Estate of Mueller v. C.I.R.

• Decision Date: 20 August 1998
• Docket Number: No. 97-1856,97-1856
• 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.
• Court: U.S. Court of Appeals — Sixth Circuit

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.

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 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 Court is a court of limited jurisdiction and lacks general equitable powers." Commissioner of Internal Revenue v. McCoy, 484 U.S. 3, 7, 108 S.Ct. 217, 98 L.Ed.2d 2 (1987) (emphasis added). Insofar as is relevant to the present case, the Tax Court has "jurisdiction to redetermine the correct amount of a deficiency." 26 U.S.C. § 6214(a).

A deficiency results when the IRS imposes a tax upon the taxpayer that is higher than that reported on the taxpayer's tax return. The deficiency may result from an oversight or, as is the case here, it may result from a disagreement as to the amount owed. A taxpayer has two choices when he disagrees with an assessment of deficiency by the IRS: he may pay the tax and then sue in District Court for a refund, or he may refuse to pay the tax and submit his claim to the limited jurisdiction of the Tax Court for redetermination of the deficiency. If the taxpayer chooses the second course, he gains the benefit of not paying the tax until the issue is resolved, but he must pay the price of submitting his claim to a court of limited jurisdiction.

A deficiency redetermination sought in the Tax Court should not be confused with a refund suit filed in the district court. Whereas the deficiency redetermination is nothing more than the judicial review of an assessment made by an administrative agency, a refund suit is an "action brought to recover a tax erroneously paid, [which,] although an action at law is equitable in its function. It is the lineal successor of the common count indebitatus assumpsit for money had and received." Stone v. White, 301 U.S. 532, 534, 57 S.Ct. 851, 81 L.Ed. 1265 (1937). Thus, by refusing to pay the tax and filing for a redetermination in the Tax Court, the taxpayer sacrifices the opportunity to have his claim adjudicated by a court with the jurisdiction to effect justice both in law and in equity.

In order to determine the correct amount of the deficiency, the Tax Court may need to consider "facts with relation to taxes for other years or other 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." 26 U.S.C. § 6214(b) (emphasis added). Thus, § 6214(b) makes it abundantly clear that the Tax Court's jurisdiction extends no further than the amount of the deficiency before it.

The Tax Court in Mueller II made much of the fact that estate taxes are not mentioned in § 6214(b)'s prohibition against determining whether taxes in other years have been overpaid or underpaid. The statute does not mention estate taxes, argued the Tax Court in Mueller II, so its limitations must not apply to estate taxes. It is true that the statute does not mention estate taxes. It is also true that § 6214(b) is titled "Jurisdiction over other years and quarters," a heading which can apply only to periodic taxes such as income or gift taxes. The estate tax is not a periodic tax. It accrues only at the death of the taxpayer, and although it may be a source of great sorrow to the IRS, the average taxpayer will die only once. Section 6214(b) does not specifically mention estate taxes because it makes no sense to speak of estate taxes for other years or other calendar quarters. The statute's failure to mention estate taxes does not support the theory that the Tax Court's jurisdiction is limited in income and gift tax cases, but unlimited in estate...