Mueller v. Comm'r of Internal Revenue (In re Estate of Mueller), 2733–90.

Citation101 T.C. No. 37,101 T.C. 551
Decision Date13 December 1993
Docket NumberNo. 2733–90.,2733–90.
PartiesESTATE OF Bessie I. MUELLER, Deceased, John S. Mueller, Personal Representative, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Steven Uzelac, Michael A. Indenbaum, and Paul L. Winter, Detroit, MI, for petitioner.

Thomas M. Rath, Detroit, MI, for respondent.

OPINION

BEGHE, Judge:

In Estate of Mueller v. Commissioner, T.C. Memo. 1992–284, we redetermined the increased value of the shares of Mueller Co. included in decedent's gross estate. We now consider respondent's motion to dismiss for lack of jurisdiction the partial affirmative defense of equitable recoupment asserted in petitioner's amended petition in respect of a time-barred overpayment of income tax by petitioner's residuary legatee, the Bessie I. Mueller Trust (the Trust). For the reasons discussed below, we deny respondent's motion to dismiss.

Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, and all Rule references are to the Tax Court Rules of Practice and Procedure.

The ancient doctrine of equitable recoupment, which developed concurrently at common law and in equity, was judicially created to preclude unjust enrichment of a party to a lawsuit and to avoid wasteful multiplicity of litigation. See generally McConnell, “The Doctrine of Recoupment in Federal Taxation”, 28 Va.L.Rev. 577, 579–581 (1942). The doctrine has been applied in Federal tax matters since the Supreme Court's decision in Bull v. United States, 295 U.S. 247 (1935), to allow the bar of the expired statutory limitation period to be overcome in limited circumstances in order to prevent inequitable windfalls to either taxpayers or the Government that would otherwise result from inconsistent tax treatment of a single transaction, item, or event affecting the same taxpayer or a sufficiently related taxpayer. See also United States v. Dalm, 494 U.S. 596, 605–606 n. 5 (1990); Rothensies v. Electric Storage Battery Co., 329 U.S. 296 (1946); Stone v. White, 301 U.S. 532 (1937). The doctrine of equitable recoupment may be applied to relieve inequities caused when a transaction is treated inconsistently under different taxes, such as the income tax and the estate tax. Bull v. United States, supra; Boyle v. United States, 355 F.2d 233 (3d Cir.1965). However, the party asserting equitable recoupment may not affirmatively collect the time-barred underpayment or overpayment of tax. Equitable recoupment “operates only to reduce a taxpayer's timely claim for a refund or to reduce the government's timely claim of deficiency”. O'Brien v. United States, 766 F.2d 1038, 1049 (7th Cir.1985).

Respondent argues that we are precluded from applying the doctrine of equitable recoupment because there is no provision in the Internal Revenue Code that grants the Tax Court jurisdiction to apply equitable recoupment, and that sections 6214(b) 1 and 6512(b),2 and their statutory predecessors, as interpreted and applied by the Supreme Court in Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418 (1943), expressly deny the Tax Court jurisdiction to apply equitable recoupment.

We disagree with both of these arguments. The absence of an express statutory grant of jurisdiction does not bar us from considering the affirmative defense of equitable recoupment because, as an affirmative defense, it comes within our jurisdiction to redetermine petitioner's estate tax deficiency. Moreover, neither section 6214(b) or 6512(b) nor Gooch Milling denies us authority to apply equitable recoupment.

Respondent points out that we have consistently adhered to the view that we lack jurisdiction to apply equitable recoupment. See, e.g., Estate of Schneider v. Commissioner, 93 T.C. 568, 570 (1989); Phillips Petroleum Co. v. Commissioner, 92 T.C. 885, 888–890 (1989); Poinier v. Commissioner, 86 T.C. 478, 490–491 (1986), affd. in part and revd. in part 898 F.2d 917 (3d Cir.1988); Estate of Van Winkle v. Commissioner, 51 T.C. 994, 999–1000 (1969); Vandenberge v. Commissioner, 3 T.C. 321, 327–328 (1944), affd. 147 F.2d 167 (5th Cir.1945). However, in United States v. Dalm, supra, the Supreme Court adverted to the possibility that the Tax Court could have applied equitable recoupment, but stated that it had “no occasion to pass upon the question whether Dalm could have raised a recoupment claim in the Tax Court,” id. at 611 n. 8, because she had not raised the issue in her Tax Court petition. We therefore reconsider the issue in light of Dalm. 3

In United States v. Dalm, supra, the taxpayer was administratrix of a decedent's estate and received fees for her services of $30,000 in 1976 and $7,000 in 1977. The decedent's sole heir also paid Mrs. Dalm $180,000 in 1976 and $133,813 in 1977, totaling one-third of the net estate, supposedly to carry out the decedent's intentions. The heir filed a Federal gift tax return for the calendar year 1976, and Mrs. Dalm paid the gift tax on that transfer. Neither the heir nor Mrs. Dalm paid gift tax on the 1977 transfer.

In 1983, after the statutory limitation period had expired on the 1976 gift tax, the IRS determined that the $180,000 and $133,813 transfers to Mrs. Dalm in 1976 and 1977 were additional fees that she should have reported as income on her Federal income tax returns for the taxable years 1976 and 1977, and determined deficiencies in her income taxes for those years. Mrs. Dalm petitioned the Tax Court for a redetermination, arguing that the transfers were gifts excludable from gross income under section 102(a), rather than fees includable as income under section 61(a)(1). However, she did not raise in her Tax Court petition, as required by Rule 39, the affirmative defense of equitable recoupment.4

Two days after the trial of the income tax case in this Court, the parties settled. Mrs. Dalm agreed to pay reduced income tax deficiencies for the taxable years 1976 and 1977. Mrs. Dalm then filed an untimely administrative claim for refund of the 1976 gift tax, and thereafter brought suit in U.S. District Court after the IRS had failed to act on the claim within 6 months. The District Court granted summary judgment in favor of the Government and dismissed the case because the recoupment claim was time barred, stating that “no precedent has yet been discovered in which an independent lawsuit, such as this, has been maintained for a year in which the statute of limitations has run.” Dalm v. United States, 89–1 USTC par. 13,806 (D.Mich.1987). The U.S. Court of Appeals for the Sixth Circuit reversed, holding that the prerequisites for applying equitable recoupment had been satisfied and that the equitable recoupment claim was not an independent lawsuit different from the case in the Tax Court. Dalm v. United States, 867 F.2d 305, 310 (6th Cir.1989). The Supreme Court granted the Government's petition for a writ of certiorari. United States v. Dalm, 493 U.S. 807 (1989).

In Dalm the factual requirements for equitable recoupment appear to have been satisfied; a single transaction (the 1976 transfer from the heir to the administratrix) had been subject to double taxation (gift tax and income tax) on the basis of inconsistent factual characterizations and legal theories (as both a gift and compensation). Cf. Commissioner v. Duberstein, 363 U.S. 278 (1960). Nonetheless, the Supreme Court reversed the Court of Appeals' decision on the ground that a claim for equitable recoupment of time-barred overpaid taxes could not, by itself, provide the jurisdictional basis for a tax refund suit in U.S. District Court. United States v. Dalm, 494 U.S. at 606–608. The Supreme Court stated that its past decisions in Stone v. White, 301 U.S. 532 (1937), and Bull v. United States, 295 U.S. 247 (1935),

stand only for the proposition that a party litigating a tax claim in a timely proceeding may, in that proceeding, seek recoupment of a related, and inconsistent, but now time-barred tax claim relating to the same transaction. * * * [ United States v. Dalm, 494 U.S. at 608.]

Inasmuch as Mrs. Dalm was trying to use her recoupment claim offensively to support a separate time-barred claim for refund of overpaid gift tax, the Supreme Court reversed the Court of Appeals for the Sixth Circuit and reinstated the District Court's decision that it had no jurisdiction to adjudicate the taxpayer's equitable recoupment claim.

Dissenting in United States v. Dalm, 494 U.S. at 612–623, Justice Stevens disagreed with the majority's decision on the District Court's jurisdiction to hear Mrs. Dalm's claim for refund based on equitable recoupment, but commended the majority's reservation of the question whether the Tax Court has authority to consider recoupment. Id. at 615 n. 3.5

Respondent argues that we lack jurisdiction to apply the doctrine of equitable recoupment because there is no provision in the Internal Revenue Code granting us authority to do so. As respondent points out, the Tax Court is a court of limited jurisdiction that derives its authority from the Internal Revenue Code. Sec. 7442. However, exercising jurisdiction over petitioner's recoupment defense does not require us to exercise jurisdiction that is beyond the scope of petitioner's main claim for the redetermination of its estate tax deficiency.

Although petitioner is, in actuality, the plaintiff in this suit, it is entitled to raise affirmative defenses to respondent's deficiency determination, such as res judicata, collateral estoppel, estoppel, waiver, duress, and the statute of limitations. Rule 39; see Woods v. Commissioner, 92 T.C. 776, 784 (1989). In Bull v. United States, 295 U.S. 247, 260 (1935), the Supreme Court recognized that in tax refund cases, “the usual procedure for the recovery of debts is reversed * * *. Payment precedes defense, and the burden of proof, normally on the claimant, is shifted to the taxpayer.” So it is in the Tax Court, where the taxpayer must sue the Commissioner of Internal...

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