Estate of Mueller v. Comm'r

Halpern, J., concurring: I agree with the majority and write separately only to address Judge Chabot’s dissent.

Judge Chabot focuses narrowly on the precise role of this Court in the tax collection process. He observes that the Court’s jurisdiction does not extend to enforcing collection: “this Court does not have jurisdiction to determine obligations to pay.” Chabot op. p. 568. Because the Court does not deal with such obligations, Judge Chabot would find no purchase within our jurisdiction on which the doctrine of equitable recoupment could rest: “equitable recoupment [does] not [fit] into the deficiency jurisdiction that the Congress has given to this Court.” Id.

Certainly, I agree with Judge Chabot that the Tax Court is a court of limited jurisdiction. I also agree that the instant case appears to invoke only our jurisdiction to redetermine the correct amount of a deficiency. Chabot op. note 2. Nevertheless, we do exercise a portion of the judicial power of the United States, Freytag v. Commissioner, 501 U.S. _ , _, 111 S. Ct. 2631, 2645 (1991), and Congress did intend us to have full judicial authority to resolve issues over which we have jurisdiction, Woods v. Commissioner, 92 T.C. 776, 788 (1989). Furthermore, equitable recoupment is a doctrine exercised by courts of law to render fundamental justice and equity in situations where a strict adherence to rules of pleading or the terms of the statutes of limitations would result in unfairness. See McConnell, “The Doctrine of Recoupment in Federal Taxation”, 28 Va. L. Rev. 577 (1942). For those reasons, and taking a somewhat less restrictive view of what it is that we do, I would find adequate purchase in our jurisdiction on which to rest the doctrine of equitable recoupment.

The Nature of Recoupment

“The word ‘recoupment’ is derived from the French ‘recouper’ — ‘to cut again.’ It signifies the right or act of making a reduction, defalcation, or discount * * * to the claim of the plaintiff. * * * [It] is a common law concept.” McConnell, supra at 577-578. “[Recoupment] is the keeping back of something that is due, because there is an equitable reason to withhold it”. Wheat v. Dotson, 12 Ark. 699 , 702 (1852).

The Supreme Court of Illinois explained how recoupment functions:

[Recoupment] adjusts by one action adverse claims growing out of the same subject-matter. * * * It is not necessary that the opposing claims should be of the same character. * * * It is sufficient that the counter claims arise out of the same subject-matter, and that they are susceptible of adjustment in one action. [Stow v. Yarwood, 14 Ill. 424, 426 (1853); emphasis added.]

Recoupment allowed the common law courts to overcome what might be described as jurisdictional limitations, and other limitations, that, normally, would have frustrated the claim of the party seeking relief. See, e.g., Wheat v. Dotson, supra at 701 (“When a defendant, in a suit upon a contract in a common law court, comes in and asks to be permitted to interpose a defense founded upon a partial failure of its consideration, he certainly applies for a kind of relief that would have been refused him there peremptorily at one period in the history of those courts, and which at that period could have been obtained only in the equity courts.”). As one commentator put it:

in factual situations where recoupment could aptly be applied, even the rigidly technical attitude of the common law courts through the early, middle and later periods of common law development did not blind the eyes of the law judges to the practical necessity and fundamental reason in recoupment. * * * [McConnell, supra at 580.]

Reasons for Recoupment

The reasons that compelled the old common law courts to allow recoupment are well known. See, e.g., Dermott v. Jones, 64 U.S. 220, 234 (1859); Wheat v. Dotson, supra at 703; Stow v. Yarwood, supra at 426 . The common law courts were especially concerned with judicial administration factors such as the desire to “[avoid] circuity of action, [to avoid] multiplicity of suits, and [to do] complete justice in a single adjudication”. McConnell, supra at 583; see also Wheat v. Dotson, supra at 703. One court stated that permitting recoupment is “perfectly just and equitable” and “calculated to do complete justice between the parties, without" putting them to the expense of two suits”. Reab v. McAllister, 8 Wend. 109, 117 (N.Y. 1831). In addition to the judicial resource concerns, however, it must be kept in mind that recoupment did (and does) not simply permit justice to be done in a single action, but the doctrine itself “tends to promote justice”. Stow v. Yarwood, supra at 426 . Thus, when the New York Court of Errors allowed recoupment, one member of the majority noted: “There is a natural equity, especially as to claims arising out of the same transaction, that one claim should compensate the other, and that the balance only should be recovered.” Reab v. McAllister, supra at 115. Another judge in the Reab majority stated “that equal and complete justice could not be meted” unless the defendant were permitted to set up evidence for recoupment. Id. at 119. Indeed, when the Supreme Court first applied recoupment in the Federal taxation context, the Court noted that to do otherwise would result in an “immoral” and “unjust” retention of funds. Bull v. United States, 295 U.S. 247, 261 (1935). Thus it occurred that the “rigid rules of the common law courts * * * materially yielded by a gradual process to the influence of common justice, common sense and common convenience.” Wheat v. Dotson, supra at 703-704. It is difficult to deny that the administrative and fairness or equitable considerations of the common law courts should be of any less importance to us today.

What We Do

Judge Chabot is right: What we do in exercising our jurisdiction to redetermine deficiencies is to correct, if necessary, the amount that the Secretary may assess as a tax. See sec. 6215. Assessment is a necessary stop on the route to enforced collection. See secs. 6201, 6203, 6303. Barring our reversal on appeal or some extraordinary set of circumstances, once we have redetermined a deficiency, the taxpayer has no further opportunity for judicial review of the demand that he can expect to receive from the Secretary. See secs. 7481, 7421; see also United States v. Dalm, 494 U.S. 596 (1990) (tax refund courts are without jurisdiction to consider time barred refund claim based solely upon equitable recoupment); Commissioner v. Sunnen, 333 U.S. 591 (1948) (final decisions of Tax Court have res judicata and collateral estoppel effect). I would, however, take a broader view of our function than does Judge Chabot. I would view our function as being integral to the enforced collection of Federal tax liability. Indeed, as we have stated, the Code is structured to channel tax litigation to the Tax Court. Woods v. Commissioner, 92 T.C. 776, 788-789 (1989). 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. What we do is so closely involved with the vast majority of litigated tax liabilities that I would conclude that, in a very real sense, what we do is to determine obligations to pay. For that reason, I would conclude that we can apply recoupment: “[Recoupment] is the keeping back of something that is due, because there is an equitable reason to withhold it”. Wheat v. Dotson, supra at 702. When it is equitable to do so, if the other requirements of recoupment are met, I believe that we have authority to apply the doctrine to reduce a deficiency.

Wright, Parr, and Beghe, JJ., agree with this concurring opinion.