Heiting v. U.S.

Federal 7th Circuit Court
Civil Court
Income Tax
Case Number: 
No. 20-1324
Decision Date: 
October 18, 2021
Federal District: 
W.D. Wisc.

Dist. Ct. did not err in dismissing plaintiffs-taxpayers’ action seeking refund of income taxes paid on unauthorized sale of stock by trustee of trust established by plaintiffs. Record showed that: (1) trustee sold stock held in trust that produced taxable gain of $5,643,067.50, even though terms of trust precluded trustee from either selling or purchasing said stock; (2) instant sale subjected plaintiffs to taxable gain as grantors of said revocable trust; and (3) trustee subsequently realized that instant sale of restricted stock was prohibited by terms of trust agreement and repurchased same number of shares sold at earlier transaction for lower price than what trustee received in earlier sale. Plaintiffs sought to invoke claim of right doctrine as codified in 26 USC section 1341 to claim deduction in subsequent tax year after plaintiffs had paid taxes arising out of gain from stock sale. However, plaintiffs failed to adequately allege that they did not have restricted right to income from sale of restricted stock held in their trust and were under legal obligation to restore that income to trust, as required under 1341(a)(2). Thus, Dist. Ct. properly dismissed plaintiff’s complaint, because they did not adequately allege that trust had legal obligation to restore restricted stock to trust. Moreover, plaintiffs could not show that trustee had legal obligation to re-purchase said restricted stock, where trust agreement precluded trustee from purchasing said stock, and complaint otherwise failed to allege that plaintiffs sought any relief from trustee or that plaintiffs threatened legal action against trustee that was related to instant sale of stock.