In the

United States Court of Appeals

For the Seventh Circuit

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Nos. 04-1148 & 04-1150

UNITED STATES OF AMERICA,

Plaintiff-Appellant,

v.

NORTHERN TRUST COMPANY, as trustee of

the Caterpillar Incorporated Master Trust

and the Inland Steel Industries Pension Trust,

Defendant-Appellee.

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Appeals from the United States District Court for the

Northern District of Illinois, Eastern Division.

Nos. 98 C 7272 & 98 C 8217—James B. Moran, Judge.

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ARGUED JUNE 8, 2004—DECIDED JUNE 22, 2004

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Before EASTERBROOK, KANNE, and DIANE P. WOOD,

Circuit Judges.

EASTERBROOK, Circuit Judge. Closed-end mutual funds

pay federal income tax on income and capital gains, then

notify their investors, to which the tax burden passes

through. A shareholder that is tax exempt (such as a pension trust or a university endowment) can claim a refund of

the taxes that the mutual fund paid on account of its

proportionate investment. Taxable investors get income

coupled with a credit for tax the mutual fund has paid. Two

pension trusts (for employees of Inland Steel and Caterpil-
2 Nos. 04-1148 & 04-1150

lar) were shareholders of record in Quest for Value Dual

Purpose Fund, a closed-end mutual fund. Quest reported to

Northern Trust Co., as trustee of these pension trusts, the

gains and taxes attributable to these shares. Northern

Trust then filed tax returns and claimed refunds on behalf

of the pension funds. During 1991 through 1995, the tax

years at issue in this litigation, Northern Trust received

more than $6 million in refunds for the benefit of these

pension plans.

The United States wants the money back. It contends

that, with the permission of the two pension funds, Northern Trust “lent” the Quest shares to “borrowers” that held

all economic incidents of ownership—the right to any

dividends on the shares, the right to vote the shares, even

the entitlement to sell them and keep the profits. If a borrower elected to return the shares at the end of the term, it

retained any capital gain or loss. For this set of rights, it

paid the pension funds 102% of the market price of the

Quest shares on the date the “loans” were made. As the

United States sees things, these transactions were sales

carrying a misleading label designed to allow the pension

funds to reap tax benefits on shares that they no longer

owned—while the “borrowers,” though taxable entitles,

avoided the economic incidence of taxes on the mutual

fund’s undistributed income and capital gains.

These suits (one for each pension fund) were filed late in

1998, less than two years from the date the refund of 1995

taxes had been paid, but more than two after the refunds

for the other tax years had been disbursed. Section 6532(b)

of the Internal Revenue Code, 26 U.S.C. §6532(b), gives the

United States only two years to commence proceedings to

recover erroneously paid refunds, “except that such suit

may be brought at any time within 5 years from the making

of the refund if it appears that any part of the refund was

induced by fraud or misrepresentation of a material fact.”

The complaint alleged that the five-year period applies
Nos. 04-1148 & 04-1150 3

because Northern Trust misrepresented that the two

pension trusts were Quest’s “shareholders” and thus eligible

for refunds. On Northern Trust’s motion under Fed. R. Civ.

P. 12(b)(6), the district court dismissed the complaint (with

respect to tax years 1991 through 1994) for failure to state

a claim on which relief may be granted. 93 F. Supp. 2d 903

(N.D. Ill. 2000). As the court saw things, status as a

shareholder is a mixed question of law and fact, and thus

not a “fact” as §6532(b) uses that term; and a “misrepresentation” occurs only if the taxpayer acts with a deceptive

state of mind, which the complaint did not allege. Four

years later the parties settled the United States’ claim with

respect to the 1995 tax year—Northern Trust eventually

paid 100¢ on the dollar—and the district court entered a

final judgment, from which the United States appealed.

Dismissal under Rule 12(b)(6) was irregular, for the

statute of limitations is an affirmative defense. See Fed. R.

Civ. P. 8(c). A complaint states a claim on which relief may

be granted whether or not some defense is potentially

available. This is why complaints need not anticipate and

attempt to plead around defenses. See, e.g., Gomez v.

Toledo, 446 U.S. 635 (1980); United States Gypsum Co. v.

Indiana Gas Co., 350 F.3d 623 (7th Cir. 2003). So it is

irrelevant that the complaint did not plead that Northern

Trust set out to deceive the Internal Revenue Service, or

was negligent (or grossly negligent) in applying for refunds.

Resolving defenses comes after the complaint stage. Even

with respect to elements of the plaintiff’s claim, complaints

need not plead facts or legal theories. See, e.g., Swierkiewicz

v. Sorema N.A., 534 U.S. 506 (2002); Bartholet v. Reishauer

A.G. (Zürich), 953 F.2d 1073 (7th Cir. 1992).

“Misrepresentation” differs from “fraud;” otherwise

§6532(b) would be redundant. Understandably, therefore,

Northern Trust does not contend that the United States had

to plead with particularity under Fed. R. Civ. P. 9(b). Yet if

the normal approach of Rule 8(a) applies, this complaint is
4 Nos. 04-1148 & 04-1150

unimpeachable. Indeed, it goes beyond what is necessary,

for the complaint does anticipate the limitations defense

and meet it with a claim that Northern Trust made a

“misrepresentation of a material fact.” What more could be

required? If, as the district court believed, the word “misrepresentation” connotes a culpable state of mind, then the

complaint pleads that state of mind by using the word

“misrepresentation,” for under Rule 9(b) “[m]alice, intent,

knowledge, and other condition of mind . . . may be averred

generally.” And if, as the United States contends, negligent

errors may be called “misrepresentations,” again the

complaint is sufficient. Instead of jettisoning the complaint,

the district judge should have invited the parties to file

motions for summary judgment or held a bench trial; then

we would know what state of mind the persons who prepared these tax returns had, and we could determine

whether that was enough under the statute. Precipitate

dismissal of the complaint has prolonged this litigation

needlessly.

There remains a possibility that this complaint contained

too much rather than too little—that the United States has

pleaded itself out of court by alleging things that, if true,

devastate its claim. The complaint alleges that the “misrepresentation” was Northern Trust’s statement that the

pension funds were “shareholders” in Quest. The district

court saw this as conclusive in defendant’s favor, for status

as a “shareholder” is not a “fact” but a legal characterization of facts. This is a subject we can address now, and we

disagree with the district court’s view that only the most

concrete statements about the world are “facts” for purposes

of §6532(b). The word “fact” is a staple of the legal system,

and no one suggests that it has a special meaning in the

Internal Revenue Code. There is no linguistic problem in

saying that a characterization (“shareholder”) derived from

combining an undisclosed view of the law with undisclosed

details about the terms of the “loan” is itself a “fact” (or a

mixed question of law and fact, which is treated as a fact for
Nos. 04-1148 & 04-1150 5

many purposes). “Facts” are not limited to those things that

can be described by Newton’s three laws of motion. Those

case-specific details that serve as minor premises in the

legal syllogism and thus determine the outcome are what

we normally understand by “facts” (or “adjudicative facts”)

in the judicial process.

Consider some parallels. Is “discrimination” under Title

VII a “fact”? Ascertaining the existence of “discrimination” requires the application of legal rules to events in the

workplace (was someone of a different race promoted under

similar circumstances?, and so on). The Supreme Court

nonetheless held in Pullman-Standard v. Swint, 456 U.S.

273 (1982), that “discrimination” is a matter of fact for

purposes of Fed. R. Civ. P. 52 and appellate review. We

know from Icicle Seafoods, Inc. v. Worthington, 475 U.S. 709

(1986), that a person’s status as a “seaman” is an issue of

fact, and from National Collegiate Athletic Association v.

University of Oklahoma, 468 U.S. 85 (1984), that the

definition of a “market” in antitrust law is an issue of fact.

Why should the identification of a “shareholder” differ? All

of these are characterizations arrived at by applying legal

rules to events that may or may not be in dispute. If the

district court articulates the wrong legal rule, it makes an

error of law on the way to its finding of fact, but this does

not render the characterization itself a proposition of “law.”

One could see the same thing through the lens of defamation law. Suppose someone points a finger and shouts:

“That man is a shareholder of Quest!” The statement could

be defamatory if it implied disreputable conduct—if, for

example, the person were a judge who had just rendered a

decision in favor of Quest rather than recusing himself.

Statements that imply propositions that can be true or false

are statements of “fact” rather than “opinion” in tort law.

See, e.g., Stevens v. Tillman, 855 F.2d 394 (7th Cir. 1988)

(discussing this doctrine). The proposition “the Inland Steel

Industries Pension Trust is a shareholder of Quest” implies
6 Nos. 04-1148 & 04-1150

things that can be true or false—at a minimum, that the

pension fund owned shares (as opposed to bonds or warrants) during the taxable year in question, and that it was

the beneficial rather than bare legal owner of the shares (in

other words, that it did not hold them as trustee, let alone

as bailee, pledgee, or custodian). The United States contends, however, that the pension fund did not enjoy beneficial ownership in these shares. That may be true or false;

and if the pension fund transferred beneficial ownership of

the shares, then the statement that it remained a “shareholder” is a misrepresentation of fact. It is no different from

the assertion “the Inland Steel Industries Pension Trust

owns 100,000 shares of Quest” when as a result of sales and

other transfers to third parties it owned only 10,000. That

misstatement, which would increase the tax refund by an

order of magnitude, would be one of fact.

Nothing else in the complaint had any potential to scuttle

the claim. Thus we must remand. We have learned enough

about §6532(b) to say that, when ruling on motions for

summary judgment or holding a bench trial, the district

court should not treat the word “misrepresentation” as

limited to intentional deception. Only one appellate opinion

to date has discussed that word’s meaning. Lane v. United

States, 286 F.3d 723 (4th Cir. 2002)—which considers and

disapproves the district court’s opinion in this litigation—holds that because “misrepresentation” appears in the

same sentence as the word “fraud,” it must mean some less

culpable state of mind. The fourth circuit thought that gross

negligence would do; we need not decide whether even that

much is essential. One way to understand §6532(b) as a

whole might be that, when the return discloses enough that

all the IRS has to do is check the calculations and apply the

law, then the period of limitations is two years; but if the

IRS must independently discover facts that contradict the

return, then it has an extra three years to do the legwork.

Then if Northern Trust had represented that “the Inland
Nos. 04-1148 & 04-1150 7

Steel Industries Pension Trust owns 100,000 shares of

Quest” when it owned only 10,000, that statement would be

a “misrepresentation” even if it was just a typographical

error (the addition of an extra zero). The only way to

identify such an error would be to ask the pension fund or

Quest for original records, a step that may not occur even

in an audit (itself a rare event). Many dictionaries define

“misrepresentation” to include both intentional and inadvertent misstatements. Whether that is the best way to

treat this word in this statutory context is a question that

need not yet be answered, for the United States tells us that

it is prepared to demonstrate that Northern Trust committed gross negligence, or worse. Only if it comes up short will

it be necessary to pin down the word’s meaning.

REVERSED AND REMANDED

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—6-22-04