Dysart v. United States

• Decision Date: 22 January 1965
• Docket Number: No. 61-63.,61-63.
• Citation: 169 Ct. Cl. 276,340 F.2d 624
• Parties: Samuel C. DYSART and Alma R. Dysart v. The UNITED STATES.
• Court: U.S. Claims Court

169 Ct. Cl. 276, 340 F.2d 624 (1965)

Samuel C. DYSART and Alma R. Dysart v. The UNITED STATES.

No. 61-63.

United States Court of Claims.

January 22, 1965.

Charles R. Cutler, Washington, D. C., for plaintiff. Kirkland, Ellis, Hodson, Chaffetz & Masters, Washington, D. C., of counsel.

Mitchell Samuelson, Washington, D. C., with whom was Asst. Atty. Gen., Louis F. Oberdorfer, for defendant. C. Moxley Featherston, Lyle M. Turner, and Philip R. Miller, Washington, D. C., were on the brief.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, and COLLINS, Judges.

LARAMORE, Judge.

This is a suit for the refund of $4,548.48 collected as a penalty for the year 1954 for an underestimation of income tax. The government, although it concedes that the imposition of the penalty was erroneous, nevertheless was denied taxpayers' claim for refund since it has asserted an offset exceeding the amount sought due to an alleged income tax deficiency for the year 1954. The taxpayers, by this motion for summary judgment, seek to strike the government's setoff. It is also admitted that the statute of limitations bars the Commissioner of Internal Revenue from making an additional assessment predicated on the alleged error. Taxpayers' claim is in the amount of $4,548.48 plus statutory interest. The government's setoff is in the amount of approximately $130,000, although it is cognizable only to the extent of reducing taxpayers' claim to zero. The sole issue presented by this motion is whether in a suit for refund where both the taxpayers' claim and the government's setoff concern the same tax¹ for the same year by the same taxpayers, the right of the government to assert such a defense is an unconditional right (as the government contends), or whether, as taxpayers contend, such a right is subject to the court's discretion after evaluating the "equities" involved in each particular case.

In late 1954, taxpayers received payment of a judgment in the amount of $359,094.56 in a patent infringement suit. The suit concerned an invention which marked a major advance in the state of the art in the adding machine industry. In 1919, the invention was orally assigned by the inventor (taxpayers' father) to his company, The Dalton Adding Machine Company. The company was subsequently acquired by Remington Rand, Inc., which repudiated the agreement. After a patent was issued in 1935, extensive negotiations for settlement were conducted by the inventor's widow without success. Suit was filed in 1937 and protracted litigation continued until two judgments were paid, one in 1954 and one in 1957.

Late in December 1954, taxpayers received payment of the proceeds of their share of the first judgment. At that time, taxpayers, who had not filed a declaration of estimated tax for 1954, were living in Havana, Cuba. After receiving the unusual lump-sum income, they filed their joint income tax return and paid the tax shown to be due thereon to the District Director of Internal Revenue in Baltimore, Maryland. The return and payment were received by the District Director on January 19, 1955, four days after January 15, 1955, which fell on a Saturday. On December 22, 1956, after an audit of the return, the Internal Revenue Service took the position that the taxpayers had reasonable cause for failure to file a declaration of estimated tax for 1954. However, it assessed a penalty against taxpayers for underestimation of the 1954 tax. This action was based on 26 U.S.C. (I.R.C.1939) § 294(d) (2) (1952 Ed.) and Treasury Regulation 111, § 29.294-1(b) (3) (A), which in effect provided that in the event a taxpayer failed to file the required declaration of estimated tax, the amount of the estimated tax for the purposes of section 294(d) (2) was zero. On June 18, 1958, the regulation was held invalid by the Sixth Circuit in Acker v. Commissioner, 258 F.2d 568, and the decision was affirmed by the Supreme Court on November 16, 1959, Commissioner v. Acker, 361 U.S. 87, 80 S.Ct. 144, 4 L.Ed.2d 127 (1959).

In their 1954 income tax return, taxpayers treated the proceeds of the judgment as capital gains on the ground that all substantial rights in the invention had been transferred by the inventor. Taxpayer, Samuel C. Dysart, had two sisters who also received payments from the 1954 judgment, and they treated the proceeds in the same way. The returns were audited in three separate revenue districts which accepted the taxpayers' treatment of the proceeds of the judgment. However, the Internal Revenue Service found that the judgment included interest from the date the patent was issued to the date of judgment and held that the interest should be taxed as ordinary income. The taxpayers conceded the issue, and a deficiency was assessed and paid with respect to the taxes due on the interest.

In 1957, a final judgment covering the last three years of the patent's life was rendered in favor of the Dysart family. Taxpayers also reported the amount paid on this judgment as capital gain in their 1957 income tax return, but this treatment was challenged by the Internal Revenue Service. After taxpayers had filed a petition in the Tax Court, the suit was settled on the basis that taxpayers would pay 60 percent of the assessed deficiency.

On October 16, 1958, after the favorable decision by the Court of Appeals for the Sixth Circuit (but before the Supreme Court's opinion) in the Acker case, supra, taxpayers filed a timely claim for refund of the penalty assessed on their 1954 return. On June 20, 1960, about six months after the Supreme Court's decision in the Acker case, the Internal Revenue Service abandoned its previous grounds for disallowance of the refund of the penalty but asserted that the judgment damages, reported as capital gain in the 1954 return, should have been taxed as ordinary income and that, although the statute of limitations barred the deficiency, it should be used as a setoff against the refund due taxpayers. This suit followed after formal denial of the claim for refund.

Taxpayers argue that the government's defense of setoff or equitable recoupment must be judged by equitable principles and as a result of the government's inequitable conduct in this case, recoupment should be denied.

At the outset it should be pointed out that the defense of recoupment in a refund suit should not be confused with the broader and more fundamental defense of lack of overpayment of the particular tax involved in the suit for refund, traceable to the landmark decision by the Supreme Court in Lewis v. Reynolds, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293 (1932). The former involves attempts to set off tax liability from one year against that for another year after the statute of limitations has run² or where attempts are made to set off the tax liability of one taxpayer against that of a second taxpayer.³ This type of defense has been commonly referred to as "equitable recoupment." In these situations where the challenged item arose in a year other than in suit or where different parties are involved, the defense may only be maintained where a single or same transaction is involved.⁴

On the other hand, where both the taxpayer's claim and the government's setoff concern the same tax for the same year by the same taxpayer, the government's right to raise such a defense is unconditional and need not meet the "same transaction" requirement of the equitable recoupment defense. Here the right of the government is based on the broader principle that a taxpayer is not entitled to a refund unless he has in fact overpaid the particular tax, while in "equitable recoupment" the right to raise such a defense is based on the more limited principle that a party should not gain the protection of the statute of limitations where he has given a different tax treatment to the same transaction in different years.⁵ Although the origin of these defenses may be traced to equitable principles, the right to raise a setoff is not subject to equitable considerations as taxpayers contend. We believe that both the government and the individual taxpayer have the legal right to raise a setoff without having to appeal to the court's discretion or to its evaluation of the particular equities. We find support for this conviction in the fact that Congress has chosen to incorporate the doctrine of "equitable recoupment" into our revenue laws by what is now commonly known as the mitigation provisions, sections 1311-1315 of the Internal Revenue Code of 1954. In so doing, Congress has enumerated a series of requirements which have to be met before these sections become operative and recoupment allowed. It is significant that none of these requirements are based on equitable considerations. If the requirements are met, there is no room for the court to look at the "equities" involved in each particular case and prevent their operation. We believe the same rationale should apply to the broader and more fundamental defense of lack of overpayment raised by the setoff defense involved in the instant case.

The crucial factor in this refund suit is that both the taxpayers' claim and the government's setoff concern the same tax (income tax) for the same year (1954) by the same taxpayer. The government seeks the opportunity to balance against the $4,548.48 income tax penalty for 1954 (now admitted to have been erroneously collected) other income tax for 1954 which these taxpayers are said to have failed to report and pay. The established doctrine of setoff in tax cases gives the government that right. There is no room, in this situation, to deny the government its right of setoff because the taxpayers' claim is relatively small, or the government's counter-demand will put them to a burdensome trial, or because the underlying facts (leading to liability in 1954) are old and complex, or the Internal Revenue Service had a previous opportunity to assess the underpaid tax. To uphold the government's right to maintain the...