Estate of Frank Branson v. Comm'r of Internal Revenue

• Decision Date: 10 July 2001
• Docket Number: PETITIONER-APPELLEE,No. 00-70293,RESPONDENT-APPELLANT,00-70293
• Citation: 264 F.3d 904
• Parties: (9th Cir. 2001) ESTATE OF FRANK BRANSON, DECEASED; MARY M. MARCH, EXECUTOR,, v. COMMISSIONER OF INTERNAL REVENUE,
• Court: U.S. Court of Appeals — Ninth Circuit

Page 904

264 F.3d 904 (9th Cir. 2001)

ESTATE OF FRANK BRANSON, DECEASED; MARY M. MARCH, EXECUTOR, PETITIONER-APPELLEE, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT-APPELLANT.

No. 00-70293

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted July 10, 2001--San Francisco, California

Filed September 5, 2001

[Copyrighted Material Omitted] Counsel Charles Bricken, Attorney, Tax Division, United States Department of Justice, Washington, D.C., for the respondent-appellant.

William Bates III, McCutchen, Doyle, Brown & Enersen, L.L.P., Palo Alto, California, for the petitioner-appellee.

Appeal from a Decision of the United States Tax Court Tax Court No. 10028-95

Before: Joseph T. Sneed, Kim McLane Wardlaw, and Marsha S. Berzon, Circuit Judges.

Sneed, Circuit Judge

Opinion by Judge Sneed

This case is before us on appeal from a judgment of the Tax Court. In the proceeding below, the Tax Court held that Appellee, the Estate of Frank Branson had underpaid its estate taxes and owed a deficiency of $348,016. The Tax Court further held that Appellee need not pay the full amount of the deficiency. Rather, the Estate could, under the doctrine of equitable recoupment, credit a $96,515 income tax over-payment against the estate tax deficiency and pay only the remainder.

The Commissioner of Internal Revenue ("Commissioner") appeals the Tax Court's application of equitable recoupment to reduce the estate tax deficiency. The Commissioner argues, first, that the Tax Court has no jurisdiction to apply equitable recoupment. In the alternative, the Commissioner contends that equitable recoupment is not available on the facts of this case.

We hold that the Tax Court did not exceed its limited jurisdictional grant when it considered the affirmative defense of equitable recoupment. We also affirm the Tax Court's application of that doctrine in this case.

FACTS

Frank Branson ("Decedent") died in November 1991. His daughter, Mary M. March, was named the executor and residuary beneficiary of his estate. As such, she assumed full individual liability for any additional taxes owed by the estate.

The estate contained stock in two separate closely held corporations ("Willits Stock" and "Savings Stock"). On the estate tax return, filed in 1992, the Willits stock was valued at $485 per share and the Savings stock at $181.50 per share. The executor was authorized to sell a certain portion of this stock (500 shares of Willits stock and 2800 shares of Savings stock) in order to pay applicable estate taxes. The Willits Stock sold for $850 per share and the Savings Stock sold for $335 per share, considerably higher than their reported value.

Under 26 U.S.C. §§ 1014(a)(1), the declared value of the stock was used as a basis for determining the gain from their sale.¹ Consistent with this statutory requirement, the difference between the stock's reported value and its sale value (approximately $600,000) was reported as a capital gain on the estate tax return. The estate did not pay taxes on this gain, but rather distributed it immediately to March, the residuary beneficiary. March then declared this money as a capital gain on her 1992 income tax return. Under §§ 1014, March was also required to use the stock value declared on the estate tax return for the purpose of determining her capital gain from the sale. Consequently, she declared a capital gain of approximately $600,000, and paid the taxes due.

In 1995, the Commissioner determined a deficiency on Appellee's estate tax return. The basis of this deficiency was the Commissioner's conclusion that the Willits and Savings stocks were worth substantially more than the estate declared. After Appellee contested the Commissioner's notice of deficiency, the Tax Court concluded that the Willits Stock was worth $626 per share and the Savings Stock was worth $276 per share. The revaluation of the stock led to an estate tax deficiency. Since, pursuant to §§ 1014, the same valuation was used to determine March's 1992 income tax liability, it necessarily followed that March had overpaid her income taxes in 1992.²

Both the Commissioner and the Estate agree that the revaluation of the estate's stock led to both an estate tax deficiency and an income tax overpayment in the 1992 tax year. The ultimate determination of the existence and amount of the estate tax deficiency was decided by the Tax Court in July 1999, long after the statute of limitations had run on a claim for refund of the income tax overpayment. However, the initial notice of estate tax deficiency was issued in March 1995, over a year before the statute of limitations for a refund of the overpaid income tax had run.

March, however, failed to file a refund claim for her 1992 income tax overpayment within the applicable limitations period. Instead, she asked that her income tax overpayment be credited against the estate tax deficiency adjudicated in the Tax Court. The Tax Court agreed and this appeal followed.

I. Standard of Review

Whether the Tax Court has authority to apply the doctrine of equitable recoupment is a jurisdictional determination subject to de novo review. I & O Pub. Co. Inc. v. Comm'r, 131 F.3d 1314, 1315 (9th Cir. 1997); Estate of Mueller v. Comm'r, 153 F.3d 302, 304 (6th Cir. 1998). The Tax Court's application of the law to undisputed facts is reviewed de novo. Pac. First Fed. Sav. Bank v. Comm'r, 961 F.2d 800, 803 (9th Cir. 1992).

II. Jurisdiction

In deciding whether the Tax Court has jurisdiction to apply the doctrine of equitable recoupment in this circumstance, we start by stating certain principles that are well-established and not in dispute. First, the Tax Court, like any federal court, is a court of limited jurisdiction. "Federal courts . . . possess only that power authorized by Constitution and statute." Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). The statute conferring subject matter jurisdiction on the Tax Court is Title 26 of the United States Code. 26 U.S.C. §§ 7442. The Tax Court's jurisdiction is defined and limited by Title 26 and it may not use general equitable powers to expand its jurisdictional grant beyond this limited Congressional authorization. It may exercise its authority only within its statutorily defined sphere. Comm'r v. McCoy, 484 U.S. 3, 7 (1987) (Tax Court "lacks general equitable powers"); Kelley v. Comm'r, 45 F.3d 348, 351 (9th Cir. 1995) (Tax Court is an "Article I court designed to handle cases of a specialized nature").

Within that sphere, however, "the Tax Court exercises its judicial power in much the same way as the federal district courts exercise theirs." Freytag v. Comm'r , 501 U.S. 868, 891 (1991). This includes the authority to apply the full range of equitable principles generally granted to courts that possess judicial powers. "Even if the Tax Court does not have farreaching general equitable powers, it can apply equitable principles and exercise equitable powers within its own jurisdictional competence." Estate of Ashman v. Comm'r, 231 F.3d 541, 545 (9th Cir. 2000); See also Kelley, 45 F.3d at 352 (Tax Court has equitable power to reform agreements between taxpayer and IRS); Buchine v. Comm'r, 20 F.3d 173, 178 (5th Cir. 1994) (holding that the Tax Court had the authority to apply the "equitable principle of reformation to a case over which it had jurisdiction").

Having set forth that which is not in dispute, we come to the issue at the heart of this appeal. Does the Tax Court's statutory grant of authority prevent it from applying the equitable doctrine of recoupment when redetermining an estate tax deficiency? We find the answer to be "no." Consequently, we hold that where, as here, the Tax Court has jurisdiction to redetermine an estate tax deficiency, it may exercise its equitable powers to recoup an income tax overpayment from the same tax year if all the criteria for an equitable recoupment claim are otherwise satisfied.

We first proceed to a brief description of the principles and purposes underlying the doctrine of equitable recoupment. We then examine the statutory authority delimiting the Tax Court's jurisdiction. Finding no conflict between the two, we affirm the Tax Court's exercise of jurisdiction and proceed to determine whether recoupment was properly granted on the facts of this case.

A. Equitable Recoupment

Generally, a party who has paid a tax that was not owed may sue for a refund under 26 U.S.C. §§ 6511. Refund suits, however, are subject to a strict statute of limitations. 26 U.S.C. §§ 6511(b)(1); §§ 6512(b)(3) (no credit or refund is allowed if taxpayer fails to file a refund claim or seek a redetermination in Tax Court within three years of when return was filed); See also, Comm'r v. Lundy , 516 U.S. 235, 240 (1996). In some circumstances, a taxpayer may be time barred from seeking a refund of an erroneous tax, but the IRS can still bring a timely suit for payment of the correct tax. In this limited circumstance, the doctrine of "equitable recoupment" may be raised as a defense to the statute of limitations. It is designed to protect a party from paying twice on a single obligation. Bull v. United States, 295 U.S. 247, 258 (1935).

Equitable recoupment arises when a single "transaction, item or taxable event" is subject to two inconsistent taxes. United States v. Dalm, 494 U.S. 596, 608 n.5 (1990); Boyle v. United States, 355 F.2d 233, 236 (3rd Cir. 1965). The doctrine permits a party to a tax dispute to raise a time barred claim in order to reduce or eliminate the money owed on the timely claim. Rothensies v. Elec. Storage Battery Co., 329 U.S. 296, 300 (1946) ("amount of [the] tax collected on the wrong theory should be allowed in recoupment against an assessment on the correct theory"). Equitable recoupment cannot be used offensively to seek a money payment, only defensively to offset an adjudicated deficiency. Dalm, 494 U.S. at 611.

Because equitable recoupment has the potential...