First National Bank of Omaha v. United States

In January 1963, the World Publishing Company (World) liquidated, distributing $166 per share to its shareholders while retaining $19 per share to pay contingent claims. Margaret Doorly owned 56,373 World shares. Doorly recognized the receipt of $185 per share ($166 per share that she actually received and $19 per share that World retained) on her 1963 tax return and paid $267,771.75 in tax on the World-retained amount. Doorly died in May 1964. Katherine Clark and the First National Bank of Omaha (collectively, trustees) (plaintiffs) were Doorly’s estate’s administrators. The estate ultimately was closed with its residue poured over into Doorly’s family trust (trust). In 1965, after resolving all contingent liabilities, World distributed approximately $18.5525 per share to its shareholders. Doorly’s estate and the trust each claimed losses of $.4475 per share on their 1965 taxes, which the Internal Revenue Service (IRS) disallowed. The trustees sued the United States (defendant) for a refund of the $267,771.75 that Doorly allegedly erroneously overpaid. The United States eventually conceded that Doorly overpaid her 1963 taxes but contended that the refund claim was time-barred. The trustees responded that the tax code’s mitigation provisions (26 U.S.C. §§ 1311–14) permitted them to avoid the statute of limitations. The district court awarded judgment to the trustees for $267,771.75 plus interest. The United States appealed, arguing that the mitigation provisions were inapplicable because (1) the IRS’s positions regarding 1963 and 1965 were not logically inconsistent, (2) the IRS did not seek to double tax the trust’s income, and (3) Doorly and her estate were not related taxpayers. The United States further argued that the judgment should reflect the refund’s impact on the estate’s and trust’s 1965 taxes.