UNITED STATES TAX COURT

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

- 2 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

Year

Income Tax

Deficiency

Sec.

6653(a)(1)

Sec.

6653(a)(2)

Sec.

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.

- 3 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.

filing resided in Hollywood, Florida.

He at the time of

- 4 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 GenerationSkipping 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

- 5 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.

- 6 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

- 7 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

- 8 proper basis for recoupment.

Commissioner, supra.

See Estate of Bartels v.

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

- 9 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.

- 10 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.

Branson v. Commissioner, supra at 10-12.

See Estate of

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 556557.

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:

- 11 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

- 12 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).

subsequently have further clarified the doctrine’s reach,

We

- 13 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

- 14 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

- 15 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.

- 16 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

- 17 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.

- 18 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.