Harman's of Idaho, Inc. v. Idaho State Tax Commission , 114 Idaho 740 ( 1988 )

JOHNSON, Justice.

This is an income tax case in which the primary issue is whether the issuance of a deficiency determination by the State Tax Commission concerning the taxes due in a particular year reopens the statute of limitations relating to a claim for credit or refund of taxes paid in an earlier year. We conclude that it does not and reverse the decision of the trial court holding that it does. We also decide that this is not an appropriate case for the application of the doctrine of equitable recoupment.

I.

The Facts.

Harman’s of Idaho, Inc. (the taxpayer) filed Idaho income tax returns for 1978, 1979 and 1980, each of which showed a net operating loss (NOL). For 1981, 1982 and 1983 the taxpayer filed returns claiming as deductions NOLs for 1979 and 1980. The Idaho State Tax Commission (the Tax Commission) determined that under I.C. § 63-3022, as it then existed, the taxpayer was not entitled to carry the full amount of the NOLs forward as deductions against taxable income for 1981,1982 and 1983, but that the taxpayer should have first carried the NOLs back as deductions against taxable income for 1976,1977 and 1978, before carrying the balance of the NOLs forward as deductions against taxable income for 1981, 1982 and 1983.

The notice of deficiency of the Tax Commission indicating the additional amount of tax due by the taxpayer for 1981, 1982 and 1983 was issued on August 30, 1984. I.C. § 63-3072(d) provides that a claim for credit or refund relating to an overpayment attributable to a NOL carry-back must be made by a taxpayer within forty months and fifteen days following the end of the taxable year of the NOL which results in the carry-back. Under this statute a claim by the taxpayer for credit or refund relating to the NOLs for 1979 and 1980 were .required to have been filed by no later than April 15, 1983 and April 15, 1984, respectively.

In recalculating the taxpayer’s income tax for 1980, 1981 and 1982, the Tax Commission first applied the NOLs to the taxpayer’s taxable income as shown on its returns for 1976 and 1977. The taxpayer’s return for 1978 did not show taxable income. The Tax Commission then applied the balance of the NOLs to the years subsequent to 1980 and asserted a deficiency in the taxes due for 1981, 1982 and 1983 of $5,955.00, plus interest. The taxpayer submitted a claim for refund of an overpayment in the taxes paid for 1976 and 1977 of $3,456.96 as a result of the application of the NOLs to those years. The Tax Commission denied this refund or the giving of credit for this amount against the deficiency for 1981, 1982 and 1983, because the claim had not been filed within the period provided for in I.C. § 63-3072(d). The taxpayer claimed that the overpayment for 1976 and 1977 should have been applied as an offset or recoupment against the amount asserted as a deficiency for 1981, 1982 and 1983.

The taxpayer paid the additional tax asserted by the Tax Commission and appealed the Tax Commission’s decision to the district court. The district court upheld the Tax Commission’s interpretation of I.C. §§ 63-3022 and 63-3072(d), but ruled that under I.C. § 63-3072(c) the taxpayer was entitled to file amended returns for 1976 and 1977 in 1984 after the Tax Commission sent its notice of deficiency determination and to claim a credit or refund within three years after the filing of the amended returns. The district court held that the claim for refund was filed within three years after the due date of amended returns for 1976 and 1977 and that the taxpayer was entitled to offset the overpayment of taxes for 1976 and 1977 against the deficiency assessed by the Tax Commission for 1981, 1982 and 1983.

The Tax Commission appealed the district court’s decision.

II.

The Assessment Of A Deficiency Relating To A Year In Which A NOL Was Incorrectly Claimed As A Deduction Does Not Reopen The Time Within Which A Taxpayer May Make A Claim For Credit Or Refund Relating To An Overpayment Attributable To The Same NOL That Should Have Been Carried-Back To A Prior Year.

During the times applicable to this case, I.C. § 63-3022 provided that a NOL must first be carried back to the three taxable years preceding the year of the NOL, before carrying the balance of the NOL forward to years following the NOL.

The pertinent portions of I.C. § 63-3072 that relate to this case state:

(a) Where that has been an overpayment of any income tax imposed by this act, the amount of such overpayment shall be credited against any income tax then due from the taxpayer, and any balance of such excess shall be refunded to the taxpayer.

(c) No such credit or refund of taxes, penalties or interest paid, shall be allowed or made after three (3) years from the due date of the return or from the time the return was filed, whichever is later, unless before the expiration of such period a claim therefore is filed by the taxpayer; ____

(d) If a claim for credit or refund relates to an overpayment attributable to a net operating loss carry-back, in lieu of the three (3) year period of limitation expressed in subsection (c), the period shall be that period which ends with the expiration of the fifteenth day of the fortieth month following the end of the taxable year of the net operating loss which results in such a carry-back.

The district court erroneously ruled that I.C. § 63-3072(d) does not foreclose the filing of amended returns for 1976 and 1977 and the filing of a claim for credit or refund for those years under the provisions of I.C. § 63-3072(c). I.C. § 63-3072(d) is very clear that where a claim for credit or refund relates to an overpayment attributable to a net operating loss carry-back, the statute of limitations for filing a claim for credit or refund is forty months and fifteen days following the end of the taxable year of the net operating loss that results in the carry-back. The fact that the taxpayer chose to claim the entire amount of the NOLs as deductions for the years 1981, 1982 and 1983, rather than applying them first to 1976 and 1977, as the statute required, and the fact that the Tax Commission subsequently correctly applied the NOLs and asserted a deficiency in the taxes due for 1981, 1982 and 1983, do not preclude the application of the limitation provided in I.C. § 63-3072(d).

Even if I.C. § 63-3072(c) were the applicable statute of limitations, by its own terms it would not assist the taxpayer, since it limits a claim for credit or refund to three years “from the due date of the return or from the time the return was filed, whichever is later.” By the time the Tax Commission issued the notice of deficiency, more than three years had passed since the filing of the 1976 and 1977 returns. The fact that under I.C. § 63-3022 the Tax Commission first carried the NOLs back to 1976 and 1977 before applying them to 1981, 1982 and 1983 did not entitle the taxpayer to file amended returns for 1976 and 1977 and to treat the date of these amended returns as being the date for the beginning of a three-year statute of limitations under I.C. § 63-3072(c). There is no statute that permits the taxpayer to do so.

We reverse the decision of the district court that the taxpayer had a period of three years from 1984 in which to make a claim for a credit or refund relating to the application of the NOLs to the income of the taxpayer for 1976 and 1977.

III.

Equitable Recoupment Is Not Applicable

The taxpayer contends that this is an appropriate case for the application of the doctrine of equitable recoupment. This is a case of first impression for the application of this doctrine by this Court. Without determining whether equitable recoupment will be applicable in other cases in this state, we hold that it is not appropriate in this case.

The doctrine of equitable recoupment has been developed by the federal courts to prevent “unjust enrichment — it is invoked either by the taxpayer to recover a twice-paid tax or by the Government to prohibit tax avoidance.” Kolom v. United States, 791 F.2d 762, 766-67 (9th Cir.1986). In its first treatment of the doctrine the Supreme Court stated that “recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiff’s action is grounded.” Bull v. United States, 295 U.S. 247, 262, 55 S.Ct. 695, 700, 79 L.Ed. 1421 (1935). See also Stone v. White, 301 U.S. 532, 57 S.Ct. 851, 81 L.Ed. 1265 (1937). In explaining the doctrine in a subsequent case the Court said:

It has never been thought to allow one transaction to be offset against another, but only to permit a transaction which is made subject of suit by a plaintiff to be examined in all its aspects, and judgment to be rendered that does justice in view of the one transaction as a whole.

Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 299, 67 S.Ct. 271, 272, 91 L.Ed. 296 (1946).

The ninth circuit has delineated the three criteria that must be met for the application of the doctrine:

The doctrine of equitable recoupment applies if “a single transaction constitute^] the taxable event claimed upon and the one considered in recoupment.” [Citations omitted.] The single transaction must also be subjected to two taxes based on inconsistent legal theories. [Citation omitted.] Finally, the amount claimed in recoupment must be barred by the statute of limitations, while the asserted deficiency by the government must be timely. [Citations omitted.]

Kolom, 791 F.2d at 767.

The facts of this case are not appropriate for the application of the doctrine of equitable recoupment. There is not a “single transaction” in this case that constitutes the taxable event upon which the Tax Commission’s claim for additional taxes is based, while at the same time being the basis of the taxpayer’s claim for recoupment. The taxpayer portrays the NOLs as the “single transaction” in this case. The NOLs are not a taxable event, but merely the basis for deductions. The NOLs do not generate a tax, but are only a means of avoiding the payment of some tax. The NOLs were not subjected to two taxes based on inconsistent legal theories.

The taxpayer chose to attempt to reduce income taxes payable to the state by deducting the full amount of the NOLs from the taxpayer’s income for 1981, 1982 and 1983. When the Tax Commission applied the NOLs in part to 1976 and 1977 in order to recalculate the taxpayer’s income tax for 1981, 1982 and 1983, the Tax Commission did not assert a tax on the NOLs, but merely applied the NOLs as the law required. This is not an appropriate case for the application of equitable recoupment.

IV.

Conclusion.

The decision of the district court that the taxpayer is entitled to have offset against the additional taxes due for 1981, 1982 and 1983 the overpayment of taxes for 1976 and 1977 is reversed.

Costs to appellant.

No attorney fees were requested.

BAKES and HUNTLEY, JJ., concur.