Estate of Branson v. Commissioner

Beghe, J., concurring: Having joined the majority opinion, I write separately to respond to Judge Chabot’s argument that the structure of our deficiency jurisdiction prohibits us from applying equitable recoupment to redetermine petitioner’s estate tax deficiency.

In Judge Chabot’s view, the sole issue for decision in the case at hand, as he argued in Estate of Mueller v. Commissioner, 101 T.C. 551, 565-566 (1993) (Mueller II), is the valuation of the Savings and Willits shares included in decedent’s gross estate. Inasmuch as we have performed that task in Branson I, the dissent contends that nothing remains for us to do to redetermine petitioner’s estate tax deficiency. I disagree: Our valuations also, as a practical matter, have redetermined a corresponding increase in the section 1014(a) basis of the shares, resulting in the residuary legatee’s time-barred overpayment of tax on the sale of the shares.

Working with the definition of “deficiency” in section 6211(a), there is a way in which the residuary legatee’s overpayment is taken into account in computing petitioner’s estate tax deficiency. While the approach I suggest requires an element of Active or “as if” thinking in applying the statute, I believe the grounds for applying equitable recoupment to the facts of this case support an interpretation of section 6211(a) that allows the residuary legatee’s overpayment to be taken into account in determining petitioner’s estate tax deficiency.

As Judge Chabot points out, the Tax Court’s task in this case is to redetermine petitioner’s estate tax deficiency, and “deficiency” is a term of art in Federal taxation that has special significance for our jurisdiction. See Murphree v. Commissioner, 87 T.C. 1309, 1311 (1986); Martz v. Commissioner, 77 T.C. 749, 754 (1981); Hannan v. Commissioner, 52 T.C. 787, 791 (1969). Section 6211(a) defines “deficiency” as follows:

SEC. 6211 DEFINITION OF A DEFICIENCY.

(a) In General.— For purposes of this title in the case of income, estate, and gift taxes imposed by subtitles A and B and excise taxes imposed by chapters 41, 42, 43, and 44 the term “deficiency” means the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44 exceeds the excess of—

(1) the sum of

(A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus

(B) the amounts previously assessed (or collected without assessment) as a deficiency, over—

(2) the amount of rebates, as defined in subsection (b)(2), made.

In other words, the deficiency (d) equals the correct tax imposed (t) less the total tax shown on the return (s) plus prior assessments (a) less rebates (r). 1 Under this definition, a deficiency in estate tax will generally result if a taxpayer is found to have undervalued property included in the gross estate because an increase in the value of included property will increase the amount of tax imposed by subtitle B. Just as the amount of the deficiency is affected by the amount of tax imposed under subtitle B, it can also be affected by “amounts previously assessed (or collected without assessment) as a deficiency”, sec. 6211(a)(1)(B); see sec. 1.6211-1(e), Income Tax Regs., and rebates made, see sec. 6211(a)(2).

In applying equitable recoupment within the statutory scheme of section 6211(a), we are in effect holding, after concluding that the residuary legatee paid too much income tax on petitioner’s gain on the 1992 sales of Willits and Savings shares, that petitioner has been assessed an additional amount of estate tax within the meaning of section 6211(a)(1)(B). In so doing, we treat the income tax overpayment as if it were a partial assessment of the estate tax deficiency. The residuary legatee’s income tax overpayment thereby has the effect of reducing the amount of the estate tax deficiency, not as a below-the-line subtraction from the deficiency, but as an above-the-line (negative) element of the deficiency itself. See sec. 6211(a)(1)(B).

There is a long and honorable tradition of using legal fictions to overcome the rigidity of the law in order to make the legal system function fairly. 2 A legal fiction is a falsehood that is deemed to be true for limited purposes designed to bridge the gap between concept and reality. 3 “A doctrine which is plainly fictitious must seek its justification in considerations of social and economic policy; a doctrine which is nonfictitious often has spurious self-evidence about it.” Fuller, Legal Fictions 71 (1967). 4

The concepts of tax “deficiency” and “underpayment” are themselves legal constructs that amount to fictions, inasmuch as neither of them purports to be the amount of a taxpayer’s remaining obligation to pay tax; they stand in somewhat the same relationship to such an obligation as shadows do to the three-dimensional object. However, once a deficiency determined by the Commissioner (or redetermined by the Tax Court) is assessed, the deficiency becomes a legal obligation that the Commissioner can collect, and reality painfully intrudes.

By allowing the residuary legatee’s overpayment to be taken into account in determining petitioner’s estate tax deficiency, we do no more than give effect to the accepted notions that “the rule of equitable recoupment permits recovery of an otherwise barred claim by resort to the fiction that the overpayment is a credit or defense against a later asserted tax liability for a year open to suit” and that “The doctrine of equitable recoupment utilizes the fiction of a tax credit or defense to liability for a year open to suit to avoid violation of the statutory scheme providing for finality of tax determinations.” Holzer v. United States, 250 F. Supp. 875, 877-878 (E.D. Wis. 1966), affd. per curiam 267 F.2d 822 (7th Cir. 1966).

“[T]he Supreme Court has explicitly and repeatedly stated that it is sometimes appropriate to interpret statutes in a manner inconsistent with their literal language.” Zelenak, “Thinking About Nonliteral Interpretations of the Internal Revenue Code”, 64 N.C. L. Rev. 623 , 631 (1986). Zelenak notes, id. at 624, that in the preceding 4 years the Supreme Court had decided at least four tax cases by adopting on confirming a nonliteral interpretation of the Code. 5

Similarly, the “two wrongs make a right” character of equitable recoupment, see Willis, “Some Limits of Equitable Recoupment, Tax Mitigation, and Res Judicata: Reflections Prompted by Chertkof v. United States,” 38 Tax Law. 625 , 633 (1985), emphasizes that “Recoupment, rather than extending the statute of limitations to correct a perceived injustice, permits a wronged party to recoup the loss against a sum still open to litigation.” In so doing, recoupment uses the legal fiction that the recoupment claim is an element in the computation of the tax subject to the timely claim, rather than the time-barred tax. The “two wrongs make a right” notion signifies that where an earlier matter has received erroneous tax treatment, “[recoupment] does not correct the wrong, as does the mitigation statute, but instead causes a later matter to be equally wrong in the opposite direction.” Id.

As Justice Stevens observed in his dissent in United States v. Dalm, 494 U.S. 596, 612-623 (1990), the Supreme Court in Bull v. United States, 295 U.S. 247 (1935), could have taken the strict view that the statute of limitations barred the taxpayer’s claim but instead “avoided that unjust result” by construing the plaintiff’s rights in a Federal tax refund suit by reference to those of a defendant, thereby proceeding “under * * * the presumption that for every right there should be a remedy.” United States v. Dalm, supra at 616-617 . Acknowledging that treating a plaintiff like a defendant “so as to permit, in effect, the equitable tolling of the limitations period” was perhaps “an unusually flexible treatment of legal categories,” Justice Stevens observed that such treatment was “nothing more than the necessary expression of an exception to a generally appropriate definition”, an exception that had received the status of a legal rule under Bull. Id. at 618 ; see Tierney, “Equitable Recoupment Revisited: The Scope of the Doctrine Revisited in Federal Tax Cases after United States v. Dalm,” 80 Ky. L.J. 95 , 131-165 (1992).

In Mueller II, we opined that we have authority to apply equitable recoupment in a case over which we have jurisdiction; in Estate of Mueller v. Commissioner, 107 T.C. 203 (1996) (Mueller III), we held, consistent with the view of the majority in United States v. Dalm, supra, that equitable recoupment is properly confined to its traditional role as an affirmative defense. 6 Having held in the case at hand that the requirements of equitable recoupment have been satisfied, our application of the doctrine does no more violence to the structure of section 6211(a) than the availability of equitable recoupment in the refund forums does to the Internal Revenue Code as a whole.

Expressed as a mathematical formula:

d = t-(s + a — r)

The formula can also be expressed as follows:

d = (t - s) - (a - r)

See ACLU of Miss., Inc. v. Finch, 638 F.2d 1336 , 1340 n.7 (5th Cir. 1981), and texts cited. This case and these texts conclude that legal fictions can be useful and justified if employed with the understanding of producer and consumer of their character as such. See also United States v. Dalm, 494 U.S. 596, 612-623 (1990) (Stevens, J., dissenting), discussed infra p. 40.

In effect, when we engage in a fiction, we redefine reality to comport with existing law as a method of changing the law to meet new realities * * *. This method of adapting the law to changing circumstances and perceptions is saved from absurdity by its underlying rationality. * * * when used properly the legal fiction is a rule of law embodying an unconcealed falsehood at one level and a deeper truth at another more important level. The falsehood is often made necessary because of the pre-existing structure of the law, and is justified (if it is justified) by the deeper underlying truth contained within the falsehood. [Miller, “Liars Should Have Good Memories: Legal Fictions and the Tax Code”, 64 U. Colo. L. Rev. 1 , 26 n.109 (1993).]

Originally published in slightly different form in three parts in 25 Ill. L. Rev. 363, 513, 865 (1930-31).

Citing and discussing Paulsen v. Commissioner, 469 U.S. 131 (1985); Bob Jones Univ. v. United States, 461 U.S. 574 (1983); Commissioner v. Tufts, 461 U.S. 300 (1983), and Hillsboro Natl. Bank v. Commissioner, 460 U.S. 370 (1983).

This observation serves to distinguish equitable recoupment and the case at hand from Commissioner v. Lundy, 516 U.S. 235 (1996).