Eleanor Coohey v. United States ( 1999 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 98-2924
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Eleanor Coohey; Dubuque Bank & *
Trust Company, Co-Executors of *
Donald Coohey’s Estate, *
*
Appellants, *
* Appeal from the United States
v. * District Court for the Northern
* District of Iowa.
United States of America, *
*
Appellee. *
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Submitted: February 8, 1999
Filed: April 12, 1999
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Before MCMILLIAN, LAY, and MURPHY, Circuit Judges.
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LAY, Circuit Judge.
This appeal arises out of a tax refund suit commenced by Donald and Eleanor
Coohey (“Taxpayers”).1 The Internal Revenue Service (“IRS”) assessed Taxpayers
1
Donald Coohey died prior to oral argument on appeal. This court allowed
substitution of the Dubuque Bank & Trust Company and Eleanor Coohey, as Co-
Executors of Donald Coohey’s Estate.
for certain deficiencies arising from the sale of livestock under deferred payment
contracts in the year of contract initiation rather than in the year of actual sale. The
IRS determined that Taxpayers should have included the fair market value of the
deferred obligation in their 1990 and 1991 taxable incomes rather than in the year the
payments were received for purposes of comparing their Alternative Minimum Tax
(“AMT”) liability under § 56(a)(6) of the Internal Revenue Code (“I.R.C.”). On April
19, 1994, Taxpayers paid in full the assessed 1990 AMT liability and interest in the
sum of $193,292.27.2 The suit for refund followed.
The district court3 granted summary judgment in favor of the IRS. The court
found that the IRS had properly applied the I.R.C. provisions (§§ 56(a)(6) and
453(b)(1)) to the deferred contracts. Taxpayers then filed an appeal. While the case
was pending decision on appeal, Congress enacted the Taxpayer Relief Act of 19974
(“Act”) which repealed § 56(a)(6) of the I.R.C. and made the repeal retroactive. See
§ 403(a) of the Act. On motion of the IRS, this court vacated and remanded this case
to the district court for further proceedings in light of the statutory change.
On remand, the parties filed cross-motions for summary judgment. The district
court then held that Taxpayers were entitled to a full refund for the previously
assessed and paid 1990 AMT in the amount of $193,292.27. The IRS conceded the
amount of the refund due Taxpayers. However, the district court also held the IRS
should be permitted to reopen the 1991 tax year under the doctrine of equitable
recoupment in order to recover the amount of credit applied in the 1991 tax year
2
This is an aggregate amount of $151,791 of principle and $41,501.27 of
interest, as stipulated by the parties.
3
The Honorable Edward J. McManus, United States District Judge for the
Northern District of Iowa.
4
Pub. L. No. 105-34, 111 Stat. 788 (1997).
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resulting from the change in the Taxpayers’ 1990 tax status.5 Taxpayers have now,
once again, appealed. We affirm.
Section 6514(b)
On appeal, Taxpayers raise several arguments. First, they assert that I.R.C.
§ 6514(b) essentially prohibits application of the defense of the doctrine of equitable
recoupment. Assuming that Taxpayers made this argument before the district court
(the district court did not address this issue), we feel that Taxpayers misconstrue the
applicability of § 6514(b).
Section 6514(b) states that, “[a]ny credit against a liability in respect of any
taxable year shall be void if any payment in respect of such liability would be
considered an overpayment under section 6401(a).”6 I.R.C. § 6514(b) (1986). The
application and subsequent limitations suggested by § 6514(b) could be applicable
and relevant outside the scope or use of the doctrine of equitable recoupment.
However, equitable recoupment, by its very nature, applies only when the statute of
limitations has expired for assessment or collection of the tax liability at issue. Its
application is a means of avoiding an unjust result caused by the enforcement of the
statute of limitations. The specific statute of limitations to which equitable
recoupment is an exception cannot then act as a bar to the doctrine’s application. As
a result, Taxpayers attempted reliance upon I.R.C. § 6514(b) is misplaced and not
applicable to the current factual situation because reliance on the statute of limitations
5
A tax credit of $89,589.00 had been permitted for the 1991 tax year. Accrued
interest was then computed to be $12,091.39 which creates the total amount due the
IRS to be $101,680.39.
6
Section 6401(a) designates any tax payment made after the period of
limitations for assessment has expired to be considered an overpayment.
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can be properly circumvented through implementation of the doctrine of equitable
recoupment.
Mitigation Provisions (§§ 1311-14)
Second, Taxpayers assert that the doctrine of equitable recoupment has now
been superseded by the mitigation provisions of the I.R.C. under §§ 1311-14.7
Taxpayers rely upon the language of United States v. Dalm, 494 U.S. 596, 610
(1990), which states: “were we to allow her to maintain a suit for refund on the basis
of equitable recoupment, we would be doing little more than overriding Congress’
judgment as to when equity requires that there be an exception to the limitations bar.”
We agree with the IRS that Taxpayers misread the Dalm case.
In Dalm, the taxpayer brought an untimely refund suit for recovery of gift taxes
which she had previously paid several years earlier. The taxpayer relied on the
doctrine of equitable recoupment as the basis to allow her jurisdiction. The Supreme
Court held that equitable recoupment permits the timely litigation of a tax claim to
7
These provisions override and displace judicially-created doctrines in cases
where the statutory provisions apply. However, those judicially-created doctrines
continue to apply in cases not covered by the statutory provisions. When Congress
established the detailed mitigation provisions, it intended that they supersede
common law recoupment remedies with respect to the categories named within the
provisions, and that within those defined areas the statutory remedy is exclusive. See
CASEY FED TAX PRAC § 11.16 (1994). The specific mitigation provisions permitting
exclusive application include: (1) double inclusion of an item of gross income
(§ 1312(1)); (2) double allowance of a deduction or credit. (§ 1312(2)); (3) double
exclusion of an item of gross income (§ 1312(3)); (4) double allowance of a
deduction or credit (§ 1312(4)); (5) correlative deductions and inclusions for trusts
or estates and legatees, beneficiaries, or heirs (§ 1312(5)); (6) correlative deduction
and credits for certain related corporations (§ 1312(6)); and (7) basis of property after
erroneous treatment of a prior transaction (§ 1312(7)). I.R.C. §§ 1312(1)-1312(7)
(1986).
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“seek recoupment of a related, and inconsistent, but now time-barred tax claim
relating to the same transaction.” Dalm, 494 U.S. at 608 (emphasis added). The
Court established that equitable recoupment could not provide the sole basis for
jurisdiction over a refund suit. Dalm, 494 U.S. at 611.
Rather than emphasizing the limitation of equitable recoupment, Dalm’s true
focus related to the question of jurisdiction. The Supreme Court denied jurisdiction
for the Court to entertain an independent lawsuit for a refund of gift taxes prohibited
by the statute of limitations under the doctrine of equitable recoupment. In that case,
the government asserted an income tax deficiency on a theory which was inconsistent
with the theory on which Dalm relied when paying the gift tax. Dalm had previously
litigated the income tax deficiency but failed to raise a claim of equitable recoupment
in order to obtain a credit for the gift tax. Thereafter, she sought in a separate action
to obtain a refund of the gift tax under the doctrine of equitable recoupment.
The Supreme Court stated that it had no jurisdiction to act upon her suit where
there was no statutory authorization to bring the suit by reason of the statute of
limitations. The Court simply held that a taxpayer had to file a claim for a refund
within three years from the time the return was filed or two years from the time the
tax was paid, whichever period expired later. The Court held that under I.R.C.
§§ 6511(a) and 7422(a), the district court was barred from passing on Dalm’s suit for
refund of the tax. The Court makes clear in Dalm that equitable recoupment
encompasses a single transaction subjected to inconsistent taxation and that “the
reason the statute of limitations is not a bar in those cases is that the court has
uncontested jurisdiction to adjudicate one of the taxes in question.” Dalm, 494 U.S.
at 611 (emphasis added). The Court’s holding “does not leave taxpayers in Dalm’s
position powerless to invoke the doctrine of equitable recoupment. . . . [as] a court
which has jurisdiction over a timely suit for refund may consider an equitable
recoupment claim for an earlier tax paid under an inconsistent theory on the same
transaction.” Dalm, 494 U.S. at 610.
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The mitigation provisions provide for an exception to the statute of limitations
in certain cases, and allow suits for refund that would otherwise be barred. The Dalm
Court was concerned that allowing the application of equitable recoupment as the
only basis of jurisdiction for an untimely refund suit would override Congress’ intent
in enacting the mitigation provisions. There is no language in Dalm which directly
or impliedly states that the use of equitable recoupment has been entirely superseded
by the mitigation provisions. Further, there has not been a rejection of all uses of the
doctrine of equitable recoupment, but rather only an attempt to use it as a sole basis
for jurisdiction.
Under these circumstances, the Court makes clear that it has “equitable power”
to review the entire transaction. Under the circumstances spelled out by the Supreme
Court, we cannot subscribe to the theory that Dalm holds that the mitigation
provisions supersede the doctrine of equitable recoupment.
Single Transaction
Next, Taxpayers urge that the district court erred in applying the doctrine of
equitable recoupment because there is not a single transaction involving the taxes
relating to the 1990 and 1991 returns.8 Under the doctrine of equitable recoupment
the offsetting amount from the year barred by the statute of limitations (in this case
1991) must be considered the same transaction if it arose from the refund due
8
Taxpayers also urge that the United States failed to plead the doctrine of
equitable recoupment as an affirmative defense as required by FED. R. CIV. P. 8(c).
However, this court has held that an affirmative defense can even be raised on appeal
where the evidence supports that defense. See Overholt Crop Ins. Service Co. v.
Travis, 941 F.2d 1361, 1368 (8th Cir. 1988); see also Mason v. Hunter; 534 F.2d 822,
825 (8th Cir. 1976); CHARLES ALLEN WRIGHT AND ARTHUR R. MILLER, 5 FEDERAL
PRACTICE AND PROCEDURE § 1278 at 491-502 (2d ed. 1990). We find that in this
case the taxpayers had ample opportunity to respond to this defense and they have
suffered no prejudice. See Parker v. United States, 110 F.3d 678, 682 (9th Cir. 1997).
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Taxpayers in the year 1990. See Estate of Vitt, 706 F.2d 871, 874-75 (8th Cir. 1983);
10 J. MERTENS, THE LAW OF FEDERAL INCOME TAXATION, § 60.05 at 16 (1976 rev.
ed.). The doctrine finds its roots in the equitable concerns of unjust enrichment.
Another necessary element of the doctrine of equitable recoupment is that the
amount in question must be subject to an argument of inconsistent theories. See
Parker v. United States, 110 F.3d 678, 683 (9th Cir. 1997). Taxpayers argue that not
only are the 1990 and 1991 taxes separate transactions, but they have never taken an
inconsistent position with regard to the tax liability. We reject both of their claims.
The relationship of the 1990 AMT refund and the 1991 AMT credit are clearly a
single transaction. The 1990 AMT which was assessed and paid by the taxpayers had
a direct relationship to the allowance of the 1991 AMT credit.9 Without the
assessment of the original amount in 1990 there would never have been a credit given
to the taxpayer for 1991. See Estate of Vitt, 706 F.2d 871 (8th Cir. 1983). In light of
the refund of the 1990 deficiency, based upon repeal of the statute, there can be little
question that the refund of the deficiency payment for the year 1990 has a direct
impact upon the 1991 credit. Obviously, if the Taxpayers receive both the benefit of
the refund and still retain the benefit of their 1991 credit, an unjust situation is
created. Taxpayers would avoid the assessment of a large amount of tax owed to the
IRS.
Inconsistent Theories
9
As a result of Taxpayers’ $193,292.27 tax payment for the 1990 tax year,
$89,589 tax credit was applied to their 1991 taxes, which subsequently reduced their
tax liability by a corresponding amount. That $89,589 credit reduced their prior tax
liability of $186,150 to $55,708. The reduced 1991 tax liability resulted in an
overpayment by Taxpayer which required a $72,550 refund to be returned to them in
1994.
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Taxpayers assert that the application of equitable recoupment is inappropriate
because they have never relied upon inconsistent positions. In Bull v. United States,
295 U.S. 247 (1935), the Supreme Court recognized that for the doctrine of equitable
recoupment to apply the party against whom that defense was being asserted must
have adopted inconsistent positions to the detriment of the opponent. See also Stone
v. White, 301 U.S. 532 (1937). Taxpayers argue that they never asserted inconsistent
positions. We believe the historical facts establish the contrary. Taxpayers received
an AMT credit for 1991 that was based on their AMT liability for 1990. Taxpayers
then sought a refund of the 1990 amount and have since asserted that they owe no
subsequent liability for the 1991 AMT credit. These positions are inherently
inconsistent and inconsistent treatment would occur if Taxpayers were allowed to
retain the 1991 AMT credit, which was permitted as the result of the incorrect
assessment of the 1990 AMT, because of the subsequent redetermination and refund
of the 1990 AMT. Allowing the correction of the 1990 AMT without correction of
the 1991 AMT credit would assign tax liability inconsistently. Should the AMT
credit for the 1991 tax year be allowed to stand, Taxpayers would receive an unearned
tax credit for funds which they have no longer paid to the IRS for the 1990 AMT.
This amount would be an unearned and unjustified windfall for the taxpayers.
Damages
Finally, Taxpayers contend that the actions of the IRS have violated I.R.C.
§ 7433 and they are entitled to the assessment of damages. Section 7433 permits
damages in cases where “[i]f, in connection with any collection of Federal tax with
respect to a taxpayer, any officer or employee of the Internal Revenue Service
recklessly or intentionally disregards any provision of this title, or any regulation
promulgated under this title, such taxpayer may bring a civil action for damages
against the United States.” I.R.C. § 7433(a) (West Supp. 1998).
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It is clear from the record before this court that the amount to be recouped is
related to the allowance of a tax credit for the amount paid the previous year. In light
of this court’s reversal of the basis for the assessment and direction to return the AMT
to the Taxpayer, the assessment of the previously granted AMT credit does not fall
within the purview of § 7433.
For the foregoing reasons, the judgment of the district court is affirmed; the
cause is remanded for the parties to stipulate as to the correct mathematical
computation to be entered as the judgment.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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