March v. Comm'r of Internal Revenue (In re Estate of Branson), 10028–95.

Citation113 T.C. No. 2,113 T.C. 6
Decision Date13 July 1999
Docket NumberNo. 10028–95.,10028–95.
PartiesEstate of Frank A. BRANSON, Deceased, Mary M. March, Executor, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

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, J.

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 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.

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 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, 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 “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 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 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.]

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.

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...

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