Estate of Orenstein v. Commissioner, Docket No. 25687-85.
| Decision Date | 26 April 2000 |
| Docket Number | Docket No. 4930-88.,Docket No. 25687-85. |
| Parties | Estate of Harry Orenstein, Deceased, Susan Carrano and Arthur Orenstein, Personal Representatives and Estate of Lora Orenstein, Deceased, Susan Carrano and Arthur Orenstein, Personal Representatives v. Commissioner. |
| Court | U.S. Tax Court |
Stuart R. Singer, Michael R. Matthias, and Jeffrey P. Berg, for the petitioners. David C. Holtz, for the respondent.
Respondent determined the following deficiencies and additions to tax with respect to decedents' Federal income taxes for the taxable years 1981 and 1982:
Additions to Tax
---------------------------------
Taxable Year Income Tax Sec. 6653 Sec. 6653 Sec. 6659
Deficiency (a) (1) (a) (2)
1981 ......................... $45,700 $2,285 50% of --
interest
due on
$45,700
1982 ......................... 7,604 -- -- $2,281
Respondent further determined that $19,539 and $7,604 of the deficiencies for 1981 and 1982, respectively, were subject to the increased interest charged on "substantial underpayments attributable to tax motivated transactions" under section 6621(c) (for 1982) or 6621(d) (for 1981).
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Petitioners in these consolidated cases are the estates of Harry Orenstein (Mr. Orenstein) and Lora Orenstein (Mrs. Orenstein). Susan Carrano and Arthur Orenstein are the personal representatives of both estates. After concessions, the issue for decision is whether petitioners, under the doctrine of equitable recoupment, are entitled to offset against their Federal income tax liabilities an overpayment of estate tax, the claim for which is barred by the statute of limitations. Subsumed in this inquiry and determinative thereof is the question of whether the Tax Court has authority to grant equitable recoupment relief.
This case was submitted fully stipulated pursuant to Rule 122, and the facts are so found. The stipulations of the parties, with accompanying exhibits, are incorporated herein by this reference.
Mr. and Mrs. Orenstein filed joint Federal income tax returns for 1981 and 1982. Mrs. Orenstein died on December 28, 1983, and Mr. Orenstein became executor of her estate. Respondent thereafter issued notices of deficiency for the 1981 and 1982 tax years, to which Mr. Orenstein responded by filing petitions for redetermination with this Court. He at the time of filing resided in Hollywood, Florida.
On May 14, 1993, Mr. Orenstein died. A prepayment of estate taxes in the amount of $1,655,000 was made in March of 1994. The estate of Mr. Orenstein then filed a U.S. Estate (and Generation-Skipping Transfer) Tax Return, Form 706, on September 7, 1994. The Form 706 reported a total estate tax liability of $1,613,799 and did not claim any deduction for debts of the decedent to respondent for the still-pending 1981 and 1982 income tax liabilities. Respondent assessed estate taxes of $1,613,799, as reported, and the excess prepayment sum was refunded in February of 1995.
Subsequently, in November of 1998, petitioners and respondent entered stipulations settling all issues with respect to the income tax deficiency cases except for that regarding petitioners' assertion of entitlement to equitable recoupment relief. Pursuant to this settlement, petitioners conceded liability for income tax deficiencies and increased interest in the amounts determined by respondent. Respondent conceded that petitioners were not liable for additions to tax under section 6653 or 6659. Petitioners maintained, however, that because the portion of such agreed liabilities owing as of Mr. Orenstein's date of estate taxes was time-barred, they were entitled to offset against the stipulated 1981 and 1982 income tax debts an $84,590 overpayment of estate tax. This claim for equitable recoupment is the subject of the instant litigation.
Petitioners contend both that their situation satisfies the factual prerequisites for equitable recoupment relief and that this Court has the legal authority to afford such relief. They base their averments primarily on our recent decisions in Estate of Branson v. Commissioner [Dec. 53,454], 113 T.C. 6 (1999), Estate of Bartels v. Commissioner [Dec. 51,386], 106 T.C. 430 (1996), and Estate of Mueller v. Commissioner [Dec. 49,461], 101 T.C. 551 (1993).
Conversely, respondent asserts that this Court lacks authority to recognize an equitable recoupment defense. Respondent argues that cases such as Estate of Branson v. Commissioner, supra, and Estate of Bartels v. Commissioner, supra, were incorrectly decided and ignore a plain reading of statutory and case law. In the alternative, respondent maintains that Continental Equities, Inc. v. Commissioner [77-1 USTC ¶ 9375], 551 F.2d 74 (5th Cir. 1977), affg. in part and revg. in part [Dec. 32,692(M)] T.C. Memo. 1974-189, is controlling law in the Eleventh Circuit and thereby settles the issues in this case, in a manner consistent with respondent's position, pursuant to the rule established in Golsen v. Commissioner [Dec. 30,049], 54 T.C. 742 (1970), affd. [71-2 USTC ¶ 9497] 445 F.2d 985 (10th Cir. 1971). We disagree with respondent and, for the reasons explained below, hold for petitioners.
To "recoup" is to "get back the equivalent of something lost." Crop Assoc.-1986 v. Commissioner [Dec. 53,539], 113 T.C. 198, 200 (1999). Equitable recoupment, in turn, is a judicially created doctrine under which a claim for a refund of or deficiency in taxes barred by a statute of limitations may nonetheless be recouped, or offset, against a tax claim of the Government (in the case of a time-barred refund) or of the taxpayer (in the case of a time-barred deficiency assessment). See Bull v. United States [35-1 USTC ¶ 9346], 295 U.S. 247, 262 (1935); Crop Assoc.-1986 v. Commissioner, supra at 200; Estate of Mueller v. Commissioner, supra at 551-552. Equitable recoupment operates only in the nature of a defense to reduce the Government's timely claim for a deficiency, or the taxpayer's timely claim for a refund, not affirmatively to collect the time-barred overpayment or underpayment. See Bull v. United States, supra at 262; Estate of Branson v. Commissioner, supra at 9-10; Estate of Mueller v. Commissioner, supra at 552.
The purpose of the equitable recoupment doctrine is "to preclude unjust enrichment of a party to a lawsuit and to avoid wasteful multiplicity of litigation." Estate of Mueller v. Commissioner, supra at 551-552; see also Crop Assoc.-1986 v. Commissioner, supra at 200. The elements necessary to sustain a claim for equitable recoupment require: (1) The refund or deficiency for which recoupment is sought by way of offset be barred by time; (2) the time-barred offset arise out of the same transaction, item, or taxable event as the overpayment or deficiency before the Court; (3) the transaction, item, or taxable event have been inconsistently subjected to two taxes; and (4) if the subject transaction, item, or taxable event involves two or more taxpayers, there be sufficient identity of interest between the taxpayers subject to the two taxes so that the taxpayers should be treated as one. See Crop Assoc.-1986 v. Commissioner, supra at 200-201; Estate of Branson v. Commissioner, supra at 15.
Here, in conceding on brief that "petitioners would be entitled to equitable recoupment relief if these cases were brought before the United States District Court", respondent essentially concedes that petitioners have met the requisite elements for a valid equitable recoupment claim. We further note that a nearly identical failure to deduct pending income tax deficiency claims, for estate tax purposes, has been held a proper basis for recoupment. See Estate of Bartels v. Commissioner, supra. Hence, we need address only the parties' contentions regarding our authority to grant such relief.
The issue of whether this Court possesses authority to recognize an equitable recoupment defense has a long history. Prior to our decision in Estate of Mueller v. Commissioner, supra, we adhered to the view that we lack jurisdiction to apply equitable recoupment. See Estate of Schneider v. Commissioner [Dec. 46,143], 93 T.C. 568, 570 (1989); Phillips Petroleum Co. v. Commissioner [Dec. 45,667], 92 T.C. 885, 889-890 (1989); Estate of Van Winkle v. Commissioner [Dec. 29,502], 51 T.C. 994, 999-1000 (1969). This position was based in large part on Commissioner v. Gooch Milling & Elevator Co. [43-2 USTC ¶ 9673], 320 U.S. 418, 420-422 (1943), in which the U.S. Supreme Court held that the limited jurisdiction of the Board of Tax Appeals, an administrative agency and the predecessor of the Tax Court, did not extend to claims of equitable recoupment.
In 1990, however, the Supreme Court noted in United States v. Dalm [90-1 USTC ¶ 50,154, 90-1 USTC ¶ 60,012], 494 U.S. 596, 611 n. 8 (1990): "We have no occasion to pass upon the question whether Dalm could have raised a recoupment claim in the Tax Court." We concluded from this statement that the Supreme Court left open whether the Tax Court, as presently constituted in the form of a court of law under Article I of the Constitution, see Freytag v. Commissioner [91-2 USTC ¶ 50,321], 501 U.S. 868, 887 (1991), has authority to hear such a claim. We then proceeded to reexamine the issue in Estate of Mueller v. Commissioner [Dec. 49,461], ...
To continue reading
Request your trial