
    A. H. KARPE v. THE UNITED STATES; THE UNITED STATES (CROSS-COMPLAINANT v. BIRDA M. VIERA (CROSS-DEFENDANT)
    [No. 161-59.
    Decided July 17, 1964] 
    
    
      
      J. Everett Blum for plaintiff. Lloyd G. Ramey on the brief.
    
      Stephen E. Wall for third party, Birda M. Viera. Baker, Palmer, Wall <& Raymond on the brief.
    
      Gynthia Holcomb, with whom was Assistant Attorney General Louis F. Oberdorfer, for defendant. Edward S. Smith, Lyle M. Turner and Philip R. Miller, on the brief.
    Before JoNes, Senior Judge, Whitaker, Laramore, Dtjreee and Davis, Judges.
    
    
      
      Plaintiff’s petition for writ of certiorari denied by the Supreme Court, 379 Ü.S. 964.
    
   Laramore, Judge,

delivered the opinion of the court:

This is a suit by plaintiff, A. H. Karpe, to recover $55,-868.05 in income taxes, plus interest, for the year 1944, which were assessed against cross-defendant, Birda M. Viera, but paid by plaintiff by means of crediting his over-assessment to her deficiency. The first question presented in this case is whether the mitigation statutes, sections 1311-1315 of tbe Internal Revenue Code of 1954, permit the assessment of the deficiency against cross-defendant. In the event the taxes were properly assessed, then we must determine whether plaintiff was obligated to pay the resulting deficiency under the terms of a property settlement agreement entered into between plaintiff and cross-defendant, his former wife. In connection with this second issue, plaintiff has raised the defense that cross-defendant by her failure to fully cooperate in contesting the assessed deficiency breached the agreement, thus relieving plaintiff of his obligation to pay the additional taxes.

During the year in issue, 1944, plaintiff and cross-defendant were husband and wife living in California, a community property state. In preparing their separate Federal income tax returns for that year, they divided family income between separate and community by applying the formula approved in Parker v. Commissioner, 31 B.T.A. 644 (1934). Under that formula, 69.2 percent of the total family income was ultimately reported by plaintiff as separate income and the remaining 30.8 percent was considered community income reportable one-half by each spouse. Cross-defendant did not have any separate income for the year in issue.

In 1949 the Commissioner of Internal Revenue discovered that plaintiff had fraudulently failed to include $225,000 as income in his 1944 Federal income tax return. As a result of the discovery of this fraudulently omitted income, the Commissioner assessed plaintiff additional taxes, fraud penalties, and interest. In so doing, the Commissioner allocated to plaintiff 69.2 percent of the unreported income as separate income and 30.8 percent as community income, one-half reportable by plaintiff. The Commissioner also in 1949 assessed cross-defendant a deficiency on the resulting increase in her share of the community income. The manner in which the omitted income was allocated by the Commissioner among separate and community income was in conformity with the formula used by plaintiff in his 1944 tax return. The resulting deficiency, interest, and fraud penalties were paid by the parties in 1949 and 1950.

Plaintiff in 1954 instituted a suit for refund in the U.S. District Court for. the Southern District of California claiming that a larger portion of the family income for the year in issue was community income reportable one-half by each spouse rather than separate income reportable solely by him. The basis for Ms claim was that the income derived from his business “was primarily due to his personal activities, management, skill, judgment and hard work,” and thus constituted community income. Plaintiff further contended that his separate income was to be determined under controlling California law by crediting his separate capital, i.e., that amount of capital which was employed in his business at the time of his marriage, “with the usual rate of interest prevailing during the subject period on a well secured long-term investment.” Under Ms theory, the excess of family income left after his separate capital had been credited with the appropriate rate of return, constituted community income since this excess was wholly due to the unique and extraordinary nature of his personal services performed in the production of that income.

The District Court partially agreed with plaintiff that a larger portion of the family income for the year in issue was community income rather than separate income as originally reported by plaintiff and allocated by the Commissioner of Internal Revenue. The trial court determined that $60,000 of the family income was attributable to plaintiff’s “personal services and labors in the conduct of his farming ventures and farm equipment business.” Then the court found that “a return before income taxes of eight percent per annum on invested, capital is reasonable and could be expected from an investment in a business like that of the plaintiff for the year 1944.” The court went on and determined that since the return on his separate capital plus the amount allocated as remuneration for his services was less than the total family income, the excess was “in large part attributable to intangibles” constituting both separate and community income. The court used the Parker formula to allocate this excess in the same proportion as the computed separate and community income bear to each other. Thus under the District Court’s decision, only 50.77 percent of the family income was plaintiff’s separate income as compared to 69.2 as originally reported, and 49.23 percent of the family income was community income, reportable one-half by each spouse, instead of the 30.8 percent originally used. The result of the determination was that plaintiff’s separate income was decreased with the concomitant increase in the community income reportable one-half by each spouse. As a consequence of this reallocation of the parties’ family income, plaintiff had a total overpayment of about $97,000 including both fraud penalties and interest. Since the District Court’s determination increased the amount of family income which was considered community income, cross-defendant’s share of that income increased with the result that she underpaid her taxes for the year in issue in the sum of about $55,000.

Within six months after the District Court’s decision became final, cross-defendant was sent a statutory notice of deficiency proposing an assessment of additional taxes for the year 1944 under the mitigation provisions of the Internal Revenue Code of 1954. Cross-defendant failed to file a petition in the Tax Court within 90 days after receipt of the statutory notice of deficiency. Plaintiff’s overassessment for 1944, as determined by the District Court, was credited in payment of cross-defendant’s resulting deficiency. The bal-anee of plaintiff’s overassessment for that year was refunded to him. The government by crediting plaintiff’s overassessment in payment of cross-defendant’s resulting deficiency, purported to act pursuant to the property settlement agreement entered into between plaintiff and cross-defendant, in which it was provided, inter alia, that plaintiff would pay any tax deficiencies assessed against either of them for the years of their marriage.

In 1959 plaintiff filed this suit on the judgment he had obtained in the District Court, claiming that (1) the statute of limitations for the assessment and collection against cross-defendant for the year 1944 had run. (In connection with this contention, plaintiff asserts that by defendant’s failure to specifically plead the application of sections 1311 through 1314 of the Internal [Revenue Code of 1954, which in certain prescribed circumstances mitigates the bar of the statute of limitations, it has not placed said sections in issue before the court and, therefore, cannot avail itself of the provisions to justify what would otherwise be a time-barred assessment); (2) even if the mitigation sections are properly before us, their provisions are not applicable in the instant case, since (a) the District Court’s determination did not require a double exclusion of an item of gross income as required by section 1312(3) (A) which prescribes those circumstances under which the application of the statute of limitations is mitigated by section 1311, and (b) the District Court in its determination did not adopt plaintiff’s inconsistent position as required by section 1311 (b) (1) (B); (3) in the event that the mitigation sections are applicable to the instant case, defendant cannot use the property settlement agreement entered into by plaintiff and cross-defendant for authority to credit his overassessment with cross-defendant’s resulting deficiency ; (4) in the event that under the property settlement agreement defendant could properly credit his overpayment, cross-defendant by her failure to cooperate fully in contesting the assessed deficiency breached the agreement, thus relieving plaintiff of his obligation to pay the additional taxes.

I

We address ourselves first to plaintiff’s procedural issue. Plaintiff raises the contention that by defendant’s failure to specifically plead the application of sections 1311 through 1314 of the 1954 Code, it cannot now invoke said sections as an exception to the application of the statute of limitations as a bar to the assessment of cross-defendant’s deficiency for the year in issue.

Rule 22(b), formerly Rule 18, of the Rules of this court, states in pertinent part, as follows:

When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendments of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure so to amend does not affect the result of the trial of these issues.

At the trial the parties through their respective counsel entered into an agreement whereby they stipulated to certain facts. One of their stipulations states in pertinent part, as follows:

On August 2,1957, Birda M. Karpe [cross-defendant] was sent a statutory notice of deficiency, a copy of which is attached as Exhibit B.

Attached to the standard form statutory notice of deficiency and part of joint exhibit B is a statement which, in part, states as follows:

The deficiency shown herein is asserted under the provisions of section 1314 of the Internal Revenue Code of 1954 and corresponding provisions of the Internal Revenue Code of 1939.

Under these circumstances, it is fair to say that the issue whether or not cross-defendant’s deficiency was properly assessed within, the provisions of the mitigation sections, was at least tried by the implied consent of the parties. The record, as shown above, clearly established that cross-defendant’s deficiency was asserted under the provisions of section 1314 of the 1954 Code. Consequently, the mitigation sections are properly before us and there is no procedural obstacle which prevents us from passing on the merits of this issue.

II

We turn now to the merits of the application of sections 1311 et seq. of the 1954 Code. These provisions were designed to mitigate the bar of the statute of limitations on either an assessment by the government or a refund to the taxpayer where the statute of limitations would serve to create either a double taxation or a double escape from taxation. Section 1311(a) sets forth the basic conditions which have to be met for the operation of the mitigation sections. They are as follows: (1) there must be a determination as defined in section 1313, (2) the determination must come within one of the categories described in section 1312 as a circumstance of adjustment, (3) correction of the effect of the error by means of the normal procedures must be prevented, and (4) an inconsistent position must have been asserted in the manner described in section 1311 (b). If these conditions are met, then the amount of the adjustment must be computed in accordance with section 1314(a) and the adjustment must be made in the manner prescribed in section 1314(a).

In the instant case, there is no dispute that conditions (1) and (3) have been met. The District Court’s judgment in Karpe v. Riddell, supra, which became final on February 18, 1957, is a determination within the meaning of section 1313(a) (1). On the date that this judgment became final, the assessment of the resulting deficiency in cross-defendant’s income for 1944 was prevented by the statute of limitations. The controversy between the parties is with respect to conditions (2) and (4).

The government contends that the circumstance of adjustment in the case is the double exclusion of an item of gross income as described in section 1312(3) (A) :

(3) Double exclusion of an item of gross income.—
(A) Items included, in income.- — The determination requires the exclusion from gross income of an item included in a return filed by the taxpayer or with respect to which tax was paid and which was erroneously excluded or omitted * * * from the gross income of a related taxpayer [cross-defendant] * * *.

The area of dispute between the parties centers on the meaning of the statutory word “item” of gross income contained in section 1312(3) (A). Plaintiff argues that the determination made by the District Court was merely to change the division between separate and community income. Plaintiff points out that no single item of income reported in plaintiff’s income tax return filed for the year 1944 or added by audits of said return was involved in the District Court suit. Plaintiff goes on and states that “ [t]he sole issue was the correctness of the division of all of the gross income between separate income and community income.” Plaintiff seems to argue that the statutory word “item,” as used in section 1312(3) (A) is strictly a qualitative one, synonymous with “type”. Thus, under plaintiff’s argument, before an amount of gross income can be an “item” of gross income within the meaning of section 1312, the amount must be reflected as a separate entry (a sum specified) in the taxpayer’s tax return for the year in issue.

We do not think that the statutory word “item” should be given such a limited interpretation. In Gooch Milling & Elevator Co. v. United States, 111 Ct. Cl. 516, 586, 18 F. Supp. 94, 100 (1948), we described an “item” as follows:

* * * The term “item” was not defined or limited by Congress, and in our opinion it should be interpreted to include any item or amount which affects gross income in more than one year, and produces, as a result, double taxation, double deduction or inequitable avoidance of tax.

Accord: Gill v. Commissioner, 306 F. 2d 902, 906 (5th Cir.1962), (citing the above-quoted language with approval); Dubuque Packing Co. v. United States, 126 F. Supp. 196 (N.D. Iowa 1954), aff’d 233 F. 2d 453 (8th Cir. 1956).

Plaintiff’s argument that before an amount of gross income can be an “item” of gross income within the meaning of section 1312 it must be reflected as a separate entry in the taxpayer’s tax return, is too restrictive to carry out the apparent congressional intent. We believe that Congress intended us to view an “item” of gross income as anything “specific and identifiable” by which such income is “directly affected.” Under our postulated test, the District Court’s determination clearly “directly affected” plaintiff’s and cross-defendant’s total gross income for the year in issue; it reduced plaintiff’s total income with the concomitant increase in cross-defendant’s total income for that year. There is no doubt that the source of this amount was “specific and identifiable.” The District Court’s determination required that part of those amounts which have been previously classified as separate income and reported solely by plaintiff be included in the parties’ community income reportable one-half by each spouse.

Thus it can be seen that although as plaintiff correctly points out that the District Court was primarily concerned with the proper division of the parties’ separate and community income, the effect of that division was to require “the exclusion from gross income of an item included in a return filed by the taxpayer or with respect to which tax was paid (one-half of the amount determined to be community income which had previously been reported as separate income) and which was erroneously excluded or omitted from the gross income of a related taxpayer [cross-defendant].”

Thus we hold that the amount of income which was excluded from plaintiff’s gross income and which was required to be included in the gross income of cross-defendant was an “item” of gross income within the meaning of section 1312. It follows that the determination in the instant case comes within the “circumstances of adjustment” described in section 1312(3) (A).

We turn now to the last condition which has to be met before the mitigation sections can be properly invoked. Section 1311(b) (1) (B) in pertinent part requires that an adjustment shall be made under this part only if—

(B) in case the amount of the adjustment would be assessed and collected in the same manner as a deficiency under section 1314, there is adopted in the determination a position maintained by the taxpayer with respect to whom the determination is made, and the position * * * •maintained by the taxpayer in the case described in sub-paragraph (B) is inconsistent with the erroneous * * * omission.

There is no doubt that plaintiff in the District Court suit maintained an inconsistent position. The problem here is whether the court in making its determination adopted plaintiff’s inconsistent position.

Plaintiff argues in effect that the statute requires that the court making the determination not only reach the same result as that urged by plaintiff, but that in so doing, it must adopt plaintiff’s theory as a basis for the result urged. Plaintiff then contends that the District Court in partially granting the result which he urged did not adopt plaintiff’s theory since it continued to use the Parlcer formula in allocating separate and community income.

At the outset, it should be pointed out that the requirement of section 1311 (b) (1) is that the determination adopt a position inconsistent with the error and that this position must have been actively maintained by the party seeking to interpose the bar of the statute of limitations. See Dobson v. United States, 165 Ct. Cl. 460, 467, 330 F. 2d 646, 650 (1964) (concurring opinion by Laramore, J.). It also appears that the requirement of the statute is not satisfied if the court making the determination merely reaches the same result which had been urged by the party who now seeks to interpose the -bar of the statute of limitations. We believe that the statutory word “position” is not synonymous with result. The drafters by using the word “position” seem to have required that the court making the determination not only grant the result urged but also adopt the party’s general theory as a basis for reaching this result. See Estate of A. W. SoBelle, 31 T.C. 272, 275 (1958).

With this in mind, we shall examine what transpired in the District Court proceedings. It is clear that the determination by the District Court partially granted the result urged by plaintiff, i.e., that for the year 1944 he had overstated his income since he had included amounts of income which should have been included in his wife’s return. Plaintiff’s theory for reaching the result urged was that a greater portion of the family income was primarily due to the extraordinary nature of his personal services performed in the production of that income, and as such should be community income rather than return of his separate invested capital reportable solely by him as separate income. The District Court partially sustained his theory that a portion of the family income which had been previously reported as separate income was not a return of his separate invested capital but was rather community income primarily due to his personal services. In the District Court proceedings both parties agreed that a determination of what constitutes community income or separate income is essentially a question of fact. However, the District Court found that not all the family income which plaintiff urged to be due to his personal services was community income. The court found that part was due to the return of his separate invested capital and the excess was in large part attributable to intangibles constituting both separate and community income. The court then allocated this excess by the use of the Parker formula.

We agree with plaintiff that section 1311(b) (1) requires not only that the court making the determination reach the same result but also that it adopt plaintiff’s general theory as a basis for reaching the result urged. However, plaintiff in his argument misconceives what was the result which he urged and what was his theory supporting that result. Here the result urged was that plaintiff overstated his income for the year 1944, since he included in his gross income amounts which should have been included in his wife’s return. The theory which plaintiff urged in support of that result was that a larger amount of the family income should have been determined to be community income since such income was due to his personal services. The District Court partially agreed with him that a larger amount should be community income. Thus it can be said that the District Court not only partially reached the result urged by taxpayer but also adopted his theory as a basis for that result.

The fact that the District Court continued to use the Parker formula in order to allocate separate and community income should not be determinative. The Parker formula is not a legal theory but a device used for the allocation of income. Theoretically once the return on separate invested capital and a reasonable compensation for personal services have been determined and taken out of the family income, there should be nothing left. However, such a precise valuation is often impossible. Thus, in those circumstances where there is an excess of family income, the Parker formula comes into play. This formula recognizes the fact that this excess is often the result of unrecorded intangibles and intrinsic circumstances. Accordingly, it distributes such excess prorata between separate and community income. Had the District Court completely applied plaintiff’s theory to all amounts of family income, resort to the Parker formula would have been unnecessary, since plaintiff urged that once a reasonable return for separate invested capital was determined, the excess of the family income was solely due to his personal services. However, the District Court only partially agreed with him with the result that there was an excess of family income and the Parker formula was used to allocate the excess. Consequently, we must hold that plaintiff’s position was adopted by the District Court in its determination and that this position was inconsistent with erroneous omission from cross-defendant’s gross income. Accordingly, the mitigation provisions of the Internal Revenue Code were properly invoked and cross-defendant’s deficiency was legally assessed.

Ill

Having determined that cross-defendant’s deficiency for the year 1944 was properly assessed under the mitigations sections, we turn to the issue whether the government could properly credit plaintiff’s overassessment with cross-defendant’s deficiency.

As stated earlier, while plaintiff’s District Court action was still pending, he entered into a property settlement agreement with his wife, preparatory to their subsequent divorce, in which it was provided, among other things, that plaintiff would pay any tax deficiencies assessed against either of them for the years of their marriage.

The government argues that under the property settlement agreement it was a third party beneficiary and as such, it could collect cross-defendant’s taxes from plaintiff. The government’s right as third party beneficiary to collect another’s taxes from an individual promising to pay them has been recognized in a number of occasions. E.g., United States v. Phoenix Indemnity Co., 231 F. 2d 513 (4th Cir. 1956); United States v. Scott, 167 F. 2d 301 (8th Cir. 1948); American Equitable Assurance Co. v. Helvering, 68 F. 2d 46 (2d Cir. 1933). It is equally true that under California law, the third party beneficiaries can enforce contracts made for their benefit. Cal. Civil Code, section 1559. Moreover, the contract creating the rights accruing to the third party beneficiary need not do so in express language. Corbin on Contracts, section 776 (pp. 23-24).

Under the parties’ settlement agreement, plaintiff contracted with cross-defendant for consideration to pay any tax deficiency assessed against her for the years of their marriage. This agreement was entered into while the District Court suit was still pending. We believe that this clause in the settlement agreement was inserted by the parties to take care of the exact situation which confronts us. It is clear that under the agreement, the United States became a third party beneficiary. As stated earlier, the rights of third party beneficiary are enforceable under California law. It follows that the government, as a third party beneficiary with enforceable rights against plaintiff, could apply moneys due plaintiff and held by it in satisfaction of cross-defendant’s debt to it.

Plaintiff argues that the case of Philadelphia Rapid Transit Co. v. United States, 81 Ct. Cl. 289, 10 F. Supp. 591 (1935), cert. denied 300 U.S. 664 (1936), requires a contrary result. In that case we were concerned with a completely different issue. Plaintiff here is not liable because he is the taxpayer, but because he contracted to pay cross-defendant’s debt. In Philadelphia Rapid Transit, the rights of the government as a third party beneficiary were assumed by both parties. In that case we held since plaintiff and its lessor were separate taxpayers, the application of plaintiff’s overpayment to its lessor’s deficiency should not be treated for interest purposes as a statutory credit (occurring where a taxpayer’s overpayment is applied to his own deficiency) but should be treated as a refund of plaintiff’s overpayment followed by a turning over of the same funds in payment of the taxes of another. In the instant case we are concerned with the threshold issue of whether the government had any enforceable rights as a third party beneficiary while in Philadelphia Rapid Transit the government’s rights were assumed by both parties.

Since we have determined that the government became a third party beneficiary under the settlement agreement, we hold that it was appropriate for it to apply a portion of moneys due him to his former wife’s deficiency.

IY

Finally, plaintiff asserts that he was relieved of any obligation under the property settlement agreement because of an alleged breach of contract by his former wife. Specifically, plaintiff contends that cross-defendant’s failure to deliver promptly the documents dealing with the tax deficiency assessed against her relieve him of any obligation to pay her tax. It appears that the only detriment which plaintiff suffered was that he was unable to have cross-defendant’s assessment judicially determined in the Tax Court. However, it is clear that plaintiff or his representatives were aware that additional taxes had been asserted against cross-defendant long before the period for petitioning the Tax Court had expired. If plaintiff was so interested in having the litigation judicially determined in the Tax Court, he could have taken protective measures to safeguard his rights in this respect.

Our Commissioner has found that even if the alleged breach occurred, it has occasioned no loss of rights to plaintiff and no damage measurable in money.

Consequently, we must hold that cross-defendant’s alleged breach of contract, if there was any, did not relieve plaintiff of the obligation to pay the additional taxes.

Since we have determined that the assessment made against cross-defendant was properly made pursuant to the provisions of section 1311 et seq. of the Internal Revenue Code of 1954 and that under the property settlement agreement, the United States government, as third party beneficiary with enforceable rights under such an agreement, properly credited plaintiff’s overassessment with cross-defendant’s deficiency, plaintiff’s petition is dismissed.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Paul H. McMurray, and the briefs and argument of counsel, makes findings of fact, as follows:

1. This is a suit by plaintiff to recover tax in the amount of $55,868.05, plus interest at 6 percent from April 30, 1957, originally assessed against his wife (cross-defendant in this action), abated on May 24, 1957, and later assessed against plaintiff. Plaintiff, Arthur Henry Karpe, is a resident of Kern County, California. Cross-defendant, Birda Marie Viera, is a resident of San Bernardino, California. Plaintiff and cross-defendant were husband and wife from November 19, 1988, to June 27, 1957, on which date a final decree of divorce was granted Birda Marie Karpe against plaintiff. She subsequently married Manuel Viera.

2. During 1907 plaintiff entered into business as a blacksmith in Bakersfield, California, with a capital investment of less than $100. At the time he married cross-defendant, hereinafter referred to as Birda Marie, he owned a profitable machinery, truck, and farm implement sales and repair business known as Karpe’s Implement House, which was the exclusive International Harvester outlet for Kern Comity. Prior to his marriage to Birda Marie, plaintiff also had entered into farming ventures, primarily on leased land. Plaintiff claimed his net worth was about $550,000 at the time of his marriage to Birda Marie in 1938.

3. For the calendar year 1944 plaintiff and Birda Marie, his wife at that time, filed separate income tax returns on or before March 15, 1945, and paid the tax shown to be due on the returns.

4. In his 1944 Federal income tax return plaintiff fraudulently failed to include income from sales of wheat in that year amounting to $225,000. The sales of the wheat were not reflected in any figure on that return or schedules attached thereto, or in any account in the plaintiff’s books, records, or accounts for the year in which it was grown or the year in which it was harvested or for any subsequent year. The wheat was grown on acreage in excess of plaintiff’s quota set by the U.S. Department of Agriculture for the respective years in which the wheat was grown and harvested.

5. In his return for the year 1944, the plaintiff allocated his total income as between his separate income and the community income of plaintiff and his wife, Birda Marie, by the use of the type of formula approved in Parker v. Commissioner, 31 B.T.A. 644, using a 6 percent return on separate capital and a $24,000 yearly salary for his services, as follows:

Return on separate capital — Separate income_$53,900
Salary — Community income_ 24, 000
Total_ 77,900
Formula applied, to allocate remaining ordinary income:
Percent reported as separate p~- = 69.2%
Percent reported as community = 30.8%

In tax returns for prior years plaintiff used the same formula, and agreed to the use of the same percentage return and salary after his returns had been audited by revenue agents. The above percentages were used by the Commissioner of Internal Revenue in determining the deficiency for the year 1944 resulting from the fraudulent omission from income in the amount of $225,000.

6. In filing separate income tax returns for 1944, plaintiff reported his separate income and his half of the community income, allocated as shown above, and Birda Marie reported the remaining half of the community income. Plaintiff’s tax return disclosed a tax liability of $137,565.15, which he paid on or about March 15, 1945. Thereafter, a deficiency was assessed against plaintiff for 1944 in the sum of $1,457.96, which, together with interest thereon in the sum of $125.60, was paid about January 31, 1947. On or about August 1, 1949, a further deficiency, resulting from the fraudulently concealed $225,000, allotted proportionally to plaintiff in accordance with the formula shown in finding 5, was assessed against plaintiff in the sum of $167,885.97, together with a fraud penalty in the sum of $84,671.97. This assessment of income taxes and penalties, together with interest in the sum of $50,774.14, was paid by plaintiff in January 1949 and May 1950. On August 12, 1949, Birda Marie was also assessed a deficiency on the resulting increase in her share of the community income. Payment was made on April 19 and May 2 of 1950.

7. On or about March 24, 1952, plaintiff filed a claim for refund based on the same grounds as stated in a subsequent suit for refund (set out in finding 8).

8. On May 3, 1954, plaintiff filed suit against the District Director of Internal Bevenue at Los Angeles in the U.S. District Court for the Southern District of California, in which he made, in substance, the following statements:

(a) The total amount paid as income tax for the taxable year 1944, together with penalty and interest, was $442,480.80.

(b) His income tax liability for 1944 did not exceed $163,347.83, which sum, together with penalty and interest as provided by law, did not exceed an aggregate of $182,169.68, and that the amount in excess thereof was erroneously and illegally assessed against plaintiff.

(c) In the preparation of plaintiff’s return for 1944 an allocation was made of his income between his separate income and the community income of plaintiff and Birda Marie.

(d) That allocation did not take into account the unique and extraordinary personal services plaintiff performed in the production of that income, and the allocation was, therefore, erroneous.

(e) In the preparation of his return the plaintiff’s separate income was overstated and the community income was understated.

(f) To give due recognition to the unique and extraordinary services rendered by plaintiff in 1944, the portion of his income properly allocable to separate property did not exceed $44,030.24, and the remainder of the ordinary income for 1944, in the sum of $152,764.15, was the community income of plaintiff and Birda Marie.

9. Plaintiff’s refund suit was tried before U.S. District Court Judge Jertberg, sitting in Fresno, California. Judge Jertbérg entered an order for judgment on December 18,1956 (Karpe v. Riddell (S.D. Cal.), 51 A.F.T.R. 1522). The court concluded that, in allocating income between plaintiff’s separate income and the community income of plaintiff and his wife for 1944, a formula based on an 8 percent return on separate property and a yearly salary for plaintiff’s services of $60,000 was reasonable, set out as follows:

Return on separate income — Separate income-$61, 891.76
Salary — Community income- 60, 000.00
Total_ 121,891.76
Formula applied to allocate remaining ordinary income:
Percent reportable as separate ^39 50.77%
Percent reportable as community '= 49.23%

10. Judge Jertberg further found as a fact:

XIII
$210,152.99 of the plaintiff’s ordinary income for 1944 was separate property and $203,778.45 was community, of which $101,889.22 is taxable to the plaintiff’s wife.

lli. Judge Jertberg made the following conclusions of law:

I
This Court has jurisdiction of the subject matter and of the parties hereto under 28 U.S.C. Section 1340.
II
50.77% or $210,152.99 of the plaintiff’s ordinary income for the year 1944 was separate income and 49.23% or $203,778.45, community.
Ill
The plaintiff fraudulently omitted income from grain sales from the net income reported on his 1944 federal income tax return and is entitled to a refund of fraud penalty only to the extent of fifty percent of the overpayment of tax determined herein.
IY
Plaintiff overpaid his 1944 federal income tax in the sum of $55,317.46, fraud penalty in the sum of $27,658.73, and interest in the sum of $14,378.74, a total of $97,354.93.
V
Plaintiff is entitled to judgment against the defendant for the year 1944 in the sum of $97,354.93, together with interest as allowed by law.
* * # # , *

12. Judgment became final on February 18, 1957. On that date the statute of limitations for assessment and collection against Birda Marie for the year 1944 had run.

13. As a consequence of the determination made in the above-noted lawsuit reallocating plaintiff’s income as between separate and community, Birda Marie’s share of the community income was increased, which resulted in a deficiency in her income tax for the year 1944. On April 30, 1957, additional taxes and interest in the amount of $55,868.05 were assessed against Birda Marie. That assessment was abated on May 24, 1957.

14. On August 2, 1957, Birda Marie was sent a statutory notice of deficiency. Attached to the notice was a statement, in part, as follows:

The deficiency shown herein is asserted under the provisions of section 1314 of the Internal Bevenue Code of 1954 and corresponding provisions of the Internal Beve-nue Code of 1939.

“Explanation of Adjustment,” also attached to the notice, was as follows:

(a) In a judgment rendered on December 18,1956 by the United States District Court for the Southern District of California, Northern Division, in the case of A. H. Karpe vs. Bobert A. Biddell, District Director of Internal Bevenue, No. 1357-ND Civil, it was found that $203,778.45 of the total ordinary net income of A. H. Karpe for the taxable year ended December 31, 1944, represented community income.
Therefore, the net income reported in your amended return, which was based on a report of examination dated October 14, 1946, is increased to include your share of the community income of $203,778.45 as determined by the District Court, or $101,889.22. Inasmuch as you reported $64,372.89, your income is increased in the amount of $37,516.33.

15. Birda Marie failed to file a petition, in tbe Tax Court within 90 days after the notice of deficiency was mailed.

16. On or about May 8,1957, the defendant issued plaintiff a notice of adjustment showing that plaintiff was due a refund of $83,081.70 consisting of an overpayment of $42,208.68 and interest of $40,873.02, and that an additional overpayment of $55,868.05 had been credited to the deficiency of Birda Marie on April 30, 1957. The amount of $83,081.70 was refunded to plaintiff.

17. The credit of $55,868.05 to Birda Marie, described above, was reversed on May 24, 1957, because the assessment against her in that amount made on April 30, 1957, was abated on May 24, 1957.

18. On or about December 6,1957, defendant sent plaintiff a second notice of adjustment showing the sum of $55,868.05, plus interest thereon of $1,163.83, had been credited against the income tax liability assessed against Birda Marie on December 6,1957, for the taxable year 1944.

19. It is plaintiff’s contention that defendant erroneously assessed additional taxes against Birda Marie for 1944 in that the statute of limitations barred such assessment. Plaintiff also contends that defendant erroneously credited his overpayment for 1944 to Birda Marie’s deficiency for 1944. He first contested defendant’s action by suit filed March 28, 1958, in U.S. District Court for the Southern District of California. On September 10, 1958, the court dismissed that action for want of jurisdiction. Plaintiff filed notice of appeal which was dismissed on March 11, 1959.

20. On April 1,1959, Birda Marie filed a claim for refund for the year 1944 in the amount of $55,868.05. On April 8, 1959, plaintiff filed suit in this court. On April 17, 1961, defendant filed a cross-claim against Birda Marie which was answered by her on July 10, 1961.

21. Plaintiff did not at any time enter into any agreement with the defendant or any agency thereof consenting to the crediting of any overassessment due him against any additional income tax or interest claimed by defendant to be due from cross-defendant Birda Marie for the year 1944. There is, however, a contract between plaintiff and cross-defendant, as set out in finding 23.

22. On or about May 22, 1956, plaintiff and cross-defendant Birda Marie entered into an agreement in writing which, since that time, has been and now is in full force and effect according to its terms.

23. The agreement referred to in finding 22, according to its terms, provides as follows:

(1) Plaintiff is inquired to pay any deficiencies in income tax or penalties or interest thereon assessed against plaintiff and cross-defendant or either of them for any year from the date of their marriage to and including the year 1955.

(2) Plaintiff shall have the right to protest or contest any such deficiency or deficiencies in income tax or penalties or interest assessed against plaintiff and cross-defendant or either of them, and cross-defendant is required to cooperate in said contest or protest by the execution of such protest or other documents, instruments, or papers prepared by plaintiff which may be reasonable, convenient, or necessary to contest and/or settle said protested assessments.

(3) Plaintiff can require cross-defendant to execute and deliver to plaintiff or his designee her power of attorney to do all things necessary, expedient, or proper in connection with any and all deficiency assessments in income taxes, penalties, or interest, including, but not limited to, the executing of such instruments as may be necessary, expedient, or proper in protesting and contesting assessments.

(4) Without limiting the generality of plaintiff’s obligation to pay all deficiencies assessed against plaintiff and cross-defendant or either of them for any period during their marriage, and plaintiff’s right to protest or contest any such deficiency, and cross-defendant’s obligation to execute any such protest or other document in connection therewith prepared by plaintiff, and plaintiff’s right to require cross-defendant to execute her power of attorney to him or his designee sufficient to permit execution of any and all documents necessary for protesting and contesting assessments, plaintiff must pay any income tax deficiency assessed against cross-defendant for the calendar year 1944 and hold her harmless on account thereof, and cross-defendant must cooperate fully with plaintiff and shall employ the attorney or attorneys selected by plaintiff, in the event plaintiff shall elect to contest any such proposed deficiency against cross-defendant by reason of the claim for refund made by plaintiff for the calendar year 1944.

(5) Any refunds of income taxes, penalties, or interest made to plaintiff and cross-defendant or either of them shall belong to plaintiff.

(6) Any refund due on account of overpayment of income taxes, penalties, or interest for the calendar year 1944 shall belong to plaintiff.

(7) Any service of notice of demand in writing by cross-defendant upon plaintiff made by mail shall be addressed to plaintiff in care of Lloyd G. Eainey and J. Everett Blum, 139 South Beverly Drive, Beverly Hills, California, or at such other address in Los Angeles County, California, as plaintiff may designate in writing served upon cross-defendant.

24. During the period from and including the month of February 1957 through the month of May 1959, Lloyd G. Eainey and J. Everett Blum, attorneys at law specializing in matters of taxation, were representing plaintiff as his attorneys and agents, and made the fact of such representation and agency known to cross-defendant during all of that period. During that period, Lloyd G. Eainey and J. Everett Blum knew that a deficiency would be assessed against cross-defendant for the year 1944.

25. The written agreement between plaintiff and cross-defendant made and entered into on or about May 22, 1956, was drafted by Lloyd G. Eainey and J. Everett Blum, acting as attorneys for plaintiff.

28. The written agreement between plaintiff and cross-defendant contains no provision stating that cross-defendant was at any time required to transmit or submit to plaintiff any documents in connection with any income tax deficiency assessment or claim for refund.

27. No act or omission of cross-defendant caused the denial of any substantive right to plaintiff, and no act or omission of cross-defendant caused the denial of any procedural right which was available to plaintiff.

28. No act or omission of cross-defendant has caused any damages to plaintiff measurable in money.

29. Neither plaintiff nor anyone in his behalf ever requested cross-defendant to execute any protest or other document, instrument, or paper in connection with any income tax deficiency proposed or assessed, or any power of attorney for executing instruments necessary, expedient, or proper in protesting or contesting any income tax assessments, prior to May of 1959.

30. Prior to May 14, 1957, plaintiff’s attorney J. Everett Blum thought that a deficiency notice had been issued against cross-defendant for the year 1944, but did not request cross-defendant to file a protest or a petition in the Tax Court and did not request her power of attorney. The time for filing protest did not, in fact, expire imtil May 17, 1957, and the time for filing a petition in the Tax Court did not finally expire until November 1, 1957.

31. The proof is not deemed adequate to support a finding that cross-defendant failed or refused to comply with the terms of the property settlement agreement.

CONCLUSION OK LAW

Upon the foregoing findings of fact, which are 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 therefore dismissed. 
      
       ünfler California law tbe salaries of the spouses are community property, owned one-half by each spouse, but capital acquired prior to the marriage and the earnings it produces during the marriage are the separate property of the spouse owning the capital. Cal. Civil Code, §§ 163-164.
     
      
       Tlie net effect of plaintiff’s claim ■would be to reduce bis total income, thereby reducing the amount by •which it was fraudulently understated and reducing the companion interest and fraud penalties assessed against plaintiff. Cross-defendant was not chargeable with fraud and no fraud penalty was assessed against her.
     
      
       Plaintiff’s brief in Karpe v. Riddell, No. 1357-N.D.-Civil, p. 11.
     
      
      The ownership of income in a community property state is to be determined under state law. Poe v. Seaborn, 282 U.S. 101 (1930); United States v. Malcolm, 282 U.S. 792 (1931).
     
      
      
        Supra, footnote 3 at p. 12.
     
      
      
        Karpe v. Riddell, 51 A.F.T.R. 1522 (1956).
     
      
      
        Id. at 1523.
     
      
      
        IMd.
      
     
      
      
        Ibid..
      
     
      
       Under the District Court determination plaintiff overpaid his taxes in the sum of about $55,000, his fraud penalty in the sum of about $28,000, and his interest in the sum of about $14,000.
     
      
       The pertinent parts of the agreement are fully set out in our findings of fact numbered 22 and 23.
     
      
       Plaintiff first filed suit in the U.S. District Court where the complaint was dismissed for lack of jurisdiction.
     
      
       Section 1311(a) reads as follows: “(a) General Rule. — If a determination (as defined in section 1313) is described in one or more of the paragraphs of section 1312 and, on the date of the determination, correction of the effect of the error referred to in the applicable paragraph of section 1312 is prevented by the operation of any law or rule of law, other than this part and other than section 7122 (relating to compromises), then the effect of the error shall be corrected by an adjustment made in the amount and in the manner specified in section 1314.”
     
      
       There is no dispute that cross-defendant is a “related taxpayer” as prescribed in section 1313(c) which defines related taxpayer as
      “* * * a taxpayer who, with the taxpayer with respect to whom a determination is made, stood, in the taxable year with respect to which the erroneous inclusion, * * * was made, in one of the following relationships:
      (1) husband and wife, * *
      During the year 1944 plaintiff and cross-defendant were husband and wife.
     
      
       Plaintiff’s reply brief, p. 4.
     
      
       We are aware that a number of courts when called upon to apply these sections have adopted the view that since the sections are in derogation of the statute of limitations they should be strictly construed. E.g., Central Hanover Bank & Trust Co. v. United States, 163 F. 2d 60, 63 (2d Cir. 1947); American Foundation Co., 2 T.C. 502 (1943). In the past we have characterized the mitigation statute as a “relief provision” which “should, if necessary, be given a liberal interpretation in order fully to carry out its apparent purpose.” Gooch Milling & Elevator Co. v. United States, supra at 587, 78 F. Supp. at 100. It has been suggested, however, that “an analysis of cases suggests that the potentiality for error latent in the conscious adoption of either general canon weighs in favor of subordinating both to a more particularized and purposive interpretive technique.” Note, 72 Harv. L. Rev. 1536, 1546-47 (1959). We agree that the application of the mitigation sections should not be sustained or denied merely on the basis of the interpretive philosophy adopted by the court. However, the complexity of the sections (see Judge Clark’s comments in Cory v. Commissioner, 261 F. 2d 702, 704 (2d Cir. 1958), and the inexactness with which such key terms as “items of income” are defined and used, require us to use as a starting point of our analysis the apparent congressional intent, in enacting these sections. We believe that they were enacted with the view that “disputes as to the year in which income or deductions belong [and in this case disputes as to which of two related taxpayers should include amounts of gross income] * * * should never result in a double tax, or a double deduction of tax or an inequitable avoidance of tax.” S. Rep. No. 1567, 75th Cong., 3d Sess., 49-50 (1938).
     
      
       See Knickerbocker, Mysteries of Mitigation: The Opening of Barred. Tears in Income Tax Cases, 30 Fordham L. Rev. 225, 241 (1961) where the author states that such an interpretation “is not only reasonable but correct.”
     
      
       The position maintained by plaintiff in the District Court proceedings •was that he had included certain community income in his return (which he had erroneously categorized as his separate income) which should not have been included in his return but should have been included in his wife's return. This was inconsistent with the erroneous omission of that very community income from the wife’s return.
     
      
       Section 1311(b)(3) requires the existence of the relationship of related taxpayer, here husband and wife, at the time the plaintiff first maintains the inconsistent position in a claim for refund. The claim for refund referred to is that filed by plaintiff on March 25, 1952, or five years before plaintiff and cross-defendant ceased to be husband and wife.
     
      
       See Knickerbocker, supra, note 17 at 239.
     
      
       The essential function of the statute of limitations, i.e., the prevention of the litigation of stale claims was preserved when Congress enacted the mitigation sections since the bar of the statute is removed only when “the party or parties in whose favor it applies shall have justified such modification by active inconsistency.” S. Rep. No. 1567, 75th Cong., 3d Sess., 49 (1,938). See Note, Sections 1311 — 15 of the Internal Revenue Code: Some Problema in Administration, 72 Harv. L. Rev. 1536, 1538 (1959).
     
      
       See G.C.M. 1030 VI-1 Cum. Bull. 26 (1927); G.C.M. 9825 X-2 Cum. Bull. 146 (1931).
     
      
       One question involved is whether the tax was properly assessed within the provisions of sections 1311 and 1315 of the Internal Revenue Code of 1954, and the corresponding provisions of the 1939 Code. A second question, assuming the assessment was properly made, relates to plaintiff’s obligation, if any, to pay additional taxes of cross-defendant (his wife at the time) for the calendar year 1944 under terms of a property-settlement agreement entered into between plaintiff and his wife prior to the divorce.
      Also involved is the matter of a possible breach of the agreement by cross-defendant in such fashion as would make her liable to pay the additional taxes for 1944.
     