T.C. Memo. 2000-150
UNITED STATES TAX COURT
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, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 25687-85, 4930-88. Filed April 26, 2000.
R issued notices of deficiency to H and W
determining Federal income tax liabilities for their
1981 and 1982 taxable years. H thereafter filed
petitions for redetermination on behalf of himself and
W’s estate. Following H’s subsequent death, his estate
filed a Federal estate tax return which did not reflect
a deduction for the still-pending income tax
liabilities. Because a refund of the resulting estate
tax overpayment is now time-barred, Ps seek to have a
corresponding amount offset against the income tax
liabilities pursuant to an equitable recoupment
defense.
Held: Ps are entitled, under the doctrine of
equitable recoupment, to offset against their Federal
income tax liabilities an overpayment of estate tax,
the claim for which is barred by the statute of
limitations. Estate of Branson v. Commissioner, 113
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T.C. 6 (1999); Estate of Bartels v. Commissioner, 106
T.C. 430 (1996); and Estate of Mueller v. Commissioner,
101 T.C. 551 (1993), followed.
Stuart R. Singer, Michael R. Matthias, and Jeffrey P. Berg,
for petitioners.
David C. Holtz, for respondent.
MEMORANDUM OPINION
NIMS, Judge: 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 Income Tax Sec. Sec. Sec.
Year Deficiency 6653(a)(1) 6653(a)(2) 6659
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.
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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.
Background
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.
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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 death had not been deducted for estate tax purposes and
refund of estate taxes was time-barred, they were entitled to
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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.
Discussion
I. Contentions of the Parties
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, 113 T.C. 6 (1999), Estate of Bartels
v. Commissioner, 106 T.C. 430 (1996), and Estate of Mueller v.
Commissioner, 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, 551 F.2d 74 (5th
Cir. 1977), affg. in part and revg. in part 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.
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Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.
1971). We disagree with respondent and, for the reasons
explained below, hold for petitioners.
II. Equitable Recoupment
A. General Rules
To “recoup” is to “get back the equivalent of something
lost.” Crop Assoc.-1986 v. Commissioner, 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, 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
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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
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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.
B. The Tax Court Position
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,
93 T.C. 568, 570 (1989); Phillips Petroleum Co. v. Commissioner,
92 T.C. 885, 889-890 (1989); Estate of Van Winkle v.
Commissioner, 51 T.C. 994, 999-1000 (1969). This position was
based in large part on Commissioner v. Gooch Milling & Elevator
Co., 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, 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, 501
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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, 101 T.C. 551 (1993), and subsequently in Estate of
Bartels v. Commissioner, 106 T.C. 430 (1996), and Estate of
Branson v. Commissioner, 113 T.C. 6 (1999). In each of these
cases, we held that this Court has authority to apply equitable
recoupment. See Estate of Branson v. Commissioner, supra at 7,
14; Estate of Bartels v. Commissioner, supra at 434-436; Estate
of Mueller v. Commissioner, supra at 556, 561.
Our position in this recent line of cases rests upon
considerations of, among other things, statutory language, the
nature of this Court, and our role in resolving tax
controversies. As regards statutory language, we have
interpreted section 6214(b), which states that the Court “shall
have no jurisdiction to determine whether or not the tax for any
other year or calendar quarter has been overpaid or underpaid”,
to mean, at most, that we may be precluded from determining the
income tax or gift tax for any prior period. See Estate of
Branson v. Commissioner, supra at 12; Estate of Bartels v.
Commissioner, supra at 434. Hence, contrary to respondent’s
averments, the section does not operate to prevent an offset for
overpayment of estate tax. See Estate of Bartels v.
Commissioner, supra at 434-435.
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Concerning the nature of this Court, we have focused on the
difference between the highly circumscribed authority of an
executive agency such as the Board of Tax Appeals and the broader
judicial power exercised by an Article I court. See Estate of
Branson v. Commissioner, supra at 10-12. We have further
concluded therefrom that Commissioner v. Gooch Milling & Elevator
Co., supra, and its progeny are not controlling on the issue of
equitable recoupment. See Estate of Branson v. Commissioner,
supra, at 11-12.
With respect to the Court’s role in resolving tax
controversies, we have placed particular emphasis on the
distinction between expanding our jurisdiction through equitable
powers and applying equitable principles in disposition of cases
that come within our jurisdiction. See Estate of Branson v.
Commissioner, supra at 12; Estate of Bartels v. Commissioner,
supra at 435; Estate of Mueller v. Commissioner, supra at 556-
557. Only the former is prohibited and only the latter is
involved when the affirmative defense of equitable recoupment is
considered in resolving a deficiency proceeding properly before
us. See Estate of Branson v. Commissioner, supra at 12-13;
Estate of Bartels v. Commissioner, supra at 435-436; Estate of
Mueller v. Commissioner, supra at 557. Moreover, in considering
our role in relation to that of the U.S. District Courts, we have
noted the following:
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Considered together, these sections [sections 7422(e),
6512(a), and 7481] indicate that “Congress intended the
Tax Court to have full judicial authority to resolve
issues over which it has jurisdiction”. Woods v.
Commissioner, 92 T.C. * * * [776, 788 (1989)]. Judge
Halpern further observed that
the Code is structured to channel tax
litigation to the Tax Court. We are the tax
forum of choice, because only here can the
tax liability be litigated prior to payment.
Understandably, we preside over the vast
majority of tax litigation. * * * [Estate of
Mueller v. Commissioner, supra at 564
(Halpern, J., concurring) (citations
omitted).]
If this Court lacked authority to consider
equitable recoupment, a taxpayer without the practical
ability to prepay the contested deficiency and sue for
refund in a different forum would be precluded from
raising a defense available to a more affluent taxpayer
who has the means to do so. We do not believe that
Congress intended this result. * * * [Estate of Branson
v. Commissioner, supra at 13-14.]
Confronted by the foregoing precedent, respondent argues
that the above cases were incorrectly decided and urges us to
adopt the position taken by the Court of Appeals for the Sixth
Circuit in Estate of Mueller v. Commissioner, 153 F.3d 302 (6th
Cir. 1998), affg. 107 T.C. 189 (1996). After determining in
Estate of Mueller v. Commissioner, 101 T.C. at 561, that we could
consider an equitable recoupment claim, we held in Estate of
Mueller v. Commissioner, 107 T.C. at 199, that the taxpayer was
not entitled to such relief on the facts of the case. The Court
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of Appeals for the Sixth Circuit affirmed but did so on the
grounds that we lacked jurisdiction to apply the doctrine. See
Estate of Mueller v. Commissioner, 153 F.3d at 307.
In Estate of Branson v. Commissioner, supra at 10-11,
however, we expressly considered the ruling by the Court of
Appeals for the Sixth Circuit. We declined then to alter our
stand on the issue of equitable recoupment for the reasons
previously discussed and, believing these reasons still valid, we
likewise decline to do so now. Thus, in accordance with the
position of this Court regarding our authority to grant equitable
recoupment relief, and with respondent’s concession that
petitioners meet the requirements of the defense, petitioners
would be entitled to recoup the barred estate tax overpayment
against the stipulated income tax deficiencies. We therefore
turn to whether, under the rule of Golsen v. Commissioner, 54
T.C. 742 (1970), the decision by the Court of Appeals for the
Fifth Circuit in Continental Equities, Inc. v. Commissioner, 551
F.2d 74 (5th Cir. 1977), demands a contrary result.
C. The Golsen Rule and the Eleventh Circuit
In Golsen v. Commissioner, supra at 757, this Court
established the rule that we shall “follow a Court of Appeals
decision which is squarely in point where appeal from our
decision lies to that Court of Appeals” (the Golsen rule). We
subsequently have further clarified the doctrine’s reach,
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emphasizing that it is “a narrow exception” and should be applied
only when the following rationale prompting its development rings
true: “where a reversal would appear inevitable, due to the
clearly established position of the Court of Appeals to which an
appeal would lie, our obligation as a national court does not
require a futile and wasteful insistence on our view.” Lardas v.
Commissioner, 99 T.C. 490, 494-495 (1992).
Here, appeal would normally lie to the Court of Appeals for
the Eleventh Circuit. No reported decision from that court
addresses the issue of the Tax Court’s authority to afford relief
on the basis of an equitable recoupment defense. However, cases
decided by the Court of Appeals for the Fifth Circuit prior to
October 1, 1981, are considered binding precedent within the
Eleventh Circuit. See Bonner v. City of Prichard, 661 F.2d 1206,
1209 (11th Cir. 1981). Respondent contends that the 1977 Fifth
Circuit case of Continental Equities, Inc. v. Commissioner,
supra, is controlling for purposes of the instant matter.
Continental Equities, Inc. v. Commissioner, supra at 78-79,
involved a section 482 imputation of interest income to
Continental Equities, Inc., (Continental) from loans it had made
to four related corporations. A correlative interest expense was
deemed to have been allocated among the four related
corporations, but three of the four failed to file a timely
refund claim. See id. at 79. Continental argued that, in order
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to sustain the imputation of interest income, the Tax Court
should have either ordered the payment of refunds to the related
corporations or allowed Continental to offset their overpayments
under the doctrine of equitable recoupment. See id.
Faced with these facts, the Court of Appeals disposed of
Continental’s recoupment claim with the following statement:
“the conclusion that the 1969 Tax Reform Act [establishing the
Tax Court as an Article I court] did not grant the Tax Court
equitable jurisdiction is inescapable. The courts that have
addressed the issue are in agreement without [sic] conclusion
that the Tax Court still does not possess jurisdiction over
equitable claims.” Id. at 84.
We, however, find Continental Equities, Inc. v.
Commissioner, supra, an insufficient basis upon which to
predicate an application of the Golsen rule. Despite the broad
language employed by the Court of Appeals for the Fifth Circuit,
three additional considerations render us unable to make the
requisite conclusion that reversal by the Court of Appeals for
the Eleventh Circuit would be inevitable if we were to sanction
equitable recoupment relief in the case at bar. These
considerations include the lack of factual similarity, the
lengthy interim of time and ensuing developments regarding Tax
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Court authority, and the decision by the Court of Appeals for the
Eleventh Circuit in Bokum v. Commissioner, 992 F.2d 1136 (11th
Cir. 1993), affg. T.C. Memo. 1990-21.
With respect to lack of similarity, the facts in Continental
Equities, Inc. v. Commissioner, supra, would not appear to
present a scenario for potential application of equitable
recoupment in the sense in which the doctrine has been defined
and used in our recent opinions. The failure or inability of the
four related corporations to claim correlative deductions for
interest as a result of a section 482 adjustment to the income of
the taxpayer, as in Continental Equities, Inc. v. Commissioner,
supra, is of a different genre than the type of inconsistent
treatment presented in cases such as Estate of Branson v.
Commissioner, 113 T.C. 6 (1999), Estate of Bartels v.
Commissioner, 106 T.C. 430 (1996), and Estate of Mueller v.
Commissioner, 101 T.C. 551 (1993).
As regards the ensuing time and developments, more than 2
decades have passed since the 1977 decision in Continental
Equities, Inc. v. Commissioner, 551 F.2d 74 (5th Cir. 1977). In
that interval, the concept of Tax Court jurisdiction has been
substantially refined. Concerning equitable recoupment in
particular, the opinion by the Supreme Court in United States v.
Dalm, 494 U.S. 596 (1990), which served as a catalyst for our own
reevaluation of our position, was issued only in 1990.
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Furthermore, since 1977 the Courts of Appeals have begun
increasingly to acknowledge the difference between exercising
equitable powers to take jurisdiction and applying equitable
principles to decide matters within the Court’s jurisdiction.
For instance, a series of recent decisions has consistently
affirmed on such basis Tax Court authority to reform written
agreements and to apply equitable estoppel. See Flight
Attendants Against UAL Offset v. Commissioner, 165 F.3d 572, 578
(7th Cir. 1999); Kelley v. Commissioner, 45 F.3d 348, 351-352
(9th Cir. 1995), affg. T.C. Memo. 1990-158; Bokum v.
Commissioner, supra at 1140-1141. Given that the Court of
Appeals for the Eleventh Circuit is among this group, we question
the determinative value in that forum of the broad and summary
language in Continental Equities, Inc. v. Commissioner, supra.
In particular, it is on the grounds of Bokum v.
Commissioner, supra, that we cannot with confidence say that the
Court of Appeals for the Eleventh Circuit would reject use of
equitable recoupment in the case at bar. In considering whether
the Tax Court possessed authority to apply equitable estoppel,
the Court of Appeals recognized the limited nature of this
Court’s jurisdiction but went on to find such authority for many
of the same reasons cited in Estate of Branson v. Commissioner,
supra, as supporting our use of equitable recoupment:
The Commissioner correctly notes that the Supreme
Court has held that “[t]he Tax Court is a court of
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limited jurisdiction and lacks general equitable
powers,” Commissioner v. McCoy, 484 U.S. 3, 7, 108
S.Ct. 217, 219, 98 L.Ed.2d 2 (1987) * * * Taken in
context, the Supreme Court’s pronouncement means that
the Tax Court has no equitable power to expand its
statutorily prescribed jurisdiction. This is quite
distinct from saying that the Tax Court has no
equitable powers in cases properly brought before it.
* * *
Although of limited jurisdiction, the Tax Court
must have the power to consider an equitable estoppel
claim, if considering the claim is necessary to the
appropriate disposition of the case before it. * * *
If the Tax Court lacked authority to entertain a
claim of equitable estoppel, taxpayers with such a
claim would no longer have a choice of fora for their
tax issues. They would effectively be forced to pay
their taxes and sue for a refund, submitting all of
their claims to the district courts. Taxpayers would
then be barred by res judicata from relitigating a
claim in the Tax Court. Thus, taxpayers would
essentially be denied the right to challenge
deficiencies in the Tax Court if they wanted to assert
an equitable estoppel claim. This would be an unfair
choice to pose to taxpayers, and would undermine the
purpose of the Tax Court. We therefore conclude that
the Tax Court did have jurisdiction over the Bokums’
equitable estoppel claim. [Bokum v. Commissioner,
supra at 1140-1141; citations and fn. ref. omitted.]
Hence, since an identical unfairness with respect to choice
of fora flows from a denial of authority to hear an equitable
recoupment defense, we believe it unlikely that the Court of
Appeals for the Eleventh Circuit would summarily reject
petitioners’ claim on the basis of Continental Equities, Inc. v.
Commissioner, supra. We therefore decline to do so. In
accordance with the precedent established by this Court in Estate
of Branson v. Commissioner, supra, Estate of Bartels v.
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Commissioner, supra, and Estate of Mueller v. Commissioner,
supra, we hold that petitioners are entitled, under the doctrine
of equitable recoupment, to offset their overpayment of estate
tax against their income tax liabilities for 1981 and 1982.
To reflect the foregoing,
Decisions will be entered
under Rule 155.