## Facts

- World Publishing Company adopted a plan of complete liquidation under I.R.C. § 337 and, on January 7, 1963, distributed $166 per share to shareholders.
- Because of a pending broker-commission lawsuit and other contingencies, World’s board retained a $4,000,000 reserve—about $19 per share—rather than distributing that amount in 1963.
- Before the liquidation, Margaret H. Doorly owned 23,973 shares of World stock outright and was the remainder beneficiary of the Gilbert M. Hitchcock Trust, which owned 32,400 shares.
- Doorly reported the liquidation on her 1963 federal income tax return as if she received $185 per share ($166 paid plus $19 retained), treating the retained amount as constructively received, and paid $267,771.75 in tax attributable to that retained amount.
- In February 1963, the Hitchcock Trust’s life income beneficiary died; in August 1963, the trust corpus (including the 32,400 World shares) was distributed to Doorly as remainderman, and Doorly immediately gifted those assets to an irrevocable “Margaret H. Doorly Family Trust,” whose trustees included First National Bank of Omaha and Katherine D. Clark.
- Doorly died in May 1964. The trustees served as administrators of her estate, and the estate later poured its residue over into the family trust.
- In 1965, after the contingent liabilities were resolved, World distributed approximately $18.5525 per share—slightly less than the $19 per share it had retained.
- On their 1965 returns, Doorly’s estate and the family trust claimed capital losses of $0.4475 per share, based on the difference between the $19 previously treated as received and the $18.5525 actually distributed; the IRS disallowed those 1965 loss deductions.
- The United States later conceded that Doorly had overpaid her 1963 tax because the retained amount should not have been included in 1963 income, but argued the 1963 refund claim was barred by the statute of limitations.
- The trustees filed a refund suit for the $267,771.75 overpayment, relying on the mitigation provisions in I.R.C. §§ 1311–1314. The district court entered judgment for the full amount plus interest, and the United States appealed.

## Issues

1. Whether the mitigation provisions of I.R.C. §§ 1311–1314 permitted correction of an otherwise time-barred 1963 overpayment tied to Doorly’s erroneous 1963 inclusion of the retained liquidation reserve.
2. Whether the government’s positions—conceding the 1963 overinclusion while disallowing the related 1965 loss deductions—constituted the kind of “inconsistent position” and “determination” required for mitigation relief.
3. Whether Doorly, her estate, and the successor family trust satisfied the “related taxpayer” requirements for mitigation when different taxpayers reported the item in different years.
4. If mitigation applied, whether the trustees were entitled to the entire conceded 1963 overpayment, or whether the refund had to be recomputed to account for the effect of correcting 1963 on the proper 1965 tax results.

## Decision

- The Eighth Circuit held that the mitigation provisions applied, so the statute of limitations did not bar an adjustment to correct the 1963 error.
- The court rejected the government’s arguments that there was no qualifying inconsistency and that Doorly, her estate, and the trust were not sufficiently related for mitigation purposes.
- The court held, however, that the district court erred in awarding the full $267,771.75 without accounting for the tax consequences that correcting 1963 would have on the estate’s and trust’s 1965 returns.
- The court affirmed in part, reversed in part, and remanded for recomputation of the refund consistent with the mitigation statutes and the proper coordinated treatment of the related years.

## Legal Principles

- I.R.C. §§ 1311–1314 create a narrow statutory exception allowing adjustment of a closed tax year when statutory conditions are met, including a qualifying “determination” and an inconsistent position that would otherwise produce an unfair result because one year is closed.
- An inconsistency can exist where the IRS effectively insists on inclusion (or its economic equivalent) in one year while denying the corresponding corrective treatment in another year arising from the same item.
- The mitigation provisions can apply across taxpayers when the statutory relationship requirements are satisfied; successor fiduciaries and a successor trust receiving the relevant property interests may qualify as related for purposes of making the adjustment.
- Even when mitigation permits reopening a closed year, the amount of the allowable refund is limited to the adjustment required by the mitigation framework; the computation must take into account the consequences that flow to the related year(s) so the taxpayer does not receive an improper tax benefit or suffer an improper detriment.

## Conclusion

The Eighth Circuit held that the mitigation provisions allowed the trustees, as successors to Doorly’s interests, to pursue a refund for Doorly’s time-barred 1963 overpayment stemming from her mistaken constructive-receipt reporting of World’s retained liquidation reserve, but it sent the case back for recalculation because correcting 1963 necessarily affected the proper tax treatment in 1965 and the refund had to be computed under the coordinated mitigation rules rather than paid in the full conceded amount without adjustment.


First National Bank of Omaha v. United States, 565 F.2d 507 (1977)