Mann v. United States, CA 3-79-0136-R.

• Decision Date: 31 August 1982
• Docket Number: No. CA 3-79-0136-R.,CA 3-79-0136-R.
• Citation: 552 F. Supp. 1132
• Parties: Guy L. MANN, Deceased, Estate of Suzanne Mann Duval, Administratrix, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Texas

552 F. Supp. 1132

Guy L. MANN, Deceased, Estate of Suzanne Mann Duval, Administratrix, Plaintiff, v. UNITED STATES of America, Defendant.

No. CA 3-79-0136-R.

United States District Court, N.D. Texas, Dallas Division.

August 31, 1982.

Robert Edwin Davis, Charles M. Meadows, Jr., Charles D. Pulman, Durant, Mankoff, Davis, Wolens & Francis, Dallas, Tex., for plaintiff.

Louise Hytken, Dept. of Justice, Tax Div., Dallas, Tex., for defendant.

MEMORANDUM OPINION

BUCHMEYER, District Judge.

This case involves an attempt by the government to offset a claim for additional estate tax which is barred by limitations against the amount recovered by the taxpayer in an income tax refund suit. One issue is presented:

Is the amount recovered by an estate in a successful income tax refund suit subject to offset — under the doctrine of "equitable recoupment"¹ — by the amount of additional estate tax which, although now barred by limitations, would have been due if the value of the claim for tax refund had been included as an asset for estate tax purposes?

Equitable recoupment is not proper under these circumstances. This doctrine must be given "limited scope," and does not apply in this case because there is not a "single transaction or taxable event" that has been "subjected to two taxes on inconsistent legal theories." Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 299-300, 67 S.Ct. 271, 272, 91 L.Ed. 296 (1946). Therefore, the income tax refund recovered by the taxpayer cannot be offset by the estate tax deficiency which is admittedly barred by limitations.

The Procedural Setting

Plaintiff Suzanne Mann Duval, Administratrix of the Estate of Guy L. Mann, Deceased, filed this suit to recover a refund of approximately $1.5 million in income taxes paid by the decedent. Specifically, she contended that Guy Mann made loans during his life to his brother and his nephew (Gerald C. Mann, Sr. and Jr.) and to three corporations with which they were associated (Diversa, Inwood Securities, and Murmanill Corporation); that these loans were connected to Guy Mann's business as a "promoter or broker"; that the loans were not repaid and became worthless in the year 1971; and that, consequently, Guy Mann was entitled to a business bad debt deduction in the amount of $2,111,902.60, which could be "carried back," under § 172 of the Internal Revenue Code, to generate a refund for the year 1968 of approximately $1.5 million in taxes and interest.

Defendant, the United States of America, contended that Guy Mann did not make true loans to his brother, his nephew and the corporations in the amounts claimed; that any advances by Guy Mann were either gifts or capital contributions; that these advances were not connected with Guy Mann's business activities, and were therefore non-business loans; and that, in any event, the advances by Guy Mann did not become worthless in 1971.

In addition, the government raised the affirmative defense of "equitable recoupment." Specifically, it claimed that under this doctrine the government was entitled to offset, against any income tax refund recovered by plaintiff, the amount of additional estate taxes which would have been due if the claim for refund had been included as an asset in the federal estate tax return — even though assessment of an estate tax deficiency was admittedly barred by limitations.

Upon the plaintiff's motion, separate trials were ordered for the plaintiff's refund claim and the government's attempt to offset by recoupment. Fed.R.Civ.P. 42(b).² The trial of the plaintiff's refund claim resulted in a jury verdict that the loans by Guy Mann were business debts and that they became wholly worthless in 1971. Mann's estate was thus entitled to the business bad debt deduction claimed for 1971; upon application of the net operating loss carryback provisions of the Internal Revenue Code, these findings entitled the plaintiff to an income tax refund for the year 1968 of approximately $1.5 million.

By motion for judgment n.o.v. the government renewed its arguments — presented earlier by unsuccessful motions for summary judgment and directed verdict³ — that there was no evidence (i) to show a business motivation for the loans, or (ii) to establish that 1971 was the year of worthlessness. This motion was denied because the evidence did support the jury's findings. Then, by agreement of the parties, the only remaining issue — the government's "equitable recoupment" claim — was presented for disposition by the plaintiff's motion for summary judgment. Under the undisputed facts and the authorities discussed below, the doctrine of "equitable recoupment" is not applicable in this case, and the plaintiff is entitled to judgment as a matter of law. Fed.R.Civ.P. 56.

The Facts

The facts concerning the equitable recoupment claim are undisputed:

Guy Mann died on November 15, 1973, and Suzanne Mann Duval, his daughter, was appointed permanent administratrix of the Estate on September 26, 1974. The estate tax return was filed on April 15, 1975. At that time, the claim for refund of income taxes had not been filed and, consequently, the estate tax return did not include the claim for refund as an asset of the estate. On January 10, 1978, almost three years later, the plaintiff timely filed the claim for refund. It was denied, and this suit was filed on February 6, 1979.

However, the ordinary statute of limitations⁴ for the government's assessment of an estate tax deficiency expired on April 15, 1978 — some three months after the plaintiff's claim for refund was filed. Accordingly, by amended answer on April 12, 1979, the government raised, as an affirmative defense, the "equitable recoupment of the estate taxes owing to the United States due to the estate's failure to include the income tax claims as assets of the estate."

The jury verdict entitled the plaintiff to recovery of approximately $1.5 million. Of this, about $1 million represents the amount of tax and interest recoverable as of November 15, 1973, the day Guy Mann died. The parties have stipulated that the value of the claim for refund on the date of Mann's death was $346,876.33.

The government contends that, although the assessment of an estate tax deficiency on this amount is barred by limitations, it is — under the doctrine of equitable recoupment — entitled to recover the deficiency by way of offset against the refund of income taxes due the plaintiff. The plaintiff responds that the doctrine of equitable recoupment is to be narrowly construed, and that the government is not entitled to recoupment in this case because the claims of both parties are not based on a "single transaction or taxable event." The government argues that such a narrow construction of the doctrine is not required, and that the "interdependency" of the two claims is sufficient to satisfy the "single transaction" test, so that "a $1,000,000 asset of the estate will not entirely escape estate taxes." The plaintiff also contends that, as a matter of law, §§ 6401(a) and 6514(b) of the Internal Revenue Code preclude the government from offsetting its time-barred claim against the plaintiff's refund.

The Doctrine of Equitable Recoupment

A doctrine known as "equitable recoupment" has been utilized in tax cases to allow one party to recover a time-barred claim by offsetting it against an amount owed to the other party. It is based upon the concept that "one taxable event should not be taxed twice, once on a correct theory and once on an incorrect theory ... and that to avoid this happening the statute of limitations will be waived." Minskoff v. United States, 490 F.2d 1283, 1285 (6th Cir. 1974). To determine whether the doctrine applies in this case requires examination of three opinions by the United States Supreme Court and of subsequent lower court decisions.

The doctrine of equitable recoupment was first applied in Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 (1935). There, the government initially determined that the decedent's interest in a partnership was corpus of his estate and collected an estate tax on this interest. Then, five years later, the government determined that a portion of the same partnership interest was income to the estate and collected an income tax deficiency. In a refund suit brought by the estate, the Supreme Court held (i) that the partnership interest was properly taxed as income to the estate, but (ii) that the government had erroneously collected estate tax on the same item. Although the plaintiff was barred by limitations from recovering the overpaid estate tax, the Court held that — under the doctrine of equitable recoupment⁵ — the plaintiff was entitled to offset the overpayment of estate tax on the partnership interest against the income tax deficiency on the same partnership interest. The Court described the doctrine of equitable recoupment as a "defense arising out of some feature of the transaction upon which the plaintiff's action is grounded" and held that "such a defense is never barred by the statute of limitations so long as the main action itself is timely" (295 U.S. at 262, 55 S.Ct. at 700).

Next, in Stone v. White, 301 U.S. 532, 57 S.Ct. 851, 81 L.Ed. 1265 (1937), the government was permitted to invoke equitable recoupment as the taxpayer had done in Bull. A trust had paid income taxes on trust income; subsequently, the Supreme Court held that in these circumstances the sole beneficiary, rather than the trust, was liable for the taxes. The trust then filed a suit for refund — but only after the government was barred by limitations from assessing the tax against the sole beneficiary. Noting that any recovery by the trust would be for the benefit of the sole beneficiary, the Court held that the doctrine of equitable recoupment entitled the government to recoup "the tax which the beneficiary should have paid against the tax which the government should not have collected from the trust" (Roth...