Estate of Frank A. Branson v. Commissioner , 113 T.C. No. 2 ( 1999 )

113 T.C. No. 2UNITED STATES TAX COURT
ESTATE OF FRANK A. BRANSON, DECEASED,
MARY M. MARCH, EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10028-95. Filed July 13, 1999.
P reported the date-of-death fair market values of
the stock of S and W as $181.50 and $485, respectively,
per share. P sold some of the S stock for $335 per
share and all the W stock for $850 per share. The gain
realized on the sales by P was distributed to the
residuary legatee, M, who reported the gain on her
Federal income tax return and paid the income tax due.
R determined a deficiency in P's estate tax liability.
R's determination was based on his assertion that at
the date of death the fair market values of the S and W
shares were $300 and $850, respectively, per share. In
Estate of Branson v. Commissioner, T.C. Memo. 1999-231,
we found that the date-of-death fair market values of
the S and W shares were $276 and $626, respectively. P
asserts that it is entitled to equitable recoupment of
the income tax overpaid by M, the refund of which is
barred by the statute of limitations.
Held, under the doctrine of equitable recoupment, P is
entitled to a credit for the income tax overpaid by M on the
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gain recognized on the sales of the shares due to the lower
values reported on the estate tax return. Estate of Bartels
v. Commissioner, 106 T.C. 430 (1996); Estate of Mueller v.
Commissioner, 101 T.C. 551 (1993), followed.
Robert A. Mills, Marco L. Quazzo, and Mary Catherine Wirth,
for petitioner.
Rebecca T. Hill, Bryce A. Kranzthor, and Elizabeth
Groenewegen, for respondent.
OPINION
PARR, Judge: In Estate of Branson v. Commissioner, T.C.
Memo. 1999-231 (Branson I), we redetermined the increased value
of the shares of Savings Bank of Mendocino County (Savings) and
Bank of Willits (Willits) included in decedent's gross estate.
We now consider whether this Court has authority to apply
equitable recoupment in light of the opinion of the Court of
Appeals for the Sixth Circuit in Estate of Mueller v.
Commissioner, 153 F.3d 302 (6th Cir. 1998), affg. on other
grounds 107 T.C. 189 (1996), and if so, whether petitioner is
entitled under that doctrine to credit for the taxes paid by the
residuary legatee on the excessive gain recognized from the sales
of the shares due to the lower values provided by the estate tax
return. Following our opinions in Estate of Bartels v.
Commissioner, 106 T.C. 430 (1996), and Estate of Mueller v.
Commissioner, 101 T.C. 551 (1993), we hold that this Court has
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authority to apply equitable recoupment. We further hold that
petitioner is entitled to recoup the residuary legatee's
excessive payment of income tax against the estate tax
deficiency.
The relevant facts are taken from our findings in Branson I,
the parties' submissions, and the existing record. Petitioner is
the estate of Frank A. Branson (decedent), who died testate on
November 9, 1991, in Mendocino, California. Mary March (March),
decedent's daughter, is the executrix and residuary legatee of
the estate. March's legal address was Potter Valley, California,
at the time the petition in this case was filed.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect as of the date of decedent's
death, and all Rule references are to the Tax Court Rules of
Practice and Procedure. All dollar amounts are rounded to the
nearest dollar, unless otherwise indicated.
Background
At the time of his death, decedent owned 12,889 shares of
Savings stock and 500 shares of Willits stock. Petitioner
reported the value of the Savings and Willits shares as $181.50
and $485, respectively, per share, on its Form 706, United States
Estate (and Generation-Skipping Transfer) Tax Return.
Decedent's will provided that all estate taxes were to be
paid from the residue of the estate. Pursuant to a court order,
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March, as executrix, was granted authority to sell 2,800 shares
of Savings stock at $335 per share and 500 shares of Willits
stock at $850 per share. March sold the shares in 1992 and paid
Federal and State of California estate taxes of $1,008,698 and
$200,632, respectively. March, as executrix and residuary
legatee, assumed individual liability for any estate taxes later
found due from petitioner.
Petitioner reported the capital gain from the sales of the
Savings and Willits shares on Schedule D of its 1992 Form 1041,
U.S. Fiduciary Income Tax Return, which it filed on or about
April 15, 1993. Petitioner calculated the gain by subtracting
the value of the shares reported on the estate tax return from
the amount received from their sale. Petitioner reported
$429,800 of gain from the sale of the Savings shares and $182,500
from the sale of the Willits shares.1 Petitioner, however, did
not pay any income tax on these gains; instead, it reported a net
long-term capital gain distribution of $610,274 to March on
Schedule K-1, Beneficiary's Share of Income, Deductions, Credits,
Etc., which it attached to the Form 1041.
March and her husband, Charles March, filed their 1992 Form
1040, U.S. Individual Income Tax Return, using the status of
1
Petitioner also reported $6,955 of long-term capital gain
from the sale of 2,000 shares of PG&E stock and a $738 net long-
term capital loss carryover from 1991. The value of the PG&E
shares and the loss carryover are not at issue in this case.
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"Married filing joint return", on or about April 15, 1993, and
paid the tax due. March reported the $610,274 gain on line 13 of
Schedule D, which was attached to the Form 1040, as "Net long-
term gain or (loss) from partnerships, S corporations, and
fiduciaries".
Respondent determined a deficiency in petitioner's estate
tax liability on the grounds that the fair market values of the
Savings and Willits shares on the date of death were $300 and
$850, respectively, per share. In Branson I, we found that the
date-of-death fair market values of the Savings and Willits
shares were $276 and $626, respectively. Petitioner asserts that
it is entitled to equitable recoupment of the income tax overpaid
by March, the refund of which is barred by the statute of
limitations, in determining the amount of its Federal estate tax
liability.
Discussion
Relying upon Estate of Mueller v. Commissioner, 153 F.3d 302(6th Cir. 1998), respondent asserts that this Court lacks
jurisdiction to consider petitioner's claim for equitable
recoupment. In Estate of Mueller v. Commissioner, 101 T.C. 551(1993) (Mueller II), we opined that we have jurisdiction to
consider claims of equitable recoupment. In Estate of Mueller v.
Commissioner, 107 T.C. 189 (1996) (Mueller III), we held that
equitable recoupment is restricted to use as a defense against an
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otherwise valid claim. As a result of our valuation of the stock
includable in Mueller's estate, see Estate of Mueller v.
Commissioner, T.C. Memo. 1992-284, and the taxpayer's failure to
claim a large previously taxed property credit on its Federal
estate tax return, it became apparent that there was no
deficiency in estate tax; rather, the taxpayer was entitled to
recover an overpayment of estate tax, regardless of equitable
recoupment. Inasmuch as application of equitable recoupment
under these circumstances would have increased the amount the
taxpayer was entitled to recover as an overpayment, rather than
reduce a deficiency, we held that equitable recoupment was not
available. The taxpayer appealed. The Court of Appeals for the
Sixth Circuit affirmed Mueller III, on the ground that this Court
lacked jurisdiction to consider the affirmative defense of
equitable recoupment. See Estate of Mueller v. Commissioner,
supra.
The Court of Appeals for the Sixth Circuit interpreted
sections 6214(b) and 6512(b) together to
explicitly confer on the Tax Court jurisdiction to do
no more than determine the amount of the deficiency
before it. The Tax Court's jurisdiction cannot extend
beyond its statutory confines to encompass an equitable
remedy such as recoupment because the Tax Court "is a
court of limited jurisdiction and lacks general
equitable powers," and because "[t]he Tax Court and its
divisions shall have such jurisdiction as is conferred
on on them by [Title 26]." * * * [Estate of Mueller v.
Commissioner, 153 F.3d at 305; citations omitted.]
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The Court of Appeals further relied upon Commissioner v.
Gooch Milling & Elevator Co., 320 U.S. 418 (1943), and several
cases decided in Federal courts which have cited Gooch Milling,2
for the proposition that this Court does not have jurisdiction to
consider the affirmative defense of equitable recoupment.
The jurisdictional status of equitable recoupment in this
Court has had a long history, which we reviewed with painstaking
care in Estate of Bartels v. Commissioner, 106 T.C. 430 (1996)
and in Mueller II. We do not here reiterate that history, except
to distinguish our position from that of the Court of Appeals for
the Sixth Circuit.
In Mueller II, we interpreted Commissioner v. Gooch Milling
& Elevator Co., supra, as presenting the question whether the
Board of Tax Appeals had authority to apply the doctrine of
equitable recoupment in income tax cases. We concluded that
Gooch Milling does not prevent this Court from "considering the
affirmative defense of equitable recoupment when it is properly
raised in a timely suit for redetermination of a tax deficiency
over which we have jurisdiction." See Mueller II, 101 T.C. at
560.
2
See Rothensies v. Electric Storage Battery Co., 329 U.S.
296, 303 (1946); Elbert v. Johnson, 164 F.2d 421, 424 (2d Cir.
1947); Mohawk Petroleum Co. v. Commissioner, 148 F.2d 957, 959
(9th Cir. 1945), affg. 47 B.T.A. 952 (1942); Estate of Van Winkle
v. Commissioner, 51 T.C. 994, 999 (1969); Wiener Mach. Co. v.
Commissioner, 16 T.C. 48, 54 (1951).
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In its opinion, the Court of Appeals for the Sixth Circuit
did not consider the difference between the Board of Tax Appeals
and the Tax Court. At the time the Board of Tax Appeals decided
the issue of whether it could consider equitable recoupment in
Gooch Milling & Elevator Co., the Board was an independent agency
in the Executive Branch of the Government. See sec. 900(k) of
the Revenue Act of 1924, ch. 234, 43 Stat. 253, 338. As a result
of the Tax Reform Act of 1969, Pub. L. 91-172, sec. 951, 83 Stat.
487, 730, the Tax Court became a legislative court under Article
I of the Constitution. See sec. 7441; Freytag v. Commissioner,
501 U.S. 868, 887 (1991) (Congress enacted legislation in 1969
with the express purpose of making the Tax Court an Article I
court rather than an executive agency). Thus, the Tax Court
exercises judicial, rather than executive, legislative, or
administrative, power. See Freytag v. Commissioner, supra at
890-891.
The difference between an agency of the Executive Branch and
an Article I court is material to this issue. "The Tax Court's
function and role in the federal judicial scheme closely resemble
those of the federal district courts, * * * [and it] exercises
its judicial power in much the same way as the federal district
courts exercise theirs." Freytag v. Commissioner, supra at 891.3
3
See also Flight Attendants Against UAL Offset v.
Commissioner, 165 F.3d 572, 578 (7th Cir. 1999) ("the present Tax
(continued...)
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Moreover, in deciding cases over which we have jurisdiction "we
have applied the equity-based principles of waiver, duty of
consistency, estoppel, substantial compliance, abuse of
discretion, laches, and the tax benefit rule." See Woods v.
Commissioner, 92 T.C. 776, 784 (1989); fn. refs. omitted. Thus,
this Court should be properly viewed as exercising full judicial
power within its limited subject matter jurisdiction.4
Furthermore, in United States v. Dalm, 494 U.S. 596, 611 n.8
(1990), the Supreme Court noted: "We have no occasion to pass
upon the question whether Dalm could have raised a recoupment
claim in the Tax Court." See also id. at 615 n.3 (Stevens, J.,
dissenting) (commending the majority's reservation of the
question whether the Tax Court has authority to consider
recoupment). Thus, although the Supreme Court agreed that the
Board of Tax Appeals could not consider equitable recoupment, we
believe that the Supreme Court has left this issue open with
respect to the Tax Court as presently constituted. Commissioner
v. Gooch Milling & Elevator Co., and its progeny, therefore, do
not control the outcome of this case.
3
(...continued)
Court operates pretty indistinguishably from a federal district
court.").
4
See Saltzman, IRS Practice and Procedure, par. 5.06[1], at
S5-20 (2d ed. 1991); Willis, "Equitable Recoupment: More
Pitfalls for the Unwary", Tax Notes 361 (Oct. 19, 1998).
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We have found support for our holding that we have authority
to apply equitable recoupment in section 6214(b).5 The
concluding language of section 6214(b), which speaks in terms of
this Court's not having "jurisdiction to determine whether or not
the tax for any other year or calendar quarter has been overpaid
or underpaid" (emphasis added), means that, at most, we are
precluded from determining the income tax or gift tax for any
prior period. See Estate of Bartels v. Commissioner, 106 T.C. at
434. In redetermining the amount of the estate tax deficiency in
this case, we are not determining the amount of income tax or
gift tax deficiency or overpayment from any prior period. See
id. We are considering such facts with relation to the share
value included in both corpus and income so that this item6 may
be examined in all its aspects, as is necessary to correctly
5
Sec. 6214(b) provides:
The Tax Court in redetermining a deficiency of income
tax for any taxable year or of gift tax for any
calendar year or calendar quarter shall consider such
facts with relation to the taxes for other years or
calendar quarters as may be necessary correctly to
redetermine the amount of such deficiency, but in so
doing shall have no jurisdiction to determine whether
or not the tax for any other year or calendar quarter
has been overpaid or underpaid.
6
See infra pp.17-18.
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redetermine the amount of the estate tax deficiency now before
us.7
In Estate of Bartels v. Commissioner, supra at 435-436, we
stated:
what is involved herein is a question of our authority
and not a question of our jurisdiction since we already
have jurisdiction by virtue of the income tax
deficiency notice and the timely petition filed in
response thereto. Thus, the cases articulating a
principle that the jurisdiction of this Court is
limited to that conferred upon it by Congress
represented by Commissioner v. Gooch Milling & Elevator
Co., supra, and its progeny, have no application. * * *
[Citation omitted.]
Therefore, "'While we cannot expand our jurisdiction through
equitable principles, we can apply equitable principles in the
disposition of cases that come within our jurisdiction.'" See
Woods v. Commissioner, supra at 784-785 (quoting Berkery v.
Commissioner, 90 T.C. 259, 270 (1988) (Hamblen, J., concurring)).
In this case, respondent accepted petitioner's and March's
income tax returns, which reported gain calculated by using the
fair market values of the shares reported on the estate tax
return. Respondent asserted a higher date-of-death fair market
value for those same shares for estate tax purposes, determined a
deficiency in petitioner's estate tax, and issued a statutory
notice of deficiency. In response, petitioner filed its timely
7
Furthermore, sec. 6214(b) specifically applies only to
income and gift taxes, and makes no mention of estate tax. See
Estate of Mueller v. Commissioner, 101 T.C. 551, 560 (1993).
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petition with this Court. There is no doubt that we have
jurisdiction of this case. We may therefore exercise full
judicial power in its disposition.
Court of Appeals for the Ninth Circuit
Any appeal in this case lies to the Court of Appeals for the
Ninth Circuit, and we are bound by any decision of that court
squarely in point. See Golsen v. Commissioner, 54 T.C. 742, 756-
757 (1970), affd. 445 F.2d 985 (10th Cir. 1971). Respondent
asserts that this issue was settled in the Ninth Circuit by
Mohawk Petroleum Co. v. Commissioner, 148 F.2d 957, 959 (9th Cir.
1945), affg. 47 B.T.A. 952 (1942).
In Mohawk Petroleum Co. v. Commissioner, supra, the Court of
Appeals relied on Gooch Milling & Elevator Co. for its decision
that the Board of Tax Appeals lacked jurisdiction to consider
equitable recoupment of income taxes. See id. at 959. Because
we have found that Gooch Milling & Elevator Co. is not on point,
it follows that Mohawk Petroleum Co. is not dispositive.
Accordingly, we disagree with respondent's assertion.
In Mueller II, we found additional support for our decision
in sections 7422(e), 6512(a), and 7481. See Mueller II, 101 T.C.
at 557. Considered together, these sections indicate that
"Congress intended the Tax Court to have full judicial authority
to resolve issues over which it has jurisdiction". Woods v.
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Commissioner, 92 T.C. at 788. Judge Halpern further observed
that
the Code is structured to channel tax litigation to the
Tax Court. We are the tax forum of choice, because
only here can the tax liability be litigated prior to
payment. Understandably, we preside over the vast
majority of tax litigation. * * * [Mueller II, 101
T.C. at 564 (Halpern, J., concurring); citations
omitted.]
If this Court lacked authority to consider equitable
recoupment, a taxpayer without the practical ability to prepay
the contested deficiency and sue for refund in a different forum
would be precluded from raising a defense available to a more
affluent taxpayer who has the means to do so. We do not believe
that Congress intended this result. Accordingly, we shall
continue to follow our opinions in Estate of Bartels v.
Commissioner, 106 T.C. 430 (1996), and Mueller II, supra.
Defensive Use
We held in Mueller III that equitable recoupment is
restricted to use as a defense against an otherwise valid claim
for a deficiency, and not to increase an overpayment of tax. See
also United States v. Dalm, 494 U.S. at 608 (tax refund courts
are without jurisdiction to consider time-barred refund claims
based solely upon equitable recoupment). We have found that
petitioner underreported the values of the Savings and Willits
shares on its estate tax return. Accordingly, petitioner has a
deficiency in estate tax, and is, therefore, properly positioned
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to invoke the doctrine of equitable recoupment to reduce that
deficiency by the amount of the income tax overpaid because of
its use of the same underreported value as the basis of the
shares.
Legatee Not Diligent
Respondent argues that equitable recoupment should not be
permitted in this case because March was not diligent in seeking
a refund of the income tax paid on the gain passed through to her
as residual legatee. The estate tax notice of deficiency was
issued on March 16, 1995, and the limitations period did not
expire on March's income tax refund until April 15, 1996. March
thus had more than a year within which to file a protective claim
for refund.
In addressing this issue in United States v. Bowcut, 287
F.2d 654, 657 (9th Cir. 1961), the Court of Appeals for the Ninth
Circuit, citing Bull v. United States, 295 U.S. 247 (1935),
stated:
It is apparently not the diligence of the taxpayer as
to his legal rights which controls, but rather the
inequity of holding that, while the government's rights
under a transaction continue unimpaired, its
adversary's rights thereunder are barred by
limitations.
Accordingly, we do not consider March's lack of diligence to
be a factor in deciding whether petitioner is entitled to claim
equitable recoupment.
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Requirements of Equitable Recoupment
In a recent case, the Supreme Court reaffirmed that a party
litigating a tax claim in a timely proceeding may, in that
proceeding, seek recoupment of a related, and inconsistent, but
now time-barred tax claim relating to the same transaction. See
United States v. Dalm, supra at 608 (interpreting Bull v. United
States, 295 U.S. 247 (1935), and Stone v. White, 301 U.S. 532(1937)).
A claim of equitable recoupment requires: (1) That the
refund or deficiency for which recoupment is sought by way of
offset be barred by time; (2) that the time-barred offset arise
out of the same transaction, item, or taxable event as the
overpayment or deficiency before the Court; (3) that the
transaction, item, or taxable event have been inconsistently
subjected to two taxes; and (4) that if the subject transaction,
item, or taxable event involves two or more taxpayers, there be
sufficient identity of interest between the taxpayers subject to
the two taxes so that the taxpayers should be treated as one.
See United States v. Dalm, supra at 604-605 & n.5; Coohey v.
United States, 172 F.3d 1060 (8th Cir. 1999); Parker v. United
States, 110 F.3d 678, 682-683 (9th Cir. 1997).
Each of these requirements is met in the instant case.
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1. Refund Time-Barred
March filed her 1992 Federal income tax return on or about
April 15, 1993, and payment was made on the same date that the
return was filed. March has never filed a claim for refund;
therefore, a claim for refund is barred by section 6511(a).
2. Single Transaction, Item, or Taxable Event
Since Bull v. United States, supra, the Supreme Court has
emphasized that a claim of equitable recoupment will lie only
where the Government has taxed a single transaction, item, or
taxable event under two inconsistent theories. See United States
v. Dalm, 494 U.S. at 608 n.5 (construing Rothensies v. Electric
Storage Battery Co., 329 U.S. 296, 299-300 (1946), Bull v. United
States, supra, and Stone v. White, supra). The terms "single
transaction", "item", or "event" are not synonymous, and the
inclusion of "item" in this phrase is significant in our case.
In Bull v. United States, supra, Archibald Bull (Bull) died
owning a partnership interest, including the right to receive
future profits. The partnership interest was transferred to his
estate, and, later his estate received the sum of approximately
$212,000, constituting its share of partnership profits earned
subsequent to Bull's death. In 1921, the executor, at the
Commissioner's insistence, erroneously included this sum in the
gross estate under the theory that it was estate corpus, and
thus, it was subjected to estate taxes. In 1925, the Government
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determined a deficiency in the estate's income tax on the correct
theory that the same sum was income to the estate. The executor
paid the income tax in 1928. Later, in that same year, the
executor filed a claim for refund for the income tax paid and
sued for refund after the claim was denied.
In considering the issue before it, the Supreme Court
stated:
A serious and difficult issue is raised by the claim
that the same receipt has been made on the basis of
both income and estate tax, although the item cannot in
the circumstances be both income and corpus; and that
the alternative prayer of the petition required the
court to render a judgment which would redress the
illegality and injustice resulting from the erroneous
inclusion of the sum in the gross estate for estate
tax. * * * [Bull v. United States, 295 U.S. at 255;
emphasis added.]
The Supreme Court found that the estate's receipt of the sum
was properly taxable as income to the estate and that under the
facts of the case, "the item could not be both corpus and income
of the estate." See Bull v. United States, supra at 258.
Thus, the Supreme Court viewed the sum of money owed to
Bull's estate as an item. See id. at 255. We have no reason to
believe that the same sum may be defined as an item for income
tax purposes but be defined as something other than an item when
included in corpus for purposes of calculating the estate tax.
See id. at 256. In the case at hand, the same item (in terms of
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share value)8 was included in both petitioner's corpus in
determining the value of the gross estate and in income.9
Therefore, the estate tax and the income tax were imposed on the
same item.
Furthermore, under the facts of the case before us, this
item cannot properly be both corpus and income to the estate.
The income tax paid by the residuary legatee on that identical
item is money which the Government is not justly entitled to
retain. See id. at 261 ("While here the money was taken through
mistake without any element of fraud, the unjust retention is
immoral and amounts in law to a fraud on the taxpayer's
rights.").
In holding that equitable recoupment was available for the
taxpayer to credit the estate tax paid on the same item subjected
8
Petitioner reported the date-of-death fair market value of
the Savings shares at $181.50 per share and used that amount as
the basis in calculating the gain on the shares later sold. We
have determined that the date-of-death fair market value of each
Savings share is $276. Thus, $94.50 ($276 minus $181.50) of
share value for each share of Savings stock was included in both
corpus and income. Similarly, $141 ($626 minus $485) of share
value for each share of Willits stock was included in both corpus
and income.
9
Petitioner sold the shares and calculated the amount of
income (capital gain) realized from the sale. The income passed
through the estate to March, who reported it on her return and
paid the income tax due. Thus, although March recognized the
income, it was realized by petitioner.
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to the income tax, the Supreme Court stated:
This is because recoupment is in the nature of a
defense arising out of some feature of the transaction
upon which the plaintiff's action is grounded. Such a
defense is never barred by the statute of limitations
so long as the main action itself is timely. [Id. at
262.]
Although the "single transaction" requirement was mentioned
in Bull v. United States, supra, it was the stated ground for
decision in Rothensies v. Electric Storage Battery Co., supra.
In that case, the taxpayer erroneously paid excise taxes on the
sale of electric storage batteries from April 1919 to April 1926.
In July 1926, the taxpayer filed a claim for refund for the
periods of mid-1922 to 1926, the years not barred by the statute
of limitations, and received a refund in 1935. Although the
taxpayer had been deducting the payment of these taxes, it did
not include the refund in income. The Government determined a
deficiency in the taxpayer's 1935 income tax, and the taxpayer
paid the deficiency and sued for refund when its claim was
denied.
In both the trial court and the Court of Appeals for the
Third Circuit, the taxpayer asserted successfully that the income
tax for 1935 should be reduced by equitable recoupment for the
time-barred excise tax overpayments for the 1919 through mid-1922
years. In affirming the District Court, the Court of Appeals for
the Third Circuit stated that the same transaction element should
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be interpreted to mean that there be "a logical connection
between main claim and the recoupment claim." Electric Storage
Battery Co. v. Rothensies, 152 F.2d 521, 524 (3d Cir. 1945),
revd. 329 U.S. 296 (1946).
In reversing on this issue, the Supreme Court stated that
equitable recoupment
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. at 299.]
In Rothensies v. Electric Storage Battery Co., supra, it is
clear that the case involved separate transactions, separate
items, and separate taxable events; the time-barred overpayments
arose from the erroneous treatment of many separate sales of
batteries as subject to excise taxes,10 and the income tax
deficiency arose from the failure to include the refunded open-
year excise taxes in gross income under the tax benefit rule.11
The time-barred refunds of the 1919 through mid-1922 excise taxes
and the inclusion of the refunded taxes that were paid in 1922
10
Therefore, the excise taxes paid in the time-barred years
were not paid on the same item or in the same transaction, but on
the same type of item or transaction.
11
See Andrews, "Modern-Day Equitable Recoupment and the 'Two
Tax Effect': Avoidance of the Statute of Limitation in Federal
Tax Controversies", 28 Ariz. L. Rev. 595, 610 (1986).
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through 1926 in the taxpayer's 1935 income had no logical
connection. The erroneous failure to include the excise tax
refund in income for 1935 is not the same transaction as
erroneously paying excise taxes in 1919 through mid-1922.
Furthermore, there was no transactional nexus between the time-
barred excise taxes paid in 1919 through mid-1922 and the
refunded excise taxes paid in 1922 through 1926, which the
taxpayer was required to include in income in 1935.
The Supreme Court has not decided a case based on the
single-transaction requirement since Rothensies v. Electric
Storage Battery Co., supra. In a recent case, United States v.
Dalm, 494 U.S. 596 (1990), the Court held that equitable
recoupment could only be used defensively, and the Court stated
that since Bull v. United States, 295 U.S. 247 (1935), it has
emphasized "that a claim of equitable recoupment will lie only
where the Government has taxed a single transaction, item, or
taxable event under two inconsistent theories." United States v.
Dalm, supra at 605 n.5.
Consequently, the interpretation and application of the
single-transaction requirement has been left to the lower courts,
which has resulted in conflicting authority.
The cases on which petitioner mainly relies are Boyle v.
United States, 355 F.2d 233 (3d Cir. 1965), revg. and remanding
per curiam 232 F. Supp. 543 (D.N.J. 1964); O'Brien v. United
- 22 -
States, 766 F.2d 1038 (7th Cir. 1985), revg. 582 F. Supp. 203(C.D. Ill. 1984); Estate of Vitt v. United States, 706 F.2d 871(8th Cir. 1983); United States v. Herring, 240 F.2d 225 (4th Cir.
1957); and United States v. Bowcut, 287 F.2d 654 (9th Cir. 1961).
In Boyle v. United States, supra, the decedent died in 1953
owning preferred stock with more than 20 years of accumulated
undeclared dividends (the arrearages). The decedent's assets
were transferred to his estate, including the value of the
arrearages, and the estate tax was paid accordingly. In 1954,
the executors distributed the preferred stock among the four
beneficiaries under the will.
Later, the beneficiaries, on receiving those arrearages,
declared their receipt and listed them as nontaxable income on
their tax returns. In 1958, after the period of limitations had
expired to claim a refund of the estate taxes, the Government
determined deficiencies in the beneficiaries' income tax because
of their reporting position with respect to the dividends. The
beneficiaries paid the income tax deficiencies and brought a suit
for refund. The District Court denied them equitable recoupment
against the time-barred estate tax, holding that the single-
transaction test of Rothensies v. Electric Storage Battery Co.,
supra, was not satisfied. See Boyle v. United States, 232 F.
Supp. at 549-550. The Court of Appeals for the Third Circuit
reversed, finding that there was "double taxation of the single
- 23 -
item" as both corpus and income, which sufficed to satisfy the
requirements of Bull v. United States. See Boyle v. United
States, 355 F.2d at 236.
The Court of Appeals distinguished Rothensies v. Electric
Storage Battery Co., on the grounds that in Rothensies v.
Electric Storage Battery Co., the taxpayer "waited over twenty
years to seek a refund",12 and the facts in Boyle were much
closer to the facts in Bull than were the circumstances of the
taxpayer in Rothensies v. Electric Storage Battery Co. See Boyle
v. United States, 355 F.2d at 236-237.
In O'Brien v. United States, supra, decedent's estate paid
estate tax on the stock of a closely held corporation, which it
valued at $215.7796 per share. In the year following the
decedent's death, the Government determined a deficiency in the
estate tax, asserting a higher value of the stock, and the
taxpayer (one of decedent's heirs) filed a petition to the Tax
Court. While the valuation issue was pending, the corporation
was liquidated, and, for the purpose of calculating the resulting
capital gain reportable on his income tax return, the taxpayer
used the value of the shares reported on the estate tax return.
The Government did not dispute this valuation and accepted the
payment of income tax on the gain arising from the liquidation.
12
Thus, the Court of Appeals for the Third Circuit indicated
that in any equitable claim, an equitable defense, such as
laches, may bar the claim.
- 24 -
In 1980, the Tax Court entered a stipulated decision in the
estate tax case, setting the value of the stock at $280.10 per
share. The taxpayer did not assert the equitable recoupment
claim in the Tax Court case.
On April 8, 1981, the taxpayer filed a claim for refund for
the income taxes that he overpaid in 1975 because of his use of
the lower value as the stock's basis. The claim for refund was
denied on the grounds that the period of limitations had run for
the 1975 taxable year. The taxpayer then filed suit for refund
in District Court, arguing that the basis for the stock should
have been higher and using equitable recoupment as the ground for
the suit.13
The District Court agreed, finding the single-transaction
requirement satisfied. Like the Court of Appeals for the Third
Circuit in Boyle, the District Court in O'Brien relied upon Bull,
and found that the facts of O'Brien were closer to Bull than to
Rothensies v. Electric Storage Battery Co. The Court of Appeals
for the Seventh Circuit reversed, on the ground that equitable
recoupment cannot be used offensively as an independent ground
13
The taxpayer also argued for the refund under secs. 1311-
1314, the statutory mitigation provisions. The District Court
accepted this argument, but the Court of Appeals for the Seventh
Circuit reversed this conclusion. See O'Brien v. United States,
582 F. Supp. 203, 206-207 (C.D. Ill. 1984), revd. 766 F.2d 1038(7th Cir. 1985).
- 25 -
for reopening years closed by the statute of limitations. See
O'Brien v. United States, 766 F.2d at 1049.
The Court of Appeals for the Seventh Circuit noted, however,
that the single-transaction test had been met. The court stated:
The "single transaction test," requiring that a
"single transaction or taxable event ha[s] been
subjected to two taxes on inconsistent theories,"
Rothensies, 329 U.S. at 300, 67 S.Ct. at 272, also
appears to be satisfied on these facts if we adopt the
reasoning of the Third Circuit in Boyle. The Boyle
court ruled that the "single transaction test" was
satisfied where undeclared dividends were erroneously
treated as assets, included as part of the corpus of
decedent's estate and subjected to estate tax, but
later were ruled taxable income upon distribution to
the beneficiaries. The net effect, the court noted,
was inconsistent treatment of the same fund directly
resulting in an overpayment of tax by the estate.
Essentially the same situation exists here where
inconsistent tax treatment of the same stock (in terms
of valuation) has directly resulted in the overpayment
of tax by the beneficiaries. [O'Brien v. United
States, supra at 1050-1051 n.16]
Petitioner also relies upon Estate of Vitt v. United States,
706 F.2d 871 (8th Cir. 1983), to support its position that double
taxation of the same fund under inconsistent theories satisfies
the single-transaction requirement.14 In Estate of Vitt v.
14
The Court of Appeals for the Eighth Circuit cited Estate
of Vitt v. United States, 706 F.2d 871 (8th Cir. 1983), in a
recently decided case, Coohey v. United States, 172 F.3d 1060,
(8th Cir. 1999). In Coohey v. United States, supra, the court
found that, under the facts of that case, an AMT refund, based
upon repeal of a statute, for one year and the allowance of an
AMT credit for the following year "are clearly a single
transaction", because without the assessment and payment of the
AMT for the earlier year, there would never have been an AMT
(continued...)
- 26 -
United States, supra, Edward Vitt owned property with his wife,
Verlena, which they held as tenants in the entirety even though
Edward had provided all the consideration for its purchase. The
Vitts conveyed the property by three separate deeds to their
daughters and grandchildren, retaining a life estate for their
joint lives. When Edward died in 1964, his estate included one-
half of the value of the property for estate tax purposes. In
reliance upon a revenue ruling that construed section 2036, the
Government determined that the entire value of the property, less
the actuarial value of Verlena's life estate, was includable in
Edward's gross estate. This resulted in the inclusion of more
than one-half of the value of the property in Edward's estate.
The estate paid the tax and interest due, and later, the revenue
ruling was revoked.
In 1975, Verlena died, and her estate tax return was filed
reporting her interest in the property but assigning it no value
for estate tax purposes. The estate did not report any value for
Verlena's interest in the property because it was previously
included in Edward's estate. The Government properly asserted
that one-half of the value of the property was includable in
Verlena's estate and determined a deficiency in the estate tax.
14
(...continued)
credit given to the taxpayer for the succeeding year.
- 27 -
The estate paid the deficiency and then filed suit for refund in
District Court.
The District Court found that no more than one-half of the
value of property was includable in Edward's estate and that the
value in excess of that amount was included in error. See Estate
of Vitt v. United States, 536 F. Supp. 403, 407 (E.D. Mo. 1982),
affd. 706 F.2d 871 (8th Cir. 1983). Further, the District Court
found that although the taxes were imposed at different times,
the subject matter of the tax never changed. Therefore, "To hold
on these facts that there is no common taxable event or fund
would be to blindly follow a narrow, overly simplified definition
of what constitutes a single transaction or taxable event". See
id. at 408. Accordingly, the District Court found that Verlena's
estate was entitled under the doctrine of equitable recoupment to
a credit for the excess tax paid by Edward's estate.
In affirming, the Court of Appeals for the Eighth Circuit
considered the Government's argument that the single-transaction
requirement was not satisfied and found that, in addition to the
double taxation of the same property, the inclusion of the
property in both estates under section 2036 in essence resulted
from the same transaction--the Vitt's transfer of the real
property with retention of a life estate for their joint lives
- 28 -
and for the life of the survivor. See Estate of Vitt v. United
States, 706 F.2d at 875.15
Finally, petitioner relies on United States v. Herring, 240
F.2d 225 (4th Cir. 1957), and United States v. Bowcut, 287 F.2d
654 (9th Cir. 1961). These cases, like the case now before us,
concerned the estate tax and the income tax, and in both cases
the taxes were not imposed on a single taxable event. In both
cases, however, the single-transaction requirement was found to
be satisfied, and equitable recoupment was applied in the
taxpayer's favor.
In United States v. Herring, supra, the decedent died in
1948, and his surviving spouse, as administratrix, filed the
estate tax return in 1949, paying the tax due. In 1951, the
Government issued a preliminary notice proposing a deficiency in
15
Although arguably there were two taxable events in Estate
of Vitt v. United States, supra,-- the death of Edward Vitt and
the death of Verlena Vitt, see Parker v. United States, 110 F.3d
678, 684 (9th Cir. 1997) (finding that death is a taxable event),
see infra p. 46--the Court of Appeals for the Eighth Circuit
considered the single transaction requirement met by the
precipitating transaction, the lifetime transfer of the property
to the Vitts’ descendants. Similarly, in the instant case,
arguably there were two transactions or taxable events--the
transfer of the stock to petitioner upon decedent's death and the
subsequent sale by petitioner of that stock--the precipitating
transaction, however, was the valuation of the same item in the
transfer from decedent to petitioner. We note that the Supreme
Court in Bull v. United States, 295 U.S. 247 (1935), also did not
consider the death of Bull and the transfer of the overvalued
partnership interest to the estate; instead it viewed the
precipitating transaction--the distribution of the partnership
income--as the single transaction.
- 29 -
income taxes, civil penalties for fraud, delinquency penalties,
and interest against the surviving spouse individually and the
estate for the years 1932 to 1948. The assessment for tax was
made in 1952, after the time for filing a claim for refund of the
estate taxes had expired. The administratrix filed suit for
refund of the estate taxes that would not have been due if the
income tax deficiency had been deducted from the value of the
estate, but the District Court dismissed this suit as untimely.
The administratrix then paid the income tax deficiency, which
greatly reduced the size of the estate, and sued for refund of
the income taxes paid on the theory that the estate was entitled
to equitable recoupment of the overpayment of the time-barred
estate tax. The District Court approved this theory and gave
judgment for the estate in the amount claimed, and the Government
appealed.
In affirming, the Court of Appeals for the Fourth Circuit
distinguished Rothensies v. Electric Storage Battery Co., 329
U.S. 396 (1946), on the ground that there the transactions "were
too remote from one another to justify recoupment and that claims
so long dead could not be resurrected under the doctrine."
United States v. Herring, supra at 227. The Court of Appeals for
the Fourth Circuit found that, although the case might differ in
- 30 -
some respects from Bull v. United States, supra, in both cases
the Government has received monies which in equity and
good conscience belong to the taxpayer, and in both the
allowance of recoupment should be made to avoid the bar
of the statutes of limitations. It is true that in the
Bull case both claims of the Government grew out of the
same transaction and were asserted against the same
money in the hands of the executor; but that, in
practical effect, is the situation that prevails here.
The Government has asserted two claims against the
monies of the estate that came into the hands of the
administratrix--one on account of past due income taxes
and the other on account of the estate tax due on the
net estate, and it is impossible to determine the
amount of the latter without making due allowance for
the deduction caused by the former. * * * [United
States v. Herring, 240 F.2d at 228.]
Four years after the Court of Appeals for the Fourth Circuit
decided the Herring case, the Court of Appeals for the Ninth
Circuit affirmed a case with similar facts, United States v.
Bowcut, 287 F.2d 654 (9th Cir. 1961), affg. 175 F. Supp. 218 (D.
Mont. 1959). In this case, the decedent died in 1952, and the
executrix (decedent's former wife) filed the estate tax return in
1953, paying the tax due. In 1954, the Government proposed
adjustments to decedent's income tax for 1947 through 1950 for
additional income tax, civil fraud penalties, and interest. The
executrix paid the taxes, penalties, and interest in
installments, and filed suit in District Court for refund of
income tax in the amount of the overpaid estate taxes on the
grounds of equitable recoupment.
In the District Court, the Government argued, inter alia,
that equitable recoupment was not appropriate under Bull v.
- 31 -
United States, supra, because the single-transaction requirement
was not satisfied. The District Court, relying upon United
States v. Herring, supra, dismissed that argument because the
same money was involved in both the claim for the income tax
deficiency and the claim for estate tax. See Bowcut v. United
States, 175 F. Supp. at 222.
On affirming the District Court, the Court of Appeals for
the Ninth Circuit did not consider the single-transaction issue,
as the Government appealed primarily on other grounds, which the
court rejected, for denying equitable recoupment. See United
States v. Bowcut, 287 F.2d at 656-657 & n.1 (9th Cir. 1961).
Although the Court of Appeals did not consider whether the
single-transaction requirement was satisfied, it did note that
"In this case the taxpayer emphasizes that she is seeking to
recover the overassessment of estate tax by recoupment from the
very fund which, taken from the estate, had brought about the
fact of overassessment." Id. at 656.
Years after United States v. Herring, supra, and United
States v. Bowcut, supra, were decided, the Commissioner accepted
the logic of these decisions and agreed in Rev. Rul. 71-56, 1971-
1 C.B. 404, to apply equitable recoupment in these
circumstances.16 Despite the statement of administrative
16
Rev. Rul. 71-56, 1971-1 C.B. 404, 470, revoked Rev. Rul.
55-226, 1955-1 C.B. 469, which ruled, citing Rothensies v.
(continued...)
- 32 -
position in Rev. Rul. 71-56, supra, respondent now argues that
the single-transaction requirement is not met in the case at
hand. In support of his position, respondent cites two Court of
Claims cases, Wilmington Trust Co. v. United States, 221 Ct. Cl.
686, 610 F.2d 703 (1979), and Ford v. United States, 149 Ct. Cl.
558, 276 F.2d 17 (1960).
In Wilmington Trust Co. v. United States, supra, the
Government argued equitable recoupment in a factual context
similar to United States v. Herring, supra, and United States v.
Bowcut, supra.17 In this consolidated case, individual
taxpayers, Carpenter and McMullan, had been engaged in forest and
land management. Carpenter and McMullan incurred certain
expenses in these activities which they properly deducted as
ordinary and necessary business expenses. After Carpenter and
McMullan had died, the Government determined deficiencies in
their predeath income taxes, on the theory that the expenses were
reductions in the amount of capital gain that Carpenter and
McMullan each had realized on sales of timber. The executor of
each decedent's estate paid the income tax deficiencies and
deducted the income taxes paid as claims against the decedent's
16
(...continued)
Electric Storage Battery Co., 329 U.S. 296 (1946), that equitable
recoupment was not available in these circumstances because the
single-transaction requirement was not satisfied.
17
See Andrews, supra at 641.
- 33 -
gross estate. Each estate was allowed these deductions for
estate tax purposes.
Each estate also timely filed an administrative claim for
refund of the predeath income taxes it had paid; the claims were
denied, and each of the executors filed suit for refund of income
tax in the Court of Claims. If allowed, the refunds of the
improperly paid income taxes would have resulted in estate tax
deficiencies, as the earlier deductions allowed for the income
tax claims against the estates would have been overstated. After
the period of limitations had expired for the Government to
assert contingent claims against the estates, the Government
amended its answer in the refund suits seeking under the doctrine
of equitable recoupment to offset any resulting estate tax
deficiencies against any income tax refunds the court determined
to be due.
In both cases, the trial court judges, citing Herring v.
United States, supra, Bowcut v. United States, supra, and Rev.
Rul. 71-56, supra, found the single-transaction requirement had
been satisfied, and recommended decision for the Government. See
Wilmington Trust Co. v. United States, 43 AFTR 2d 79-801, 79-1
USTC par. 9223 (Ct. Cl. Trial Div. 1979), revd. and remanded 221
Ct. Cl. 686, 610 F.2d 703 (1979); McMullan v. United States, 42
AFTR 2d 78-5723, 78-2 USTC par. 9656 (Ct. Cl. Trial Div. 1978).
- 34 -
The Court of Claims reversed the trial court and held for
the taxpayers, stating that it was obliged by Rothensies v.
Electric Storage Battery Co., 329 U.S. 296 (1946), to give the
single-transaction requirement a narrow, inflexible
interpretation. See Wilmington Trust Co. v. United States, 221
Ct. Cl. 686, 610 F.2d 703, 713 (1979). In finding that the
single-transaction requirement was not satisfied, the court
stated:
The income tax refund is based upon the
deductibility from ordinary income of the timber
operations expense. The estate tax deficiency,
however, exists because the estate deducted the
additional income taxes reflecting those expenses that
it paid and now is recovering. The recoupment claim
thus arises from a different transaction (the reduced
deduction from the estate tax) than the refund claims
(the increased deductions from ordinary income). The
government is not seeking to offset against each other
two taxes levied on the same transaction, but to offset
the tax on one transaction against the tax on another.
* * * [Id. at 714.]
Thus, although the precipitating transaction was the
deduction of the business expenses, the Court of Claims did not
find this sufficient.18
In 1939, the taxpayers (children) in Ford v. United States,
149 Ct. Cl. 558, 276 F.2d 17 (1960), received stock in a closely
18
Academic commentators have almost invariably supported the
Herring-Bowcut analysis over the conclusion of the Court of
Claims. See Andrews, supra at 630-650; Willis, "Some Limits of
Equitable Recoupment, Tax Mitigation, and Res Judicata:
Reflections Prompted by Chertkof v. United States", 38 Tax Law.
625, 642-645 (1985).
- 35 -
held Brazilian coffee company from their deceased father's
estate. For estate tax purposes, the executors reported the
date-of-death fair market value of the stock at $11,857, which
was adjusted upward to $23,715 in an audit of the estate tax
return. Eight years later, in 1947, the children sold the stock
for $258,948, and reported gain based upon the adjusted date-of-
death value of the stock. The children then filed a timely claim
for refund, asserting that the basis reported on the income tax
returns was erroneous, and that the correct date-of-death value,
and, therefore correct basis, was $331,418. See id. at 20.
The Government denied the refunds, on the basis of the date-
of-death value reported in the estate tax return. The children
filed suit in the Court of Claims, and at trial the court found
that the actual fair market value of the stock at the date of the
father's death was greater than the amount the children received
in the 1947 sale. The Government did not advert that it might be
entitled under the doctrine of equitable recoupment to offset the
overpaid income tax against the earlier underpaid estate tax.
However, on its own initiative the Court of Claims considered
this issue, and on a 3-2 vote, held that the Government was not
entitled to recoupment because the facts were not identical to
those in Bull v. United States, 295 U.S. 247 (1935), and Stone v.
White, 301 U.S. 532 (1937). The court found that although "The
instant case comes fairly close to satisfying the recoupment
- 36 -
standards of the Supreme Court, * * * the teaching of Rothensies
is that [the doctrine of equitable recoupment] is not a flexible
doctrine, but a doctrine strictly limited, and limited for good
reason." Ford v. United States, 276 F.2d at 23. The Court of
Claims did not cite United States v. Herring, supra, and United
States v. Bowcut, 287 F.2d 654 (9th Cir. 1961), and Rev. Rul. 71-
56, supra, had not yet been issued.
The "good reason" referred to in Ford v. United States,
supra, is the avoidance of the kind of staleness that the Supreme
Court feared in Rothensies v. Electric Storage Battery Co.,
supra.
That concern does not apply in the case at hand. An
automatic feature arising from the statutory relationship between
the estate tax and the income tax is that once the value of the
item included in the gross estate is finally determined, there is
little or no factual issue with respect to the time-barred claim;
hence there is no genuine issue of staleness. Furthermore, as
the value improperly excluded from (or included in) the gross
estate automatically is the same amount erroneously included in
(or excluded from) gross income, neither the Commissioner nor the
taxpayer is required to perform extensive additional
recordkeeping or investigation with respect to the time-barred
claim. Finally, unlike the overpaid excise taxes in Rothensies
v. Electric Storage Battery Co., supra, which had been collected
- 37 -
for more than 2 decades and time barred for more than 15 years,
in this case the open claim and the time-barred claim arose at
approximately the same time.
In two recent decisions, Estate of Harrah v. United States,
77 F.3d 1122 (9th Cir. 1995), and Parker v. United States, 110
F.3d 678 (9th Cir. 1997), the Court of Appeals for the Ninth
Circuit, the circuit to which any appeal in this case would lie,
held that equitable recoupment was not available because, inter
alia, on the facts in those cases no tax had been imposed twice
on a single transaction. These cases are distinguishable from
the case at hand.
In Estate of Harrah v. United States, supra, William F.
Harrah died in 1978. His estate included 5,930,301 shares of
common stock of Harrah's Inc. (Harrah's), which were valued at
$13.325 per share in the estate tax return filed in 1980. In
1980, Harrah's was merged with Holiday Inns, Inc. (Holiday Inns).
In this merger, the estate received $60,262,886 of cash, a $45
million promissory note executed by Holiday Inns, and convertible
subordinated debentures of Holiday Inns with a face value of
$105,262,800.
The amount of the taxable gain reported by the estate from
the merger transaction depended upon the value of the promissory
note and the convertible subordinated debentures and the basis of
the Harrah's stock. On its 1980 income tax return, the estate
- 38 -
valued the promissory note at its face value, $45 million, and
the convertible subordinated debentures at $84,210,240, on the
basis of a 20-percent discount from their face value.
Accordingly, the estate reported $110,451,865 of taxable gain on
its return.
In 1982, the estate converted the debentures into Holiday
Inns stock, which resulted in a basis of $16 per share. In this
year, the Government determined a deficiency in estate tax,
contending that the value of the Harrah's stock was $34.05 rather
than $13.325 as reported on the return.
In 1983, the estate sold 679,400 shares of Holiday Inns
stock for $25,159,789, and distributed 1,101,447 shares to a
marital trust that was established by William F. Harrah's will,
which also provided that the marital trust was to be funded from
the estate. In 1984, the estate sold 58,200 shares of Holiday
Inns stock for $2,620,487, and the marital trust sold all its
shares for $58,177,080. In each of these sales, the $16 basis
was used to compute the gain realized.
The estate filed a petition with this Court, contesting the
Commissioner's determination of the value of the Harrah's stock
that it reported on the estate tax return. In 1986, during the
pendency of this litigation, the estate filed a timely income tax
refund claim for 1980, on the ground that if it had undervalued
the Harrah's stock, it had then overstated the gain it realized
- 39 -
in the 1980 merger with Holiday Inns. At this time, the
Commissioner and the estate stipulated that for estate tax
purposes the Harrah's stock had a value of $19.41 per share.
Because of this stipulation, the value of the Harrah's stock was
not an issue on appeal. See Estate of Harrah v. United States,
supra at 1125 n.4.
After the stipulation of the value of the Harrah's stock,
the estate filed a revised claim for refund of its 1980 income
taxes. In 1988, the Government stated that it would oppose the
1980 refund claim on the grounds that the convertible
subordinated debentures were undervalued. In 1989, the estate
filed suit in District Court for refund of $10,542,641 of income
tax paid for the 1980 taxable year.
At this time, the estate filed a claim for refund of income
taxes for the 1983 and 1984 taxable years, and the marital trust
filed a claim with respect to its 1984 taxable year. The claims
filed for 1983 and 1984 were denied on the grounds that they were
untimely. As a result of the denial of these claims, the estate
amended its refund suit in District Court to include its claims
for the 1983 and 1984 years. The marital trust joined in this
action, and sought a refund for its 1984 taxable year.
The District Court applied the doctrine of equitable
recoupment and found the three refund claims were not barred by
the statute of limitations and also found that the proper
- 40 -
discount was 16.8 percent from the face value of the convertible
subordinated debentures, rather than 20 percent as reported on
the estate's 1980 income tax return. The District Court's
determination of the amount of the discount was accepted by the
Government and was not an issue on appeal. See Estate of Harrah
v. United States, supra at 1125.
The only issue before the Court of Appeals for the Ninth
Circuit was whether equitable recoupment would provide
jurisdiction for the court to consider the estate's and trust's
1983 and 1984 time-barred claims for refund of the income tax
paid on their sales of the Holiday Inns stock. See Estate of
Harrah v. United States, supra.
In deciding this issue, the Court of Appeals stated:
The "single transaction" requirement is but a
reflection of the requirement that recoupment by the
taxpayer on a time-barred claim is available only when
it is asserted defensively against a timely claim by
the government with respect to the same transaction. A
time-barred claim alone cannot provide jurisdiction to
remove that bar. [Id. at 1126.]
The Court of Appeals found that both the estate and marital
trust were seeking to employ equitable recoupment offensively as
the basis of jurisdiction, in a manner not countenanced by Bull
v. United States, supra, and United States v. Dalm, supra. See
id. at 1126. Further, the Court of Appeals found that the
estate's and trust's attempts to supply the required jurisdiction
by characterizing their efforts to reduce their 1983 and 1984
- 41 -
taxes as an assertion of equitable recoupment in respect to the
open 1980 tax year must fail because consideration of the 1983
and 1984 years was barred by the statute of limitations, and the
1983 and 1984 sales of the Holiday Inns stock transactions were
distinct from the Harrah/Holiday Inns merger transactions
occurring in 1980. Although the Court of Appeals found "a common
thread of factual similarity" linking the 1983 and 1984
transactions with the 1980 transactions, it was not enough to
provide jurisdiction. See id. at 1126.
In Estate of Harrah v. United States, 77 F.3d 1122 (9th Cir.
1997), the Court of Appeals for the Ninth Circuit did not decide
the issue now before us; the value of the stock in Harrah had
been stipulated, and when the District Court determined the value
of the convertible debentures, it consequently determined the
amount of gain from the sale of that stock. Unlike the stock at
issue in this case, the convertible subordinated debentures were
not items included in the estate for estate tax purposes.
Furthermore, as the taxpayer's 1980 claim for refund of the
overpayment of income tax realized in that sale was not time
barred, the court did not have to consider the issue of whether
the estate could recoup the excess income tax paid as a credit
against the underpaid estate tax. In short, the issue now before
us is the issue that was not before the Court of Appeals.
- 42 -
In addition to these differences, the instant case is
otherwise distinguishable from Estate of Harrah v. United States,
supra. In our case, petitioner is not seeking to gain
jurisdiction with a time-barred claim; we have jurisdiction
because respondent determined a deficiency in petitioner's estate
tax, issued a notice of deficiency, and petitioner filed timely a
petition in response thereto. Moreover, petitioner is not
attempting to reduce the income tax paid in the time-barred year;
it is asserting that equitable recoupment is available to reduce
the estate tax deficiency in the open year with the income tax on
the same item that earlier was erroneously overpaid.
Most importantly, the 1983 and 1984 sales of the Holiday
Inns shares by the estate and trust were many transactional
generations removed from the transfer of the Harrah's stock to
the estate and its sale of that stock in the merger. Neither the
convertible subordinated debentures nor the Holiday Inns shares
were items included in the estate. Furthermore, unlike the item
in Bull v. United States, supra, and the item in the instant
case, the Holiday Inns shares were not taxed once under the
estate tax as corpus and again under the income tax as capital
gain.
Finally, unlike the case at hand, where the only act of
petitioner that contributed to the circumstance of double
taxation was the erroneous valuation of those assets, see United
- 43 -
States v. Bowcut, 287 F.2d at 656 (the "only act of this taxpayer
[the executrix] which contributed to the circumstance of a double
tax upon the estate was her erroneous return of estate tax
liability"), the taxpayer in Estate of Harrah v. United States,
supra, engaged in several sales transactions with multiple
valuation errors.
In Parker v. United States, 110 F.3d 678 (9th Cir. 1997),
the appellants (sisters) were the two daughters of Eleanor Parker
(mother), who died in 1971. In 1972, the sisters sued Edward
Allison (stepfather), alleging that he had abused his role as a
fiduciary by embezzling funds from the mother's separate assets
and from a testamentary trust created by the mother in 1958 for
the sisters. The suit was settled in 1975 with the stepfather
agreeing in part to create a $325,000 settlement trust. The
income of the settlement trust was to be paid to the stepfather,
and the remainder was to be paid to the sisters upon his death.
The stepfather died in 1985. At the request of the executor
of the stepfather's estate, and over the objections of the
sisters, the trustee paid $90,000 in estate taxes owed by the
stepfather's estate from the corpus of the settlement trust. The
sisters filed a timely claim for refund following the estate tax
payment, which was rejected by the Government. The sisters then
filed suit for refund in the District Court.
- 44 -
In the District Court, the Government moved for summary
judgment arguing that the sisters were not entitled to a refund
because the value of the settlement trust, if not part of the
stepfather's estate, was part of the mother's estate.19 The
Government claimed--by way of asserted equitable recoupment--that
taxes due from the mother's estate greatly exceeded the $90,000
that the sisters were trying to recover. The District Court
granted the Government's motion.
The sisters filed a timely motion for reconsideration in
1995, arguing for the first time that equitable recoupment did
not apply because the case did not involve a single transaction
or an identity of interest as required under the doctrine. The
District Court denied the sisters' motion for reconsideration,
finding that equitable recoupment applied. The District Court
reasoned that the case involved a single transaction, the
taxation of the settlement trust, and that the requisite identity
of interest was present because the parties seeking the refund
were the same parties who received the benefit of a larger
inheritance when the mother's estate was not taxed.
19
The District Court found that at the time of her death,
the mother had a cause of action against the stepfather for his
fraudulent conveyances. By converting the mother's asset (her
cause of action) into a sum certain by settling the claim, that
sum was therefore includable in the mother's gross estate. See
Parker v. United States, 110 F.3d 678, 681 (9th Cir. 1997).
- 45 -
On appeal, the Court of Appeals for the Ninth Circuit
accepted the Government's concession that the settlement trust
had been improperly included in the stepfather's estate.
However, the Court of Appeals concluded that even if the mother's
claim against the stepfather had been includable in her estate,
the Government's claim against her was time barred and that bar
could not be circumvented by application of the doctrine of
equitable recoupment because this case involved two or more
taxpayers, two or more transactions, no inconsistent treatment
between them, and no equitable reason to deny the sisters their
refund.
In concluding that the District Court erroneously combined
two or more separate transactions and analyzed them under the
guise of taxation of the trust, the Court of Appeals for the
Ninth Circuit observed that when the Supreme Court declared in
Rothensies v. Electric Storage Battery Co., 329 U.S. at 299, that
equitable recoupment
"permit[s] a transaction which is made the 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." * * * This
pronouncement, however, does not mean that courts
should lump together related, but nonetheless separate
transactions so that the facts of a case can be viewed
as "one transaction as a whole." * * * [Parker v.
United States, supra at 684; citation omitted.]
A number of factors contributed to the Court of Appeals'
decision in Parker to treat the sisters' matter as involving more
- 46 -
than a single transaction. First, neither the mother nor her
estate was a party to the settlement trust created 4 years after
the mother's death. Second, it was not the creation of the trust
that gave rise to the tax liability that the Government claimed
existed with respect to the mother's estate. The mother's estate
tax liability existed because she possessed a valuable right when
she died, the claim against the stepfather for conversion,
embezzlement, and breach of fiduciary duty. The Court of Appeals
for the Ninth Circuit reasoned that these "transactions" (the
mother's death or the stepfather's tortious conduct giving rise
to the mother's chose in action) were undeniably separate from
the event giving rise to the sisters' refund claim--the
stepfather's death and the concededly erroneous taxation of his
estate. See Parker v. United States, supra at 684. While the
Court of Appeals conceded that the creation and taxation of the
settlement trust were in some ways related to these various
transactions, it found that any factual and arithmetic link
between them was insufficient to enable the Government to succeed
in its claim for recoupment. See id.
In contrast to Parker, in which the mother was not even a
party to the creation of the settlement trust, in the case at
hand, petitioner both undervalued and sold the shares of stock
that gave rise to the estate tax deficiency, and the same
undervaluation and sale automatically resulted in petitioner's
- 47 -
realization of excess income, and the payment of excess income
tax. Therefore, unlike the taxpayer in Rothensies v. Electric
Storage Battery Co., supra, and the Government in Parker v.
United States, supra, petitioner is not attempting to lump
distinct transactions separated by many years into a single
taxable event.20
Any appeal in this case would lie to the Court of Appeals
for the Ninth Circuit, and we are bound by any decision of that
court squarely in point. See Golsen v. Commissioner, 54 T.C. at
756-757. However, the Court of Appeals did not consider the
precise issue now before us, and both Estate of Harrah v. United
States, 77 F.3d 1122 (9th Cir. 1995), and Parker v. United
States, 110 F.3d 678 (9th Cir. 1997), are otherwise
distinguishable on their facts; Golsen does not apply. See id.Here, there is more than a mere logical relationship or
factual and arithmetical link between the tax paid on the gain
realized on the shares sold by petitioner and the valuation of
those same shares for the estate tax. Because of the statutory
20
When the taxpayer in Rothensies v. Electric Storage
Battery Co., 329 U.S. 296 (1946), brought suit in 1943, the claim
pleaded as recoupment was for taxes collected over 20 years
before and barred by statute for over 16 years. See id. at 302-
303. Similarly, in Parker v. United States, 110 F.3d 678 (9th
Cir. 1997), the settlement trust was created in 1975, 4 years
after the mother's death, and it was a decade later before the
Government "roused to action" when the sisters sought the refund
to which they were entitled. See id. at 685. In the instant
case, the stock was sold by petitioner in the year immediately
following decedent's death.
- 48 -
relationship between sections 2031 and 1014, there is automatic
causality between the fair market value of shares reported by the
estate and the gain recognized on the sale of the same property.
The purpose of section 1014 is, in general, to provide a basis
for property acquired from a decedent that is equal to the value
placed upon such property for purposes of the Federal estate tax.
See sec. 1.1014-1(a), Income Tax Regs. Once the proper date-of-
death fair market value is established by judicial process and
made subject to the estate tax, it is automatic, under the facts
of this case, that gain has been improperly subjected to the
income tax. Accordingly, we find that the single transaction,
item, or taxable event requirement is met.
3. Inconsistent Treatment
Both the estate and the income tax depend upon the same
matter of fact--the fair market value of the shares at the date
of decedent's death. Accordingly, the value existing at
decedent's death is taxed only once. See secs. 1014, 2031.
With respect to this issue in Parker v. United States,
supra, the Court of Appeals for the Ninth Circuit compared the
facts of that case, in which there was an erroneous inclusion in
the stepfather's estate and an erroneous failure to assess the
full value of the mother's gross estate, with Bull v. United
States, 295 U.S. 247 (1935), in which the same amount of
partnership profits was taxed as both corpus and income. See
- 49 -
Parker v. United States, supra at 685. In Parker, the court
reasoned that while the Government's failure to determine a
deficiency in the mother's estate on the basis of the value of
the remainder interest, and the inclusion of the corpus in the
stepfather's estate were both wrong, the erroneous tax treatment
of the separate estates was not the result of inconsistent
theories of taxation as required under the doctrine. See id.
The instant case is clearly distinguishable from Parker v.
United States, supra. In this case, the same item has been
subjected to taxation under inconsistent theories, as corpus
under the estate tax and as capital gain under the income tax.
We conclude that this requirement is satisfied. See Bull v.
United States, supra at 261; see also Boyle v. United States, 355
F.2d at 236 (treatment of the same fund as both corpus and income
provided the necessary inconsistency of treatment).
4. Identity of Interest
The courts that have found equitable recoupment available in
the cases before them have not required absolute identity of
interest between the payor of the erroneous overpayment (or
underpayment where the Government asserts recoupment) and the
recipient of the recoupment. However, if the subject transaction
involves two or more taxpayers, equitable recoupment will not be
- 50 -
available unless a sufficient identity of interest exists so that
the taxpayers should be treated as one. See Parker v. United
States, supra at 683.
In the instant case, we find that there is sufficient
identity of interest between petitioner and the payor of the tax
that petitioner seeks to recoup. Decedent's will provides that
the estate taxes are to be paid from the residue of the estate,
and petitioner sold stock included in that residue to pay its
estate tax liability. The gain realized on the sales passed
through to the residuary legatee, March, who reported the gain
and paid the income tax due. Any adjustment through recoupment
will benefit only the residuary legatee, and any distinction of
legal entities would be purely artificial. See Stone v. White,
301 U.S. 532 (1937) (identity of interest between the trust which
paid the tax and the beneficiary who had received the income);
Estate of Vitt v. United States, 706 F.2d 871, 875 n.3 (8th Cir.
1983) (sufficient identity of interest between the separate
estates of deceased spouses, because the same parties
detrimentally affected by the overpayment of estate tax would
receive the proceeds from recoupment); Boyle v. United States,
supra at 236 (sufficient identity of interest between estate that
paid estate tax on accumulated dividend arrearages included in
corpus and all the beneficiaries of the estate who later were
paid the dividends and liable for the income tax thereon); United
- 51 -
States v. Herring, 240 F.2d 225, 228 (4th Cir. 1957) (sufficient
identity between decedent and estate); Bowcut v. United States,
175 F. Supp. 218, 221-222 (D. Mont. 1959) (same).
To reflect the foregoing,
Decision will be entered
under Rule 155.
Reviewed by the Court.
GERBER, WELLS, COLVIN, HALPERN, BEGHE, CHIECHI, LARO, FOLEY,
VASQUEZ, GALE, THORNTON, and MARVEL, JJ., agree with this
majority opinion.
- 52 -
BEGHE, J., concurring: Having joined the majority opinion,
I write separately to respond to Judge Chabot's argument that the
structure of our deficiency jurisdiction prohibits us from
applying equitable recoupment to redetermine petitioner's estate
tax deficiency.
In Judge Chabot's view, the sole issue for decision in the
case at hand, as he argued in Estate of Mueller v. Commissioner,
101 T.C. 551, 565-566 (1993) (Mueller II), is the valuation of
the Savings and Willits shares included in decedent's gross
estate. Inasmuch as we have performed that task in Branson I,
the dissent contends that nothing remains for us to do to
redetermine petitioner's estate tax deficiency. I disagree: Our
valuations also, as a practical matter, have redetermined a
corresponding increase in the section 1014(a) basis of the
shares, resulting in the residuary legatee's time-barred
overpayment of tax on the sale of the shares.
Working with the definition of "deficiency" in section
6211(a), there is a way in which the residuary legatee's
overpayment is taken into account in computing petitioner's
estate tax deficiency. While the approach I suggest requires an
element of fictive or "as if" thinking in applying the statute, I
believe the grounds for applying equitable recoupment to the
facts of this case support an interpretation of section 6211(a)
- 53 -
that allows the residuary legatee's overpayment to be taken into
account in determining petitioner's estate tax deficiency.
As Judge Chabot points out, the Tax Court's task in this
case is to redetermine petitioner's estate tax deficiency, and
"deficiency" is a term of art in Federal taxation that has
special significance for our jurisdiction. See Murphree v.
Commissioner, 87 T.C. 1309, 1311 (1986); Martz v. Commissioner,
77 T.C. 749, 754 (1981); Hannan v. Commissioner, 52 T.C. 787, 791
(1969). Section 6211(a) defines "deficiency" as follows:
SEC. 6211 DEFINITION OF A DEFICIENCY.
(a) In General.-- For purposes of this title in
the case of income, estate, and gift taxes imposed by
subtitles A and B and excise taxes imposed by chapters
41, 42, 43, and 44 the term "deficiency" means the
amount by which the tax imposed by subtitle A or B, or
chapter 41, 42, 43, or 44 exceeds the excess of--
(1) the sum of
(A) the amount shown as the tax by the
taxpayer upon his return, if a return was
made by the taxpayer and an amount was shown
as the tax by the taxpayer thereon, plus
(B) the amounts previously assessed (or
collected without assessment) as a
deficiency, over--
(2) the amount of rebates, as defined in
subsection (b)(2), made.
In other words, the deficiency (d) equals the correct tax imposed
(t) less the total tax shown on the return (s) plus prior
- 54 -
assessments (a) less rebates (r).1 Under this definition, a
deficiency in estate tax will generally result if a taxpayer is
found to have undervalued property included in the gross estate
because an increase in the value of included property will
increase the amount of tax imposed by subtitle B. Just as the
amount of the deficiency is affected by the amount of tax imposed
under subtitle B, it can also be affected by "amounts previously
assessed (or collected without assessment) as a deficiency", sec.
6211(a)(1)(B), see sec. 1.6211-1(e), Income Tax Regs., and
rebates made, see sec. 6211(a)(2).
In applying equitable recoupment within the statutory scheme
of section 6211(a), we are in effect holding, after concluding
that the residuary legatee paid too much income tax on
petitioner's gain on the 1992 sales of Willits and Savings
shares, that petitioner has been assessed an additional amount of
estate tax within the meaning of section 6211(a)(1)(B). In so
doing, we treat the income tax overpayment as if it were a
partial assessment of the estate tax deficiency. The residuary
legatee's income tax overpayment thereby has the effect of
reducing the amount of the estate tax deficiency, not as a below-
1
Expressed as a mathematical formula:
d = t - (s + a - r).
The formula can also be expressed as follows:
d = (t - s) - (a - r).
- 55 -
the-line subtraction from the deficiency, but as an above-the-
line (negative) element of the deficiency itself. See sec.
6211(a)(1)(B).
There is a long and honorable tradition of using legal
fictions to overcome the rigidity of the law in order to make the
legal system function fairly.2 A legal fiction is a falsehood
that is deemed to be true for limited purposes designed to bridge
the gap between concept and reality.3 "A doctrine which is
plainly fictitious must seek its justification in considerations
of social and economic policy; a doctrine which is nonfictitious
2
See ACLU of Mississippi, Inc. v. Finch, 638 F.2d 1336,
1340 n.7 (5th Cir. 1981), and texts cited. This case and these
texts conclude that legal fictions can be useful and justified
if employed with the understanding of producer and consumer of
their character as such. See also United States v. Dalm, 494
U.S. 596, 612-623 (1990) (Stevens, J., dissenting), discussed
infra pp. 7-8.
3
In effect, when we engage in a fiction, we
redefine reality to comport with existing law as
a method of changing the law to meet new realities
* * *. This method of adapting the law to changing
circumstances and perceptions is saved from absurdity
by its underlying rationality. * * * when used
properly the legal fiction is a rule of law embodying
an unconcealed falsehood at one level and a deeper
truth at another more important level. The falsehood
is often made necessary because of the pre-existing
structure of the law, and is justified (if it is
justified) by the deeper underlying truth contained
within the falsehood.
Miller, "Liars Should Have Good Memories: Legal Fictions and the
Tax Code", 64 U. Colo. L. Rev. 1, 26 n.109 (1993).
- 56 -
often has spurious self-evidence about it." L. Fuller, Legal
Fictions 71 (1967).4
The concepts of tax "deficiency" and "underpayment" are
themselves legal constructs that amount to fictions, inasmuch as
neither of them purports to be the amount of a petitioner's
remaining obligation to pay tax; they stand in somewhat the same
relationship to such obligation as shadows do to the three-
dimensional object. However, once a deficiency determined by the
Commissioner (or redetermined by the Tax Court) is assessed, the
deficiency becomes a legal obligation that the Commissioner can
collect, and reality painfully intrudes.
By allowing the residuary legatee's overpayment to be taken
into account in determining petitioner's estate tax deficiency,
we do no more than give effect to the accepted notions that "the
rule of equitable recoupment permits recovery of an otherwise
barred claim by resort to the fiction that the overpayment is a
credit or defense against a later asserted tax liability for a
year open to suit" and that "The doctrine of equitable recoupment
utilizes the fiction of a tax credit or defense to liability for
a year open to suit to avoid violation of the statutory scheme
providing for finality of tax determinations." Holzer v. United
4
Originally published in slightly different form in three
parts in 25 Ill. L. Rev. 363, 513, 865 (1930-31).
- 57 -
States, 250 F. Supp. 875, 877-878 (E.D. Wis. 1966), affd. per
curiam 367 F.2d 822 (7th Cir. 1966).
"[T]he Supreme Court has explicitly and repeatedly stated
that it is sometimes appropriate to interpret statutes in a
manner inconsistent with their literal language." Zelenak,
"Thinking About Nonliteral Interpretations of the Internal
Revenue Code", 64 N.C. L. Rev. 623, 631 (1986). Zelenak notes,
id. at 624, that in the preceding 4 years the Supreme Court had
decided at least four tax cases by adopting on confirming a
nonliteral interpretation of the Code.5
Similarly, the "two wrongs make a right" character of
equitable recoupment, see Willis, "Some Limits of Equitable
Recoupment, Tax Mitigation, and Res Judicata: Reflections
Prompted by Chertkof v. United States," 38 Tax Law. 625 (1985),
emphasizes that "Recoupment, rather than extending the statute of
limitations to correct a perceived injustice, permits a wronged
party to recoup the loss against a sum still open to litigation."
Id. at 633. In so doing, recoupment uses the legal fiction that
the recoupment claim is an element in the computation of the tax
subject to the timely claim, rather than the time-barred tax.
The "two wrongs make a right" notion signifies that where an
5
Citing and discussing Paulsen v. Commissioner, 469 U.S.
131 (1985); Bob Jones Univ. v. United States, 461 U.S. 574(1983); Commissioner v. Tufts, 461 U.S. 300 (1983); Hillsboro
Natl. Bank v. Commissioner, 460 U.S. 370 (1983).
- 58 -
earlier matter has received erroneous tax treatment,
"[recoupment] does not correct the wrong, as does the mitigation
statute, but instead causes a later matter to be equally wrong in
the opposite direction." Id.As Justice Stevens observed in his dissent in United States
v. Dalm, 494 U.S. 596, 612-623 (1990), the Supreme Court in Bull
v. United States, 295 U.S. 247 (1935), could have taken the
strict view that the statute of limitations barred the taxpayer's
claim, but instead "avoided that unjust result" by construing the
plaintiff's rights in a Federal tax refund suit by reference to
those of a defendant, thereby proceeding "under * * * the
presumption that for every right there should be a remedy."
United States v. Dalm, supra at 616-617. Acknowledging that
treating a plaintiff like a defendant "so as to permit, in
effect, the equitable tolling of the limitations period" was
perhaps "an unusually flexible treatment of legal categories,"
Justice Stevens observed that such treatment was "nothing more
than the necessary expression of an exception to a generally
appropriate definition", an exception that had received the
status of a legal rule under Bull. Id. at 618. See Tierney,
"Equitable Recoupment Revisited: The Scope of the Doctrine
Revisited in Federal Tax Cases after United States v. Dalm," 80
Ky. L.J. 95, 131-165 (1992).
- 59 -
In Mueller II, we opined that we have authority to apply
equitable recoupment in a case over which we have jurisdiction;
in Estate of Mueller v. Commissioner, 107 T.C. 203 (1996)
(Mueller III), we held, consistent with the view of the majority
in United States v. Dalm, supra, that equitable recoupment is
properly confined to its traditional role as an affirmative
defense.6 Having held in the case at hand that the requirements
of equitable recoupment have been satisfied, our application of
the doctrine does no more violence to the structure of section
6211(a) than the availability of equitable recoupment in the
refund forums does to the Internal Revenue Code as a whole.
6
This observation serves to distinguish equitable
recoupment and the case at hand from Commissioner v. Lundy, 516
U.S. 235 (1996).
- 60 -
LARO, J., concurring: The United States Tax Court is a
court of law that, like the United States District Courts, has
the authority to apply equitable principles such as equitable
recoupment. The majority holds as much, and I agree. I write
separately to emphasize the fact that this Court, although
different from District Courts in a few regards, the most obvious
of which is that District Courts were created under Article III
of the U.S. Constitution whereas this Court was created under
Article I of the U.S. Constitution, is a court of law that has
the authority to apply all of the judicial powers of a District
Court.
This Court's predecessors, namely, the Board of Tax Appeals
and the Tax Court of the United States, were not courts of law,
and they did not possess the judicial powers of a District Court.
This Court's predecessors were independent agencies in the
executive branch of the Federal Government, and, as such, their
powers were limited to those powers conferred upon them by the
executive branch. See Commissioner v. Gooch Milling & Elevator
Co., 320 U.S. 418 (1943); Old Colony Trust Co. v. Commissioner,
279 U.S. 716, 725 (1929). The fact that this Court's
predecessors were executive agencies and not courts of law made
them fundamentally different from the District Courts. The fact
that this Court’s predecessors were executive agencies and not
courts of law made them fundamentally different from this Court.
- 61 -
Following the passage of the Tax Reform Act of 1969 (1969
Act), Pub. L. 91-172, sec. 951, 83 Stat. 730, the United States
Tax Court is the functional equivalent of a District Court. See
sec. 951 of the 1969 Act, 83 Stat. 730. See also Freytag v.
Commissioner, 501 U.S. 868, 890-891 (1991). Through the 1969
Act, Congress changed the status of this Court from an
"independent agency in the Executive Branch of the Government" to
a "court of record" "established * * * under Article I of the
Constitution of the United States". See sec. 7441 before and
after amendment by the 1969 Act; see also Freytag v.
Commissioner, supra at 890-891. Congress established the United
States Tax Court through a constitutionally permissible exercise
of its Article I powers. See Freytag v. Commissioner, supra.
The United States Tax Court, as established by Congress under the
1969 Act, sits as a District Courtlike tribunal that "exercises a
portion of the judicial power of the United States * * *. * * *
to the exclusion of any other function". Id. at 891. This
Court's judicial power allows the Court to decide cases without
undue influence from either the executive or legislative branch.
See id. at 890-891; Roberts v. Commissioner, 175 F.3d 889 (11th
Cir. 1999); see also Burns, Stix Friedman & Co. v. Commissioner,
57 T.C. 392, 395 (1971), wherein the Court stated:
It is clear from the statutory language and the Senate
committee report (S. Rept. No. 91-552, 91st Cong., 1st
Sess., p. 302, 1969-3 C.B. 614) that Congress removed
- 62 -
the Tax Court from the Executive Branch and established
it as an article I court primarily for the purpose of
recognizing its status as a judicial body and disposing
of any problems that its status as an executive agency
sitting in judgment on another executive agency might pose.
This Court's District Courtlike status means that the Court's
decisions are subject to review only by a Federal appellate
court. See sec. 7482(a) ("The United States Courts of Appeals
* * * shall have exclusive jurisdiction to review the decisions
of the Tax Court * * * in the same manner and to the same extent
as decisions of the district courts in civil actions tried
without a jury").
Appellate courts have repeatedly applied the law that
preceded the 1969 Act to hold that the predecessors of the United
States Tax Court were not courts of law and, more importantly,
that these predecessors lacked judicial powers. In Lasky v.
Commissioner, 235 F.2d 97 (9th Cir. 1956), affd. per curiam
352 U.S. 1027 (1957), for example, the Court of Appeals for the
Ninth Circuit held that the Tax Court of the United States,
unlike a District Court, was without authority to vacate a final
decision. The Ninth Circuit reasoned that the Tax Court of the
United States was "not a court at all but merely an
administrative agency". Id. at 98; accord Swall v. Commissioner,
122 F.2d 324 (1st Cir. 1941); Sweet v. Commissioner, 120 F.2d 77(1st Cir. 1941). Other appellate courts had ruled similarly,
applying the same reasoning. See, e.g., White's Will v.
- 63 -
Commissioner, 142 F.2d 746 (3d Cir. 1944), affg. 40 B.T.A. 664(1939); Monjar v. Commissioner, 140 F.2d 263 (2d Cir. 1944),
affg. an unreported Order of the Board of Tax Appeals; Denholm &
McKay Co. v. Commissioner, 132 F.2d 243 (1st Cir. 1942), vacating
41 B.T.A. 986 (1940) and reinstating 39 B.T.A. 767 (1939); see
also Helvering v. Northern Coal Co., 293 U.S. 191 (1934).
These prior cases do not address the current status of this
Court as a court of law that performs exclusively judicial
functions. None of these cases, therefore, has any bearing on
the types of powers that this Court is authorized to exercise in
performing our judicial functions. The Supreme Court
acknowledged so much in Freytag when the Court held that Congress
constitutionally established the United States Tax Court as a
court of law that "[exercises] judicial power and perform[s]
exclusively judicial functions" and, in so holding, rejected the
Commissioner's argument that the 1969 Act "simply changed the
status of the Tax Court within * * * [the executive] branch."
Freytag v. Commissioner, supra at 885, 892. It naturally follows
from Congress' elevation of this Court to an "exclusively
judicial" court that this Court possesses all of the inherent
powers of the judiciary and that this Court's legal and equitable
powers are diametrically different from this Court's executive
agency predecessors which wielded executive powers only.
- 64 -
The Supreme Court has recently stated in dictum that the
United States Tax Court lacks "general equitable powers". See
Commissioner v. McCoy, 484 U.S. 3, 7 (1987) (per curiam). When
taken in context, this statement is not remarkable. Nor is it
inconsistent with the view of this Court as to our ability to
exercise District Courtlike equitable powers. The context of the
Supreme Court's statement in McCoy indicates clearly that the
Court was merely applying the well-settled rule that no court of
law may ignore the express intent of Congress as to the
imposition of interest and penalties. See id.; see also Flight
Attendants Against UAL Offset v. Commissioner, 165 F.3d 572, 578
(7th Cir. 1999) ("In context, the Supreme Court's dictum in
Commissioner v. McCoy, 484 U.S. 3, 7, 98 L. Ed. 2d 2, 108 S. Ct.
217 (1987) (per curiam), that the Tax Court lacks 'general
equitable powers' means only that the Tax Court is not empowered
to override statutory limits on its power by forgiving interest
and penalties that Congress has imposed for nonpayment of
taxes--but then no court is, unless the imposition would be
unconstitutional."). In fact, the Court made no mention of McCoy
when it decided Freytag 4 years later.
In sum, Congress, through the 1969 Act, elevated the status
of this Court to a court of law, and the Supreme Court in Freytag
held that Congress' action was constitutional. As a Federal
court of law, this Court naturally possesses the inherent powers
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of any other Federal court of law, e.g., the Federal District
Courts, including the power to apply equitable principles such as
equitable recoupment. Because the Court holds as much today, I
concur in our decision.
PARR, FOLEY, VASQUEZ, THORNTON, and MARVEL, JJ., agree with
this concurring opinion.
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CHABOT, J., dissenting: The majority hold that this Court
has authority to apply the doctrine of equitable recoupment and
"that petitioner is entitled to recoup the residuary legatee's
excessive payment of income tax against the estate tax
deficiency." Supra majority op. pp. 2-3. For the reasons set
forth in my dissent in Estate of Mueller v. Commissioner, 101
T.C. 551, 565-571 (1993) (Mueller II), I respectfully dissent.
The majority opinion and Judge Laro's concurring opinion do
not attempt to deal with the substance of that dissent; instead,
they focus on this Court's status as a Court, as a result of the
amendments made by the Tax Reform Act of 1969 (TRA '69), Pub. L.
91-172, sec. 951, 83 Stat. 730. I am well aware of the text of
TRA '69, its legislative history, and the Congress' intentions.
I am satisfied that there is nothing in the materials considered
by or generated by the Congress in connection with TRA '69 that
speaks to the issue of equitable recoupment; however, it is clear
that the Congress did not intend to make this Court an "Article
III court".
Firstly, clearly, this Court is a court.
Secondly, this Court is not a Federal District Court. This
Court is a Federal trial court, like the District Courts, and
must abide by the same Federal Rules of Evidence. However this
Court has statutory authority to prescribe its own Rules of
Practice and Procedure (sec. 7453), which in many respects are
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different from the Federal Rules of Civil Procedure. This Court
has statutorily prescribed deficiency jurisdiction, which the
District Courts do not have; the District Courts have refund
jurisdiction, which this Court does not have (except where an
overpayment is developed in a case that began as a deficiency
case, or in a "TEFRA partnership" or S corporation case). This
Court has developed the "Lawrence doctrine", modified by the
"Golsen doctrine", as described in Lardas v. Commissioner, 99
T.C. 490, 493-495 (1992), which does not have a practical
counterpart in the District Courts. This Court's burden of proof
rules in deficiency cases differ in some respects from those
applicable in refund cases in the District Courts. See in this
connection Helvering v. Taylor, 293 U.S. 507, 514 (1935). As to
other differences between this Court and the District Courts, see
Commissioner v. Lundy, 516 U.S. 235, 244-245, 252 (1996).
Thirdly, as to the critical dispute in the instant case,
this Court and the District Courts differ in their statutory
powers in such a way that equitable recoupment fits what the
District Courts do (decide directly how much, including interest,
the Government must pay to the taxpayer, or vice versa) and does
not fit what this Court does, redetermine the amount of the
deficiency, if any, which is merely one factor in how much must
be paid.
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Fourthly, nothing in the concepts of a "court", or a "court
of law", makes equitable recoupment an essential characteristic
of a court, or of a court of law.
My position remains that we are to resolve those matters
which affect the amount of the estate tax deficiency to be set
forth on the decision document we enter in the instant case.
Equitable recoupment does not affect any of the elements of the
deficiency, as statutorily defined, and so does not affect the
decision we enter. Judge Beghe's concurring opinion does deal
with this Court's deficiency jurisdiction, which is the only
jurisdiction that brings the instant case before us. Judge
Beghe’s concurring opinion suggests a route by which the square
peg of recoupment could be squeezed into the round hole of the
statutory definition of deficiency.1
However, several aspects of this suggested route remain to
be paved. Firstly, "deficiency" and "underpayment" are defined
terms. Secs. 6211, 6664(a). They are not legal fictions. The
amount, if any, that a taxpayer may have to pay to the Government
may well be different from the amount of the deficiency or any
underpayment.
Secondly, the Supreme Court has recently indicated that, as
to the Tax Court, the statute of limitations (the major
1
This imagery is generally thought to have originated in
Sidney Smith's reference to “a square person has squeezed himself
into the round hole.” Sketches of Moral Philosophy (1850).
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impediment that equitable recoupment is designed to circumvent)
must be given a strict application, and the equities are
unavailing. See Commissioner v. Lundy, 516 U.S. 235 (1996).
Thus, this Court was barred from holding that Lundy overpaid his
income taxes even if his claim for refund would have been timely
in a District Court. See id. at 251-253 (majority op.), 253-254,
263 (Thomas, J., dissenting). Also, Lundy lost even though it
was clear that Lundy and his wife had substantially overpaid
their income taxes. See id. at 237. Lundy did not involve the
staleness, missing documents, and faded memories that statutes of
limitations are generally established to guard against. The
majority of the Supreme Court determined that there was no room
for legal fictions suggested by Justices Thomas and Stevens, the
Court of Appeals for the Fourth Circuit, or Lundy's counsel, to
correct this obvious injustice, and the Government was permitted
to hold onto the Lundys' overpaid taxes solely because of the
text of the then-applicable statute of limitations. Of course,
Lundy’s situation does not fit into the current mold of equitable
recoupment. The relevance of Lundy to our discussion is the
Supreme Court’s focus on the details of statutory grants and
limitations of power and jurisdiction, and that Court’s
reluctance to modify the strictness of the statute even to
correct an obvious injustice.
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Thirdly, Judge Beghe's concurrence relies on the analysis of
equitable recoupment in Justice Stevens' dissent in United States
v. Dalm, 494 U.S. 596, 612-623 (1990). Although much
understanding may be gleaned from a distinguished jurist's
dissent, the fact remains that the dissent is what the Supreme
Court's majority rejected.
COHEN and WHALEN, JJ. agree with this dissent.