Fisher v. U.S.

• Decision Date: 10 April 1996
• Docket Number: No. 95-5118,95-5118
• Citation: 80 F.3d 1576
• Parties: -1648, 96-1 USTC P 50,204 Gisele C. FISHER, Plaintiff-Appellee, v. The UNITED STATES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1576

80 F.3d 1576

77 A.F.T.R.2d 96-1648, 96-1 USTC P 50,204

Gisele C. FISHER, Plaintiff-Appellee, v. The UNITED STATES, Defendant-Appellant.

No. 95-5118.

United States Court of Appeals, Federal Circuit.

April 10, 1996.

Appealed from: U.S. Court of Federal Claims; Judge Futey.

Paul W. Oden, Miller, Nash, Wiener, Hager & Carlsen, Seattle, Washington, argued for plaintiff-appellee.

Joan I. Oppenheimer, Attorney, Department of Justice, Washington, D.C., argued for defendant-appellant. With her on the brief were Loretta C. Argrett, Assistant Attorney General, Gary R. Allen and Jonathan S. Cohen, Attorneys.

Before LOURIE, Circuit Judge, FRIEDMAN, Senior Circuit Judge, and BRYSON, Circuit Judge.

FRIEDMAN, Senior Circuit Judge.

In Lewis v. Reynolds, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293, modified on other grounds, 284 U.S. 599, 52 S.Ct. 264, 76 L.Ed. 514 (1932), the Supreme Court held that in a tax refund suit, the Internal Revenue Service (IRS) may offset against the refund other taxes that had previously not been assessed, and the assessment of which the statute of limitations barred. The question in this case, here on appeal from the United States Court of Federal Claims, is whether the same principle permits the offset against a tax refund of previously unassessed interest on an underpayment of tax, the assessment of which the statute of limitations similarly barred. The Court of Federal Claims held that the interest could not be offset. We reverse.

I.

In 1987 the appellee Fisher, as representative of an estate, filed an estate tax return and paid the tax. In 1990 the IRS sent Fisher a notice of deficiency of $1,726,477, based upon three items: (1) the increase in the value of the stock in a closely-held corporation that the estate owned; (2) the treatment of the decedent's transfer of almost $100,000 to his adult son as a taxable gift; and (3) the reduction of the marital deduction to reflect administration expenses paid from estate income. The increase in the stock valuation was responsible for most of the deficiency.

The notice did not include interest on the deficiency.

Fisher paid the deficiency and, after the IRS disallowed her refund claim in April 1991, filed the present suit in the Court of Federal Claims for a refund of the $1,726,477. The statute of limitations for the assessment In its first amended answer, the government asserted:

                of tax and interest thereon expired on March 4, 1991.   The IRS never assessed the alleged deficiency (or interest thereon)
                

12. During the time period when the tax in dispute was unpaid (October 6, 1987, through November 20, 1990), interest in the amount of approximately $701,964 was due the government, but was inadvertently not assessed by the government. Plaintiff has not paid such interest which is due to defendant.

13. Plaintiff owes defendant approximately $701,964 in interest, and such amount should be offset against any recovery to which plaintiff might otherwise be entitled. (The interest offset might actually lower the amount of estate tax due. The impact of the interest offset on any final judgment in plaintiff's favor can thus be determined only after all other issues in this case have been decided.)

On the plaintiff's motion for summary judgment and the government's cross-motion for summary judgment, the court denied the plaintiff's motion (involving an issue not here relevant) and granted the government's motion. The court held that the IRS properly had imposed additional taxes to reflect treatment of the decedent's payment to his son as a taxable gift and the reduction of the marital deduction.

Fisher then moved to strike the government's first amended answer, on the ground that the "defendant does not have a reasonable basis to assert an offset of interest allegedly due, but not assessed, on the underlying tax item which is the subject of this tax refund case." Fisher v. United States, 31 Fed. Cl. 396, 396-97 (1994). The Court of Federal Claims denied the motion to strike. It stated:

As noted in the seminal Supreme Court case, Lewis v. Reynolds, "the ultimate question presented for decision, upon a claim for refund, is whether the taxpayer has overpaid his tax." 284 U.S. at 283, 52 S.Ct. at 146. If the amount of interest on that payment had been assessed, and plaintiff had paid that amount along with her payment of the underlying tax, then her suit here would be for refund not just of the tax, but of the interest she was required to pay on that tax. It is illogical to hold that plaintiff must pay interest on an amount that the IRS should never have assessed. If plaintiff wins her claim for a refund on the merits, defendant is in the untenable position of producing a "reasonable basis" for asserting that the government is owed interest on an "erroneous assessment."

Nonetheless, the instant case presents a narrow situation in which defendant might be able to assert a reasonable basis for the interest item. The case at hand involves a dispute over stock valuation. Therefore, at trial there is the possibility that this court could find that neither party properly valued the stock, and that some intermediate valuation is correct. In such a situation, part of the assessment by the government would be correct, and interest that would have accrued on such portion might reasonably be offset against that portion that is due to plaintiff in refund.... Therefore, defendant has posited a reasonable basis for the offset. This issue, however, is only amenable to resolution after this court has rendered a decision on the merits after trial.

Id. at 398.

After trial, the court upheld the stock valuation Fisher reported in the estate tax return, and entered judgment for Fisher for the deficiency she had paid, $1,726,477.

The government filed a motion to correct the judgment by reducing it to reflect the two issues on which it previously had prevailed and an offset of $55,600 covering interest on those two items from 1987 to 1990. It requested the court to issue a corrected judgment for the plaintiff for $1,534,128. In her response, Fisher agreed that the judgment should be reduced to reflect the two items on which the government had prevailed, but denied that the government was entitled to offset the interest on those items. She therefore consented to entry of a corrected judgment of $1,589,728.

The court corrected the judgment as Fisher proposed, but held that Defendant is not entitled to an interest offset. In its June 2, 1994, Opinion, the court indicated that defendant could be entitled to an interest offset if plaintiff improperly valued the stock. Fisher v. United States, 31 Fed. Cl. 396, 398 (1994). The court, however, found in favor of plaintiff's stock valuation. Further, in Dysart v. United States, 169 Ct.Cl. 276, 282-83, 340 F.2d 624 (1965), the court indicated that a taxpayer should not reap a benefit when no refund is due. In this case, however, plaintiff paid the underlying tax and defendant has held the funds. Fisher, 31 Fed. Cl. at 397. Therefore, plaintiff is not reaping a benefit; plaintiff is due a refund.

The government's appeal challenges only the denial of the offset.

II.

A. Lewis was an income tax refund suit in which, in response to the claim, the Commissioner of Internal Revenue determined that a deduction taken on the return, which he previously had allowed, had been improperly taken. He redetermined the tax to eliminate the deduction. The limitations period for assessing an additional tax to reflect the disallowance of the deduction had expired when the Commissioner acted. The Supreme Court affirmed the Commissioner's action, stating:

While the statutes authorizing refunds do not specifically empower the Commissioner to reaudit a return whenever repayment is claimed, authority therefor is necessarily implied. An overpayment must appear before refund is authorized. Although the statute of limitations may have barred the assessment and collection of any additional sum, it does not obliterate the right of the United States to retain payments already received when they do not exceed the amount which might have been properly assessed and demanded.

284 U.S. at 283, 52 S.Ct. at 146.

In Dysart v. United States, 169 Ct.Cl. 276, 340 F.2d 624 (1965), the Court of Claims, whose decisions bind us, see South Corp. v. United States, 690 F.2d 1368, 1370 (Fed.Cir.1982), applied Lewis to permit a comparable offset in a slightly different situation. There the taxpayer sought a refund of an improperly paid penalty for underestimation of income for the year involved. Dysart, 340 F.2d at 626-27. The government sought to offset an alleged tax deficiency for the same year, the time for assessing which had expired. Id. at 627. The court denied the taxpayer's motion to strike the offset. It stated:

In a refund action, the taxpayer cannot recover unless he has overpaid his tax. It is not enough that he can prevail on the particular items on which he sues, for he may have underpaid with respect to other components entering into that tax. Only if the overall balance moves his way can he recover. His entire tax liability under the particular tax return is therefore open for redetermination. The setoff is one mechanism by which the government alleges that, looking at the particular tax as a whole, the taxpayer has not in fact overpaid his tax.

Id. at 628.

The court referred to "the essential principle that a taxpayer suing for a refund of a tax for a particular year must show that, in actuality, he overpaid that tax." Id. at 629-30. The court also ruled that "the [government's] right to raise a setoff is not subject to equitable considerations as taxpayers contend." Id. at 627.

Lewis and Dysart together stand for the proposition that the government may offset against a tax refund claim any additional amounts the taxpayer owes with respect to the tax shown on the return, even though the statute of limitations would bar assessing the...