Estate of Mueller v. C.I.R., No. 97-1856

• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)
• Writing for the Court: BATCHELDER
• Citation: 153 F.3d 302
• Parties: -5737 ESTATE of Bessie I. MUELLER, Deceased; John S. Mueller, Personal Representative, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Docket Number: No. 97-1856
• Decision Date: 20 August 1998

Page 302

153 F.3d 302 82 A.F.T.R.2d 98-5737 ESTATE of Bessie I. MUELLER, Deceased; John S. Mueller,
Personal Representative, Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. No. 97-1856. United States Court of Appeals,
Sixth Circuit. Argued June 11, 1998.
Decided Aug. 20, 1998.

Page 303

Stevan Uzelac (argued and briefed), Miller, Canfield, Paddock & Stone, Detroit, Michigan, for John S. Mueller.

Stevan Uzelac, Michael A. Indenbaum (briefed), Miller, Canfield, Paddock & Stone, Detroit, Michigan, for Estate of Bessie I. Mueller, Deceased.

Jonathan S. Cohen (briefed), Charles Bricken (argued and briefed), U.S. Department of Justice, Appellate Section Tax Division, Washington, DC, for Commissioner of Internal Revenue.

Before: KEITH, BATCHELDER, and DAUGHTREY, Circuit Judges.

OPINION

BATCHELDER, Circuit Judge:

This is a case in which a taxpayer and the Internal Revenue Service ("IRS") disagree over the effect of an audit adjustment to the taxpayer's estate tax return. Specifically at issue are 8,924 shares of stock that the taxpayer undervalued when it filed the estate tax return, as a result of which the taxpayer underreported the taxable value of the shares and, consequently, underpaid its estate taxes. In addition, the government's determination that the stock was worth more than taxpayer claimed also had the effect of creating an overpayment in capital gains tax paid by the taxpayer in a previous year on the stock's sale. Just as the higher stock valuation resulted in a higher taxable amount, it also resulted in a higher basis in the stock and, therefore, a smaller amount of capital gains upon the sale of the stock. The problem for taxpayer is that the statute of limitations now bars any claim for a refund of the overpaid capital gains tax.

The question on appeal is whether the taxpayer is entitled to assert the defense of equitable recoupment in order to use the time-barred overpayment of capital gains taxes as a set-off against the timely charged deficiency in estate taxes. Before we can reach this question, however, we must first decide whether the Tax Court had the jurisdiction to apply the doctrine of equitable recoupment. Because we find that the Tax Court lacked jurisdiction to consider a claim for equitable recoupment, we affirm the dismissal of the taxpayer's suit without reaching the merits of the equitable recoupment claim.

I.

The appellant, Estate of Bessie I. Mueller, ¹ filed its estate tax return and paid $5,523,953 which it had determined to be its tax liability. Upon subsequent audit, however, the IRS determined that appellant had made several errors. First, it discovered that appellant failed to claim a credit in the amount of $1,152,649 available to it for prior paid taxes under I.R.C. § 2013. Second, it found that the appellant claimed $6,000 more in unified credits than it was allowed. Finally, and most important to this case, the IRS determined that appellant had underreported the taxable value of 8,924 shares of Mueller Co. stock at $1,505 per share rather than at $2,150 per share. Based on these and other smaller adjustments, the IRS determined that appellant owed an estate tax deficiency of $1,985,624.

Appellant filed a timely petition in Tax Court seeking a redetermination of its estate tax liability, but failed to file a protective claim for refund of its income tax that, according to the IRS's valuation of the stock, it had overpaid. The refund claim expired and appellant subsequently amended its petition to the Tax Court to assert the affirmative defense of equitable recoupment against the estate tax deficiency. Thus, appellant sought two forms of relief from the Tax Court: it sought to have the valuation of the stock redetermined and it sought to have the time-barred income tax refund set-off via equitable recoupment against the estate tax deficiency.

After a trial, the Tax Court found that the stock should have been valued at $1,700 per share, rather than $1,505 per share as appellant had claimed or $2,150 per share as the IRS had claimed. This new valuation resulted

Page 304

in an estate tax deficiency of $957,099, due to the underreported value of the stock, but the deficiency was offset by the estate's failure to claim the $1,152,649 credit for prior taxes paid. Thus, the Tax Court held that there was no deficiency at all, but rather that appellant had overpaid its estate taxes. This decision was the first of three rendered by the Tax Court, and we shall refer to it as Mueller I.

After Mueller I, the IRS moved to dismiss the estate's claim for equitable recoupment for lack of jurisdiction. A divided Tax Court denied the motion, ruling that it had jurisdiction to entertain the affirmative defense of equitable recoupment. This decision, which we call Mueller II, dealt only with the Tax Court's jurisdiction to consider the defense of equitable recoupment, and did not address the merits of the question. After further trial proceedings, the Tax Court issued its decision in Mueller III, holding that equitable recoupment did not apply in the circumstances of this case.

II.

The dispute here is entirely a legal one, as neither party contests any issues of fact. We review the legal conclusions of the tax court de novo. Estate of Swallen v. Commissioner of Internal Revenue, 98 F.3d 919, 922 (6th Cir.1996); see also Wolpaw v. Commissioner of Internal Revenue, 47 F.3d 787, 790 (6th Cir.1995); United States v. Hans, 921 F.2d 81, 82 (6th Cir.1990). The taxpayer is appealing the Tax Court's Mueller III decision not to apply equitable recoupment and does not appeal the Mueller II decision to exercise jurisdiction over the equitable recoupment claim. Before we can reach the question decided in Mueller III, however, we must first determine whether the Tax Court was correct to hold, as it did in Mueller II, that it had the jurisdiction to consider such a claim. "[E]very federal appellate court has a special obligation to 'satisfy itself not only of its own jurisdiction, but also that of the lower courts in a cause under review.' " Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 541, 106 S.Ct. 1326, 89 L.Ed.2d 501 (1986) (quoting Mitchell v. Maurer, 293 U.S. 237, 244, 55 S.Ct. 162, 79 L.Ed. 338 (1934)).

The Tax Code specifies that "[t]he Tax Court and its divisions shall have such jurisdiction as is conferred on them by [Title 26]." 26 U.S.C. § 7442. In addition, the Supreme Court has held that "[t]he Tax...