Woods v. Commissioner

Chabot, J. dissenting: The majority have chosen to declare that this Court has general equitable powers; in the process, they overrule precedents dating back to 1931 and 1954. Respectfully, I dissent.

“Equity” and “equitable” are appealing words. They conjure up visions of “doing right”, of “mercy”, and of Solomon-like wisdom. Certainly, none of us wants this Court to be perceived as “inequitable”. However, this connotation of “equity” and “equitable”, and awareness of the antonym, should not be allowed to affect the nature and work of the Court or our decision-making process.

When the judges of this Court (and other courts) have written that this Court does not have general equitable powers, they have not meant that we were forbidden to do anything “equitable”, or even that we were forbidden to do anything that equity courts do. Rather, we are forbidden to do things that only equity courts do. The distinction is not a play on words. Many devices in English jurisprudence, where our equity court models originated, were equity court innovations but then were taken over or adapted by law courts. The same is true with regard to the development of law and equity courts in the United States. Thus, many devices or procedures that may be described as “equitable” or that may initially have been solely the province of equity courts, have come to be tools and procedures used by law courts. See, e.g., 1 J. Pomeroy, Equity Jurisprudence, secs. 68-95, p. 92 et seq. (5th ed. 1941) (law courts adopted equity courts’ treatments of lost instruments, penalties, mortgages and express trusts (in both of which law courts recognize and give effect to so-called “equitable interests”), discovery (which once required the bringing of a separate proceeding in an equity court in order to discover information to be used in an ongoing proceeding in a law court, requirements of seals, etc.). Thus, the majority’s list of “instances where we have applied equitable principles in deciding issues over which we had jurisdiction” (majority opinion p. 784) does not properly lead to the majority’s conclusion that this Court has general equitable powers.

On the other hand, there are tools and procedures that are regarded as the province of equity courts and not of law courts. Interestingly, for purposes of the instant case, Pomeroy’s states that—

A suit to enforce the specific performance of a contract, or to reform a written instrument on the ground of mistake must always belong to the equity jurisdiction, and to it alone, since these remedies are wholly beyond the scope of common-law methods and courts * * * . [1 J. Pomeroy, Equity Jurisprudence, sec. 131, p. 180 (5th ed. 1941).]

If we are to have general equity power (except where limited by our jurisdictional statute, a concession that the majority seems to make), then we embark on a sea with few if any discernible shores.

For example, if we were to conclude by a preponderance of the evidence that the written instrument reflecting a separation agreement does not “fix” the amount payable as child support, but that the parties to that agreement intended that a certain amount be so fixed, then would we have authority to reform the instrument where the reformation would have only tax consequences and not affect the nontax property rights of the parties to the agreement? At the present time, in certain types of cases involving written agreements, we employ the “strong proof” rule while a number of Courts of Appeals follow the “Danielson rule” (Commissioner v. Danielson, 378 F.2d 771 (3d Cir. 1967), revg. 44 T.C. 549 (1965)). If both parties to an agreement are before us (as where respondent has sent inconsistent notices of deficiency and acts essentially as stakeholder in consolidated cases) and we are convinced by strong proof that the parties’ writing misstates the parties’ intent, then would we have authority to reform the writing (or to order the parties to reform the writing) and thereby avoid application of a Danielson rule standard?

More fertile minds will quickly conjure up other uses for these equity tools or, in the spirit that led to the formation and wide-spread flourishing of equity courts, create new tools. Was this the role that the Congress envisioned when the Board of Tax Appeals was created?

The majority seek to use the Supreme Court’s opinion in Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418 (1943), in support of their thesis that, when the Congress created the Board of Tax Appeals, it was understood that the Board had general equitable powers. (Majority opinion pp. 785-786.) In Barry v. Commissioner, 1 B.T.A. 156 (1924), we held, in effect, that we had power akin to equitable recoupment.

Firstly, if equitable recoupment authority is properly an indicium of general equity powers, then it is important to note that the Congress took pains at the earliest practical opportunity (the Revenue Act of 1926) to make it clear that we did not have that authority. That 1926 Act provision remains, virtually unchanged, in our controlling charter (see the concluding language of sec. 6214(b) of the Internal Revenue Code of 1986). Thus, the Congress did not mean for us to exercise this power.

Secondly, the Board that decided Constitution Publishing Co. v. Commissioner, 22 B.T.A. 426 (1931), included nine Members who were on the Board when Barry had been decided and when the Congress overruled Barry. Constitution Publishing was written by one of those nine members. Constitution Publishing was reviewed by the Board. The only dissenter from our opinion in Constitution Publishing was not appointed to the Board until 3 months after the enactment of the Revenue Act of 1926. Thus, more than half of the members of the Board had passed through what the majority herein suggest was an exercise of general equitable powers—and the Congress’ rejection of that power—and then saw fit to declare that “We can not reform the instrument, although both parties intended something else.” 22 B.T.A. 428 . Thus, the members who served during the period that the majority direct us to, and so would have been familiar with the Congress’ intentions, were virtually unanimous in concluding that we did not have this general equitable power. The majority seek to overcome this evidence by merely overruling it.

Finally, it appears that the majority may be misled by the word “equitable” in the term “equitable recoupment”. As Professor Dubroff points out (H. Dubroff, United States Tax Court — An Historical Analysis, p. 484 (1979)) equitable recoupment is—

a doctrine developed and applied by both the courts of common law and equity 873 * * * .

Thus, even if we were to exercise the power of equitable recoupment, that would not be an indication that we have general equitable power. See 1 J. Pomeroy, Equity Jurisprudence, supra.

I would not reform the instrument. If the majority are correct in their analysis that the instrument is not ambiguous, then I would hold that respondent is to bear the loss that results from the error of respondent’s “scrivener”.

I dissent.

NlMS and PARR, JJ., agree with this dissent. McConnell, “The Doctrine of Recoupment in Federal Taxation,” 28 Va. L. Rev. 577 , 579-84 (1942).