18 N.Y.2d 498 (1966)

Under New York law, the filing of a notice of claim for unpaid federal taxes with the representatives of an estate constitutes the commencement of a ‘proceeding in court’ for purposes of tolling the federal statute of limitations on tax collection.

Summary

These consolidated cases address whether the filing of a notice of claim for unpaid taxes with estate representatives constitutes commencing a ‘proceeding in court’ under the Internal Revenue Code, thus tolling the statute of limitations. The New York Court of Appeals held that under New York law, it does. The court reasoned that filing a claim is the initial step toward judicial settlement, effectively pausing the statute of limitations. This decision hinges on interpreting federal law in light of state procedural rules, affirming the Appellate Division’s order.

Facts

In Matter of Feinberg, the administratrix of the estate filed an income tax return for the decedent. The IRS assessed a deficiency and filed a verified proof of claim with the administratrix, who neither paid nor rejected it. Years later, the government sought to compel an accounting, but the administratrix argued the claim was time-barred.

In Matter of Field, the executors reported an estate tax. The IRS claimed a deficiency, which was later reduced. An assessment was made, and the District Director filed a verified proof of claim with the executors, who did not pay or reject it. The government later sought to compel an accounting and distrained the estate’s bank account. The executors argued the government’s application was untimely.

Procedural History

In both cases, the Surrogate’s Court initially ruled that the Government’s tax claims were time-barred. The Appellate Division reversed these decisions, granting leave to appeal to the Court of Appeals.

Issue(s)

Whether, under federal law, the Government instituted a ‘proceeding in court’ within six years after the tax assessment against each estate by merely filing a notice of claim with the estate representatives, thereby tolling the federal statute of limitations for tax collection.

Holding

Yes, because under New York law, filing a verified claim with the representatives of an estate is considered the first step toward having the claim determined upon judicial settlement, and thus constitutes the commencement of a special proceeding that tolls the statute of limitations.

Court’s Reasoning

The court reasoned that while federal law governs the timeliness of federal tax claims, the determination of what constitutes commencing a ‘proceeding in court’ depends on state law. Citing Herb v. Pitcairn, the court emphasized that the critical factor is whether the process employed would, without more, bring the parties into court. The court acknowledged the diversity of legal proceedings and procedures across jurisdictions and inferred that Congress intended to adopt the appropriate local rule as the applicable federal law, as long as it does not discriminate against the Government. The court referred to United States v. Saxe, noting that the effect of a notice of claim is dependent on State law.

Under New York law, as established in Matter of Schorer, filing a verified claim with the estate representatives is the first step toward having the claim ‘tried and determined upon the judicial settlement.’ This is viewed as commencing a special proceeding that tolls the statute of limitations. The court rejected the argument that rejection of the claim is a prerequisite to jurisdiction, stating that timeliness depends on when a claim is filed rather than when it is rejected. The purpose of the statute of limitations is to penalize claimants for sleeping on their rights, and there is no such procrastination when a claim is presented within the prescribed limitations period. The court stated that the short Statute of Limitations on litigating rejected claims outside the Surrogate’s Court did not apply to tax claims asserted by the Federal Government, since “the United States is not bound by state statutes of limitations.”

Therefore, the Government commenced a special proceeding by filing the tax claims, tolling the statute of limitations. Subsequent actions, such as abandoning an earlier attempt to compel an accounting or distraining the estate’s checking account, are merely proceedings within the special proceeding. The court also held that the fact the claims were filed by the District Director of Internal Revenue does not violate section 3740 of the Internal Revenue Code of 1939, as that section does not apply to communications between parties which are not filed in court, according to Taylor v. United States.