Estate of Reimer v. Commissioner Chris J. Anderson TX 8020 July 23, 2007

Estate of Reimer v. Commissioner  Citation:12 TC 913 (1949) Aff’d per Curiam 180 F2d 159 (6 th Cir. 1950)  Justice: Arundell  Code Sections: 293(b)

Facts  Charles Reimer was a partner in an operation known as Reimer & Bloomgren Machine Co. located in Ohio.  : Reimer filed annual returns for the partnership.  June of 1945: Reimer filed amended returns for years 1943 and  February 23, 1947: Reimer died.  November 5, 1947: IRS made jeopardy assessments against Reimer’s estate including a 50% addition to the tax for fraud for the tax years in question ( ). Reimer’s wife is the executor of his estate and is the petitioner in this case. She admits he fraudulently understated his correct net income in order to evade tax for the years involved.

Issue  Is the 50% addition to the tax for fraud provided by section 293(b) allowed to be imposed against and collected from the estate of a decedent who during his lifetime fraudulently understated his correct net income with intent to evade tax? Ruling  Yes, the estate is still liable for the 50% additions to tax and is not avoided due to the death of the taxpayer.

Case History  There was no Federal statute covering the survival of the cause of action provided by Sec. 193 (b) against a taxpayer’s estate where proceedings had not been instituted prior to his death.  Before 1940: The Commissioner took the position that imposing additions to the tax were penalties inflicted as personal punishment for the failure of the taxpayer to comply with the revenue laws and did not survive the death of the taxpayer. National City Bank of New York, Executor Van Choate v. General Electric Co. Schreiber v. Sharpless

Case History  1940: Decision was reversed in Helvering v. Mitchell, 303 U.S. 391, 401.  Supreme Court held the 50% tax due to fraud with the intent to evade tax under 293 (b) was not barred by the acquittal of the taxpayer on an indictment charging willful attempt to evade tax under 146 (b) (criminal).  The court held that the 50% tax penalty was a civil penalty and was properly imposed against the decedent’s estate.  The 50% addition to the tax for fraud is imposed as a remedial measure to indemnify and compensate the U.S. for the loss resulting from the wrongful act or tort committed by the taxpayer.  The final question is whether a cause of action of this nature survives against the estate in Reimer’s case.

Reasoning  Court ruled in Sullivan v. Associated Billposters & Distributors that the cause of action survives “if the injury upon which it is based is one affecting property rights as distinguished from an injury affecting the person.”  Therefore, a cause of action for injury done to these rights can achieve its purpose as well after the death of the owner as before if it affects the right to property.  The primary purpose of taxation is to obtain money which the sovereign may use in the performance of its many governmental functions. The result of the taxpayer filing fraudulent income tax returns which understates his true tax liability is to deprive the sovereign of money it is entitled to receive and obligated to collect.

Reasoning  The Government also had to expend other funds in order to uncover the fraud and collect the proper tax due. These are monetary losses.  The Court ruled that the taxpayer’s wrongful act is in the nature of an injury to the property of the U.S.  The fraudulent cause of action survives against the estate of the taxpayer, regardless of whether proceedings were initiated before or after his death. The respondents deficiency notice must be sustained due to the petitioner conceded that decedent, fraudulently understated his correct net income for the tax years involved.

Aff’d Per Curiam  Sixth Circuit U.S. Court of Appeals affirmed this decision in Kirk v. Commissioner, 1950, 179 F2d 619.  The decision was based on reasoning from the Supreme Court ruling in the Mitchell case along with the Tax Court ruling in this case.