Lewis v. Reynolds

In 1921, an administrator of Arthur Cooper’s estate filed a federal tax return on behalf of Cooper’s estate on which the administrator claimed deductions for attorney’s fees and state inheritance taxes. In 1925, the Internal Revenue Service (IRS) (defendant) audited the tax return, disallowing the deductions for the state inheritance taxes but allowing those for attorney’s fees, and assessed a deficiency. The trustees of Cooper’s will (plaintiffs) paid the deficiency but disagreed with the IRS’s assessment. In March 1926, after the statute of limitations had run for the IRS to reassess Cooper’s estate’s tax liability but before the statute of limitations had run for the trustees to file a claim for a refund, the trustees filed a claim for a refund of the paid deficiency. In response to the claim, the IRS recalculated the estate’s tax liability and determined that the deductions for the inheritance taxes should have been allowed and that the deductions for the attorney’s fees should not have been allowed. The IRS denied the refund claim on the grounds that, even though the trustees’ ground for a refund was to recover amounts paid because of an improperly denied deduction (that of the inheritance taxes), the estate had benefitted from an improperly allowed deduction (that of the attorney’s fees), and so, on a net basis, the government had not received an amount in excess of what was properly due to it. The trustees sued for the refund. The trial court found in favor of the IRS, and the court of appeals affirmed. The trustees appealed to the United States Supreme Court.