Mueller v. Comm'r of Internal Revenue (In re Estate of Mueller)

Decision Date05 November 1996
Docket NumberNo. 2733–90.,2733–90.
Citation107 T.C. No. 13,107 T.C. 189
PartiesESTATE OF Bessie I. MUELLER, Deceased, John S. Mueller, Personal Representative, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

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

Thomas M. Rath and Trevor T. Wetherington, Grand Rapids, MI, for respondent.

R determined a deficiency in P's estate tax liability. P claims that it is entitled to equitable recoupment of previously paid income tax, the refund of which is barred by the statute of limitations. In Estate of Mueller v. Commissioner, 101 T.C. 551 (1993), we held that we have jurisdiction to consider claims of equitable recoupment.

As a result of our valuation of stock includable in the estate, see Estate of Mueller v. Commissioner, T.C.Memo. 1992–284, it is now apparent that there is no deficiency in estate tax; rather, P is entitled to recover an overpayment of estate tax, regardless of equitable recoupment. Under these circumstances, any application of equitable recoupment would increase the amount that P is entitled to recover as an overpayment.

Held: Equitable recoupment is restricted to use as a defense against an otherwise valid claim. For purposes of equitable recoupment, the notice of deficiency is considered to be R's claim for additional estate tax. See Bull v. United States, 295 U.S. 247 (1935). Once it is determined that R has no valid claim for additional tax, the defense of equitable recoupment has no application. Equitable recoupment cannot be used to increase the amount of an overpayment that P is entitled to recover.

OPINION

RUWE, Judge: *

Respondent determined a deficiency of $1,985,624 in petitioner's Federal estate tax. Respondent's deficiency determination was primarily based on her assertion that the date-of-death value of shares of stock in the Mueller Co. was $2,150 per share, as opposed to $1,505 per share as reported on the estate tax return. The amount of the deficiency determined by respondent was the result of this increase in value and other adjustments not in issue, including respondent's allowance of a credit for tax on prior transfers in the amount of $1,152,649, that had not been claimed by petitioner on its estate tax return. Petitioner petitioned this Court for a redetermination.1

Petitioner subsequently filed an amended petition alleging that “The Commissioner erred in determining said Deficiency by disallowing recoupment against such [estate] tax amount for the income tax paid by the Bessie I. Mueller Trust * * * on capital gains realized from the post-death sale of * * * Mueller Company common stock includable in the Decedent's gross estate.” The Bessie I. Mueller Administration Trust (the Trust) is the residuary legatee of decedent's estate. After decedent's death, the Trust sold shares of Mueller Co. stock that were included in decedent's gross estate. On its income tax return, the Trust reported gain on the sale using a basis of $1,500 per share. 2 The Trust's basis in the stock is controlled by the value of the stock at decedent's date of death. See sec. 1014(a)(1).3

In Estate of Mueller v. Commissioner, T.C.Memo. 1992–284 (Mueller I), we found that the date-of-death value of the Mueller Co. stock was $1,700 per share, as opposed to $1,505 per share as reported on petitioner's estate tax return or $2,150 as determined by respondent in the notice of deficiency. As a result, it is now clear that the Trust understated its basis and overstated its gain on the sale of Mueller Co. stock and, therefore, overpaid its income tax. However, the statute of limitations bars refund of the Trust's overpayment of income tax.

Respondent moved to dismiss petitioner's claim for recoupment on the ground that we lacked jurisdiction to consider equitable recoupment. In Estate of Mueller v. Commissioner, 101 T.C. 551 (1993) (Mueller II), we held that this Court is authorized to entertain the affirmative defense of equitable recoupment in an action for redetermination of a deficiency and denied respondent's jurisdictional motion. Id. at 561. However, we made no findings with respect to whether petitioner satisfied the requirements for applying equitable recoupment in this case.

It subsequently became clear that our opinion in Mueller I, which increased decedent's taxable estate by less than the amount determined in the notice of deficiency, combined with respondent's allowance in the notice of deficiency of the credit for tax on prior transfers, will result in a decision that there is no deficiency in petitioner's estate tax.4 Indeed, petitioner is entitled to recover an overpayment of its estate tax, regardless of whether or not equitable recoupment applies in this case.5

The threshold issue we must address is whether petitioner may use equitable recoupment against respondent, where respondent has no valid claim for additional estate tax against which petitioner needs to defend.

Pursuant to the doctrine of equitable recoupment, “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. 596, 608 (1990). Equitable recoupment can be used as a defense by both taxpayers and the Government. Stone v. White, 301 U.S. 532 (1937). While recoupment claims are generally not barred by the statute of limitations if the main action is timely, use of recoupment based on an otherwise time-barred claim is limited to defending against the claim in the main action.6 Reiter v. Cooper, 507 U.S. 258, 264 (1993); United States v. Dalm, supra at 605; Stone v. White, supra at 538–539; Bull v. United States, 295 U.S. 247, 262–263 (1935); United States v. Forma, 42 F.3d 759, 765 (2d Cir.1994); 7 In re Greenstreet, Inc., 209 F.2d 660, 663 (7th Cir.1954).8

Petitioner acknowledges that equitable recoupment is limited to defensive use. However, petitioner argues that it should be allowed to use equitable recoupment to defend against the additional tax that would have been due as a result of our valuation of decedent's stock, assuming that respondent had not allowed the credit for prior transfers in the notice of deficiency. Petitioner would have us apply recoupment against a hypothetical tax liability on a transaction-by-transaction basis, regardless of whether there was a valid claim for additional tax liability against which to defend. On brief, petitioner describes this as an issue of first impression.

Respondent takes the position that equitable recoupment can be used by a taxpayer only as a defensive measure to reduce or eliminate a taxpayer's actual liability for additional tax. Respondent argues that once it is clear that the taxpayer has no additional tax liability, there is no valid claim against which to defend. Respondent contends that to allow equitable recoupment of time-barred taxes to increase the overpayment that is already due petitioner is the same as permitting petitioner affirmatively to collect the time-barred overpayment of tax.

Respondent's position finds support in Mueller II where we stated:

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). [ Estate of Mueller v. Commissioner, 101 T.C. at 552.]

The opinion in O'Brien v. United States, 766 F.2d 1038, 1049 (7th Cir.1985), also supports respondent's position that equitable recoupment may be used only as a defense against the additional tax that would otherwise be due:

Recoupment * * * will permit a taxpayer to recoup an erroneously paid tax, the refund of which is time-barred, against a timely and correctly asserted deficiency by the government. The doctrine thus operates only to reduce * * * the government's timely claim of deficiency; it does not allow the collection of the barred tax itself. In summary, the doctrine requires some validly asserted deficiency or refund against which the asserting party desires to recoup a time-barred refund or deficiency.

* * *

Attempts by taxpayers to utilize the doctrine to revive an untimely affirmative refund claim, as opposed to offset a timely government claim of deficiency with a barred claim of the taxpayer, have been uniformly rejected. * * * [Id. at 1049; citation omitted.]

Likewise, in Brigham v. United States, 200 Ct.Cl. 68, 80–81, 470 F.2d 571, 577 (1972), the court explained the function of equitable recoupment as follows:

When its benefits are sought by the taxpayer, the function of the doctrine is to allow the taxpayer to reduce the amount of a deficiency recoverable by the Government by the amount of an otherwise barred overpayment of the taxpayer. * * *

Petitioner correctly points out that none of these cases, nor any others relied upon by respondent, specifically address the situation that confronts us; i.e., whether equitable recoupment applies where, in the main action, the Court finds that there is an increase in a taxable item, but because of another adjustment in the main action, which is in the taxpayer's favor (the allowance of the credit for prior transfers), there is no additional tax owed to the Government. Further examination of the origin and nature of equitable recoupment is, therefore, appropriate.

The doctrine of equitable recoupment in tax cases was first articulated in Bull v. United States, supra. The Commissioner had determined a deficiency in estate tax, which the estate paid. Thereafter, the Commissioner inconsistently determined that there was a deficiency in the income tax liability of the estate based on the same item. The taxpayer paid the income tax deficiency and brought suit for refund. It was ultimately determined...

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  • March v. Comm'r of Internal Revenue (In re Estate of Branson)
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    ...the Court of Appeals for the Sixth Circuit in Estate of Mueller v. Commissioner, 153 F.3d 302 (6th Cir.1998), affg. on other grounds 107 T.C. 189 (1996), and if so, whether petitioner is entitled under that doctrine to credit for the taxes paid by the residuary legatee on the excessive gain......
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    ...value at which property is returned for estate tax purposes is, however, entitled to great weight"); Estate of Mueller v. Commissioner, 107 T.C. 189, 226-27 n.23 (1996) (Beghe, J., dissenting) (noting Commissioner's inconsistent treatment of shares at issue) ("It would be inconsistent to ho......
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