the amount of $35,168.12, with the notation “Internal Kevenue Service — Sept. 1962.” The return indicated no taxable income and no tax liability. In “Schedule A,” the interest deduction was explained as follows:

25. The following is a summary of certain of the income and deduction items shown by the Forms 1041 filed by the successor trustees of the Lida E. Tompkins Trust, the plaintiff herein, referred to in findings 13,16,18, and 24, for each of the calendar years 1959 to 1962, inclusive:

26. After the death of Charles H. Tompkins on December 12, 1956, federal partnership returns of income (Form 1065) were filed by the trustees under the wills of Lida E. Tompkins and Charles H. Tompkins, the partnership being designated as the “Charles H. Tompkins and Lida E. Tompkins Trusts.” Such returns included the years 1957 through 1962. For those years, with the exception of 1959, when the partnership reported interest income of $2,487.98, all of the gross income was from rentals of commercial real estate, ranging from $176,657.69 in 1957 to $141,569.24 in 1962. As the rental properties were sold, as set forth in finding 5, the resulting capital gain realized by the Lida E. Tompkins Trust was reported on the trust’s fiduciary income tax returns (Form 1041). Several of the properties in which Lida E. Tompkins had owned an interest resulted in profitable sales to the trust. The property located at 1533 I Street, N.W., was the only income-producing property still owned by the partnership in 1962.

27. Following the death of Charles H. Tompkins, the successor trustees under the will of Lida E. Tompkins included the Eiggs National Bank of Washington, D.C. The bank was, in this capacity, represented by Mr. Vincent C. Burke, Jr., who had been in the trust department from December 15,1954 until January 1970. At that time, and for some time previously, he had been Senior Vice President and Trust Officer. In January 1970, he was transferred to the general banking department of the bank as Senior Vice President. From the time the bank became such a successor trustee, Mr. Burke was a director in the H Street Building Corporation, hereinabove referred to in finding 3. Mr. Burke still is such a director. For his services as a director, Mr. Burke has received fees, no part of which has been paid over to the plaintiff trust.

28. As shown, the decedent Lida E. Tompkins had owned 186 shares of common stock of the H Street Building Corporation. Decedent’s husband 'also owned 186 shares of common stock in H Street (and 540 shares of preferred stock, there being 1,350 shares of such stock outstanding). At the time of decedent’s death, the assets of the H. Street Building Corporation included certain depreciable office buildings, which were leased. Such properties included an office building located at 1818 H Street, N.W., Washington, D.C., which was leased to the International Bank for Eeconstruction and Development (the “World Bank Building”). In addition, H Street owned a 50 percent undivided interest in certain unimproved land in Arlington County, Virginia, known as the West Tract, 'and on Connecticut Avenue in Washington, D.C., known as Temple Heights. A corporation known as Ambassador, Inc., the principal stockholder of which was Mr. Morris Cafritz, owned the other 50 percent interest. The two corporations purchased these properties for the purpose of future development. As set forth in finding 9, the Eiggs National Bank is also a trustee under the will of Charles H. Tompkins. Furthermore, following the death of Mr. Cafritz, the bank also became (and still is) a coexecutor and co-trustee under his will. As set forth in finding 14, the value of the common stock owned by the decedent in H Street was the sole issue tried before the Tax Court (Estate of Lida R. Tompkins, 20 TGM 1768 (1961)), all other issues having been settled. On the Temple Heights property, there are presently located two office buildings, known as the Universal Buildings, and the Washington Hilton Hotel. On the West Tract in Virginia are presently located three apartment buildings known as the Elver Houses, and certain industrial properties adjacent thereto.

29. Mr. Burke, representing the Eiggs National Bank as a ootrustee of trusts established under the wills of Lida E. Tompkins, Charles H. Tompkins, and Morris Cafritz, and acting as a director of the H Street Building Corporation, was very active with respect to the interests of these various entities. The activities of the H Street Building Corporation increased in early 1957, commencing with discussions with Mr. Cafritz concerning the commencement of a second Eiver House in Virginia and the first Universal Building. Problems of financing arose which were resolved only after the adult children of Charles and Lida E. Tompkins became parties to the agreement providing permanent financing. The H Street Building Corporation acted as agent of the Lida and Charles Tompkins partnership with' respect to the parking garage and bowling alley property located at 1533 I Street, N.W., managing the property, and receiving a management fee.

30. In conjunction with Mr. Cafritz, Mr. Burke, on behalf of the Biggs National Bank, was also a party to the negotiations which culminated in the sale, prior to 1962, to tire Hilton-TJris Corporation, of the part of the Temple Heights property which is now the site of the Washington Hilton Hotel, at a cash price of $4,200,000. The H Street Building Corporation and Ambassador, Inc., each owned one-half of the property, which' consisted of approximately four and one-half acres of land. The third Biver House was completed after the death of Mr. Charles H. Tompkins but prior to the death of Mr. Cafritz.

31. When the Commissioner of Internal Bevenue, on May 24, 1957, asserted the deficiency in the federal estate tax of the decedent in the amount of $2,160,256.47, the payment of such large amount as the basis for filing a claim for refund and instituting suit in the United States Court of Claims or in the appropriate United States District Court would have presented a serious and difficult financial problem. Although the estate, as finally determined for estate tax purposes, was $2,909,183.33 (net estate on original return, $1,233,168.24 (finding 3), plus the increase in assets of $1,746,304.61 (finding 22), less additional administrative and litigation expenses of $70,289.52 not claimed in the original estate tax return), so that the estate had a net value of at least $700,000 in excess of the proposed deficiency, nevertheless the cash position of the plaintiff at the time of the asserted deficiency would not have permitted the payment of such amount in such form. Forced liquidations or borrowings, assuming such borrowings could have been arranged, would have been necessary. The executor-trustees considered such courses to be financially impractical and inadvisable. During 1957, the trustees of plaintiff trust were able to negotiate, at a substantial profit, sales of the former home of Mr. and Mrs. Tompkins known as “Whitehaven,” and of the World Bank property owned by the H Street Corporation, the former being sold for approximately $200,000, at a profit of over $90,000, and the latter for approximately $5,000,000. If the Tax Court decision had been entered prior to the sale by the H Street Building Corporation of the World Bank property, the trust would have had to borrow the necessary funds to meet the obligation imposed thereby. By the time the final deficiency in estate tax had been determined in 1962, the trust was more liquid. It was not necessary to make any sacrifice sale in order to raise the money to pay the deficiency.

32. In 1951, the trustees of the plaintiff trust and of the trust of Charles H. Tompkins gave consideration to the question of whether the trusts should sell the H Street Corporation stock they owned but concluded that, although such sales could be made, it would not then be provident to do so. At that time, the land owned by the corporation was increasing in value. Although the land was valuable, the trusts did not at that time have the money necessary to develop the Temple Heights and West Tract properties.

33. In addition to the sales of the properties hereinabove referred to, which the plaintiff trustees made or in which they participated, other sales made by them included 1,507 shares of stock of the Chas. H. Tompkins Company. These shares, constituting those remaining after specific bequests, were sold in 1961 at a price of $100 per share over the Tax Court stipulation figure. In addition, the commercial rental properties in which the trust had an 'interest were gradually sold at profits, thereby producing capital gains.

34. The Eiggs National Bank, during Mr. Burke’s long experience in the trust department as Senior Vice President and Trust Officer, handled many trusts which involved merely collections of income such as dividends and interest, and the distribution thereof to beneficiaries. It had few trusts which involved as many complications as that of the plaintiff. The bank was compensated for its services in the form of fees consisting of a percentage of the value of the trust assets as of a certain date each year and a percentage of the income actually distributed to the beneficiaries.

35. (a) By letter dated August 25, 1964, tbe District Director of the Internal Revenue Service at Baltimore, Maryland, transmitted to the plaintiff trust a revenue agent’s report dated July 7, 1964, covering 'an examination of plaintiff’s fiduciary income tax returns for the years 1957, 1959, 1960,1961, and 1962. For the year 1962, adjustments in taxable income were made so that, instead of no such income as reported (finding 24), the amount thereof was stated bo be $78,416.12. However, the “interest expense” was increased by the sum of $323,753.35, so that, with the interest expense of $35,168.12 as reported in the return, a total deductible interest expense of $358,921.47 was allowed. The interest expense increase was explained as follows :

The taxpayer paid $358,921.47 in interest, attributable to the tax deficiency assessed per the Estate of Lida R. Tompkins, previously distributed to this taxpayer.
The interest payments were made $98,395.12, during 1960; $55,198.35, during 1961; and $205,328.00, during 1962.
The interest payments were being made on a contingent deficiency being litigated in the Appellate Division of the Internal Revenue Service and in the Tax Court of the United States. Final determination was effected and assessment authorized on August 31, 1962.
As no indebtedness is recognized for contested tax deficiencies, the interest payments made during 1960, and 1961 must be grouped with the 1962 payment and only deductible during 1962.
Interest Expense, as corrected_$358,921.47
Interest Expense, per return- 35,168.12
Interest Expense, increased_$323,753. 35

Thus, for that year, the interest expense increase of $323,753.35, and the taxable income increase of $78,416.12, resulted in an excess of deductions over income in the amount of $245,337.23, again resulting, as did the return filed by plaintiff, in no tax liability.

(b) With respect to the year 1959, the return for which reported taxable income of $2,389.22 (finding 13), the agent increased such income by $80,226.41, resulting in total income of $82,615.63. However, he allowed the $245,337.23 excess of deductions over income for 1962, as set forth above, as a “Net Operating Loss Carryback” deduction, resulting in an excess of deductions over 1959 income in the amount of $162,721.60. The agent explained that “Pursuant to Section 172(b), Internal Eevenue Code, a Net Operating Loss [of $245,837.28 for the year 1962] is allowable.” On this calculation, such net operating loss carryback absorbed the entire $82,615.63 of income, resulting in no tax liability for such year, and in a remaining loss carryover for 1960 in said amount of $162,721.60. Since plaintiff had paid a tax of $485.63 with respect to such 1959 year, such amount was considered as an overpayment for which plaintiff was entitled to a refund.

(c) With respect to the year 1960, the return for which reported taxable income of $40,265.54 (finding 16), the agent increased such income by $122,456.06, resulting in total income of $162,721.60. However, the balance of the 1962 loss carryback (i.e., the amount remaining after absorbing the 1959 income) in the amount of $162,721.60, as hereinabove set forth, absorbed the entire $162,721.60 of income, resulting in no tax liability for such year. The agent’s explanation was as follows: “The remainder of the 1962 Net Operating Loss carried back to 1959 and unabsorbed, $162,121.60, is an allowable Net Operating Loss Carryback deduction during 1960. See Section 172(b) Internal Eevenue Code.” Since plaintiff had paid a tax of $19,923.22 with respect to such 1960 year, such amount was considered as an overpayment for which plaintiff was entitled to a refund.

(d) The amounts of $485.63 and $19,923.22 considered as overpayments for 1959 and 1960, respectively, as hereinabove set forth, were refunded together with interest.

36. (a) By letter dated March 9, 1965, the District Director transmitted to the plaintiff trust another report, dated February 23, 1965, made by the same revenue agent, covering an additional examination of plaintiff’s fiduciary income tax returns for the years 1959,1960, and 1962. By the letter, deficiencies were asserted against plaintiff, in the amounts of $485.63 (plus interest) for 1959, and $19,923.22 (plus interest) for 1960, the same amounts which the District Director had previously considered to have constituted overpay-ments and which he had refunded, as hereinabove set forth (finding 35). Such deficiencies resulted from a determination that, contrary to the previous conclusion of the revenue agent, there was no net operating loss for 1962 which could be carried back to 1959 and 1960. In the portion of the agent’s report headed “Preliminary Statement,” he explained that “The principal cause of the changes reflected herein was the disallowance of a Net Operating Loss for the year 1962 and the Carrybacks to 1959 and 1960.” Specifically with respect to the year 1962 the agent explained:

(a) Interest Expense Decreased_$245,337.23
During 1962, the taxpayer was determined to have accrued $358,921.47 as interest expense, attributable to a Federal Estate Tax deficiency.
This interest expense was considered to result in a $245,337.23 net operating loss, as reflected in the Revenue Agent’s Report dated July 6,1964.
However, interest expenses attributable to Federal Tax deficiencies’ payments are deemed to be nonbusiness expenditures. See Revenue Ruling 58-142, Cumulative Bulletin 147, and W. A. Morse, D.C. 183 F. Supp. 847.
On a corrected basis, the nonbusiness deductions exceeded nonbusiness income, and when adjustment for such excess is made, in accordance with the modifications provided in Section 172(d) (4), Internal Revenue Code, no net operating loss results. * * *
Based on the above, interest expense, in the amount of the unallowable net operating loss $245,337.23 is being decreased.

Included in the corrected computations for the year was a schedule dividing the taxpayer’s “Income” and “Deductions” into “Business” and “Non-business” categories. The partnership activities (findings 5, 7, and 26) were listed under “Business.” As shown (finding 24), the “Interest” item under “Deductions” was, as set forth on the return, $35,168. This item was “corrected” by the agent to $358,921, the total amount of the interest attributable to the estate tax deficiency which had been paid. This entire amount was allocated to the “Non-business” expenses. There was then computed an excess of nonbusiness deductions over non-business income in the amount of $305,962, which, as adjusted by a special adjustment with respect to a capital gains deduction, came to $318,493. On the “business” portion, there was a profit of $48,092, which, offset against the $305,962 “nonbusiness” deficit, resulted in an overall net loss of $257,870, none of which was allowed as a net operating loss which could be carried back.

(b) Under date of April 28, 1965, plaintiff paid the deficiency of $485.63, together with interest of $64.72, for 1959, and the deficiency of $19,923.22, together with interest of $2,655.52, for 1960.

37. (a) On February 10, 1966, plaintiff filed separate claims for refund for 1959 and 1960 for the tax and interest paid, as aforesaid, in the aggregate amounts of $550.35 for 1959, and $22,578.87 for 1960. The sole basis asserted for recovery was the disallowance of a net operating loss for 1962 which plaintiff sought to carry back to the years 1959 and 1960. In each claim, plaintiff stated, in identical language:

This taxpayer is a testamentary trust created under the will of Lida E. Tompkins who died January 28,1953. Since creation of the trust, and pursuant to the provisions of said will, The Eiggs National Bank of Washington, D.C., James Sherier and Allan D. Henry have been, and still are, the Trustees. Substantially all of Mrs. Tompkins’ estate passed to this residuary trust, the real properties upon date of death and the personal property by distribution from her husband Chas. H. Tompkins, executor of her estate, prior to his death on December 12, 1956. The personal property consisted largely of stocks and bonds, the principal item of which was capital stock in H Street Building Corporation, a close corporation. * * *
Under date of May 24,1957, a statutory notice of deficiency was mailed asserting a deficiency in estate tax in the amount of $2,160,256.47. The estate having been previously closed, as aforesaid, The Eiggs National Bank of Washington, D.C., Allan D. Henry and James Sherier were appointed executors, d.b.n., on or about August 14, 1957 for the purpose, inter alia, of prosecuting an appeal to the Tax Court of the United States. None of the assets which theretofore had been acquired by the testamentary trust were transferred back to the estate, all of them being retained by the trust in the conduct of its business of investing the corpus for the production of income pursuant to the trust provisions. * * *
Tlie Tax Court decision, entered May 10, 1962 (from which no appeal was taken), held that the deficiency in Federal estate tax was $806,113.59. Partial payments, on account, were made both as to estate tax and interest in the years 1960 and 1961, and the balance was paid in 1962, all such payments being made by this taxpayer. The interest on said deficiency which was paid in 1962 was claimed as a deduction from gross income in the fiduciary income tax return for that year. A revenue agent’s report, dated July 6, 1964, allowed such deduction, and determined that this taxpayer had a net operating loss carryback to 1959 from 1962 of $245,337.23, the unused portion of which ($162,721.60) was allowed as a deduction for 1960. The revenue agent’s _ action was reversed on review, on the erroneous basis that said interest paid by this taxpayer for 1962 was not attributable to its trade or business within the meaning of § 172(d) (4) of the 1954 Code. * * *
All of the activities of this testamentary trust were devoted to the handling of the investments constituting the corpus of the trust, collecting the income therefrom, and otherwise observing the provisions of the decedent’s testamentary trust. Such activities were the taxpayer’s trade or business, as were its activities in contesting the asserted deficiency in estate tax, and the interest thereon which automatically attaches under the Code. Pending the said decision of the Tax Court the taxpayer had full control and use of the investment properties, and the income produced by those properties, in the furtherance of its business activities. The interest ultimately paid by this taxpayer in 1962, in connection with the deficiency in Federal estate tax, was “attributable” to its trade or business, and accordingly does not constitute a nonbusiness deduction within the meaning of § 172 (d) (4) of the 1954 Code.

(b) Plaintiff’s claims were formally disallowed on May 27, 1966.

38. (a) The petition herein was filed on August 26, 1966. It asserts that defendant erred in holding that the interest paid by plaintiff on the estate tax deficiency was a non-business deduction for 1962 within the meaning of Section 172(d) (4) of the Internal Eevenue Code of 1954 and that defendant should have held that it was an expense attributable to the business of the plaintiff, deductible under Section 172(c), and constituting a net operating loss carryback from 1962 to 1959 and 1960.

(b) By its First Amendment to Petition, filed on March 9, 1970, plaintiff asserted an alternative ground for recovery in full of the amount claimed for 1960, i.e., that although plaintiff paid interest on the deficiency in estate tax in the aggregate amount of $99,400 in 1960, its return for such year failed to include any interest deduction, and that, similarly, no deduction from gross income was computed or allowed by the District Director in his determination letter dated March 9-, 1965. It is alleged that had such deduction been made by the District Director, plaintiff would have had no taxable net income for 1960. Said First Amendment applies only to the year 1960. In its answer to such amended petition, defendant includes a jurisdictional defense to the amendment, i.e., that the alternative ground was not claimed as a ground for relief in a timely claim for refund and that the statute of limitations on suits for recovery of the item ran prior to the time plaintiff filed its refund claim for 1960 on February 10,1966.

CONCLUSION OK LAW

Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover and the petition is dismissed. 
      
       The opinion of Nichols., Judge, concurring in part and dissenting in part, in which Skelton, Judge, joins, follows the opinion of the trial commissioner which has been adopted by the court.
     
      
      
        Estate of Lida R. Tompkins, 20 TCM 1763.
     
      
       The agent divided the trust’s 1962 “income” and “deductions” into “business” and “nonbusiness” categories. The commercial rental real properties which had been owned jointly by Mr. and Mrs. Tompkins and with respect to which federal partnership returns of income had been filed (by Mr. and Mrs. Tompkins during their lifetimes, by Mr. Tompkins individually and as trustee after Mrs. Tompkins’ death, and by the trustees under the wills of Mr. and Mrs. Tompkins after they both died) were regarded as producing the “business” income and deductions. The entire amount of the interest attributable to the estate tax deficiency, $358,921, was allocated to the “nonbusiness” expenses. There was then computed an excess of nonbusiness deductions over nonbusiness income in the amount of $305,962. On the “business” portion, there was a profit of $48,092, which, offset against the $305,962 “nonbusiness” deficit, resulted in an overall net loss of $257,870, none of which was allowed as a net operating loss deduction which could be carried back.
     
      
       On June 17,1968, the court denied, Tvithout prejudice, plaintiffs motion and defendant’s cross-motion for summary judgment and remanded the case to the trial commissioner for trial.
     
      
       In this respect defendant goes beyond the position of the Commissioner of Internal Revenue, who, as above-noted (n. 2) categorized the trust’s “partnership” activities as a “business.”
     
      
       “Sec. 206. (a) As used in this section the term ‘net loss’ means the excess of the deductions * * * over the grossi income, with the following exceptions and limitations:
      “(1) Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall be allowed only to the extent of the amount of the gross income not derived from such trade or business.”
     
      
       Plaintiff’s Reply to Defendant’s Brief to the Commissioner, pp. 16-17.
     
      
       Plaintiff’s Brief to the Commissioner, p. 11.
     
      
       Defendant now concedes that the Internal Revenue Service erred in concluding that the interest paid in 1960 and 1961 could be deducted only in 1962. It says, “The interest paid in 1960 and 1961 could be deducted only for the years of payment for the reason that, when the payments were made, taxpayer’s liability for the interest was uncontingent and uncontested.” Defendant’s Brief to the Commissioner, p. 14.
     
      
       Defendant says that since, under 26 U.S.C. § 6511(a) (1958), a refund claim must be filed -within three years after the filing of the return (plaintiff’s 1960 return was filed on April 14, 1961), and no claim for refund on behalf of plaintiff was filed until 1966, a refund made by the Service pursuant to its August 1964 or its 1966 determinations which would have been based on a correction of errors in plaintiff’s 1960 return (rather than its 1962 return) would have been improper under 26 U.S.C. § 6514 (1958) which bars a refund after the expiration of the period of limitation, for filing a claim therefor. Plaintiff responds that, under the circumstances of this case, such a refund could have been made under the mitigation provisions of 26 U.S.C. § 1311, “Correction of error,” and §1312(4), “Double disallowance of a deduction or credit,” the latter section and paragraph permitting am adjustment when the Service’s “determination disallows a deduction or credit which should have been allowed to, but was not allowed to, the taxpayer for another taxable year * * In view of the disposition made of plaintiff’s alternate claim, these contentions need not be decided.
     
      
       Tax Court finally determined value.
     
      
       Oil and gas.
     
      
       The stipulation figure, $551,100, representes 1,837 shares at $300 per share. The 1,507 shares sold were sold at $400 per share. The other 330 shares were specific bequests.
     