Reply Brief — United States v. Dalm

STATES OF AMERICA, PETITIONER

Vv

Frances L. Daim

ON WRIT OF CERTIORARI

10 |THE UNITED STATES COURT OF APPEALS

POR THE SIXTH CIRCUIT

TABLE OF AUTHORITIES

| Page

Cases:

Brigham v. United States, 470 F.2d 571 (Ct. Cl.

1973), cert. denied, 414 U.S. 831 (1973) ........ 7

Bull v. United States, 295 U.S. 247 (1935) ........ 2,7,8

Commissioner v. Gooch Milling & Elevator Co.,

enn 06 00900 609060000 08 6

Elbert v. Johnson, 164 F.2d 421 (2d Cir. 1947) .... 3, 6, 7

Ellard v. United States, 228 Ct. Cl. 815 (1981) .... 7

Evans Trust v. United States, 462 F.2d 521 (Ct.

ee eee ccc cccececeeceses 7

O’Brien v. United States, 766 F.2d 1038 (7th Cir.

APE eh eek eeSGb66000060seeecsers 5,7, 8,9

Rothensies v. Electric Storage Battery Co., 329

EE 2

William v. Neely, 134 F. 1 (8th Cir. 1904) ........ S

Statutes:

Revenue Act of 1924, ch. 234, 43 Stat. 253:

CE re 2-3

on od posceeeuessces 2-3

I 2-3

en ne cccncencseeeseess 2-3

§ 308(b), 43 Stat. 308-309 ................. 2-3

Ee 2-3

TD «cccccscccccecceseses 2-3

EEE 2-3

Revenue Act of 1926, ch. 27, 44 Stat. 9:

EEE 3

§$§ 1001-1003, 44 Stat. 109-110 ............. 3

Internal Revenue Code of 1939 § 322(a) (26 U.S.C.

SPE PEMEPRER Ee Sbececcecccesccccecces 6

_ - A te es

u In the Supreme Court of the Anited States

OCTOBER TERM, 1989 i

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Statutes — Continued:

Internal Revenue Code of 1954 (26 U.S.C.):

OS GRBR-ERES .cccccccccecceeseseseeeeneen 2,9 °

OB GBEE 2. cccccccccccccccccccccceseseesean 5 No. 88-1951

DGREE occcccccccccccececaseusee 5

DGBBE ccccccccccccceecoeseseneeenene 1,4, 5 UNITED STATES OF AMERICA, PETITIONER

GREER... ccccccoccceecesseaueneeee 5 .

OO SS 3,7 i.

Miscellaneous: FRANCES L. DALM

Andrews, Modern-Day Equitable Recoupment and

~ _ Hi. —_= ON WRIT OF CERTIORARI

of Limitation in Federal Tax Controversies, 28

TO THE UNITED STATES COURT OF APPEALS

Asie. L.. Rev. GB GED .. 0 ccccccocenuebeen< 3 FOR THE SIXTH CIRCUIT

M. Saltzman, /RS Practice and Procedure (1981) . . 5

; REPLY BRIEF FOR THE PETITIONER

In our opening brief, we point out (Br. 10) that respond-

ent did not file her claim for a refund of gift tax within the

period required by the applicable statute of limitations. 26

U.S.C. 6511.' Since respondent failed to act within the

limitations period, there is no statutory basis for jurisdic-

tion over this suit, and the district court therefore properly

dismissed it. Br. 8-11. We also show that the doctrine of

equitable recoupment, as applied by this Court in tax

cases, provides no basis for jurisdiction over an independ-

ent, time-barred refund suit such as respondent’s. Br.

11-19. Rather, that doctrine allows a tax claim over which

ee 100 <rarmlned in 08 hs

Sit iaiiisiaey sfesenees ase to the internal

of 1954 (26 U.S.C.), as amended (the Code or I.R.C.).

(1)

2

aspects.” Rothensies v. Electric Storage Battery Co., 329

U.S. 296, 299 (1946). In such a case, where jurisdiction

properly lies, a party may offer the existence of a previous

overpayment as an equitable reason why the deficiency

being litigated should be reduced. Respondent’s proposed

expansion of the doctrine of equitable recoupment would

not only eviscerate clear jurisdictional limitations, it

would also render nugatory the restrictions that Congress

has imposed upon the availability of relief under the

mitigation provisions of the Internal Revenue Code,

I.R.C. §§ 1311-1314. Br. 25-27. Finally, we show in our

opening brief that the jurisdictional limitations do not

operate unfairly here. Respondent could have pursued a

procedural course that would have permitted her properly

to invoke the doctrine of equitable recoupment; she simply

failed to do so. Br. 30-34.

Respondent’s brief does not squarely address these

arguments. Instead, she makes several contentions which,

as we shall show, either lack merit or miss the point.

1. Respondent argues, first, that this case is in-

distinguishable from Bull v. United States, 295 U.S. 247

(1935), because in both cases the taxpayer paid a non-

income tax, the government then asserted an income tax

deficiency, and the taxpayer unsuccessfully opposed the

deficiency in the Tax Court or its predecessor (the Board

of Tax Appeals) and then filed a claim and suit for refund.

Respondent’s contention overlooks the critical distinc-

tion between Bull and this case. In Bull, the taxpayer

followed the correct procedure for challenging the amount

of income tax deficiency. Under the pre-1926 law ap-

plicable in that case, a taxpayer could petition the Board

of Tax Appeals to review a deficiency asserted by the

Commissioner and, if unsuccessful, file a refund claim

and obtain de novo review in a district court or the Court

of Claims. See Sections 274(a), (b), and (c), 308(a), (b),

3

and (c), 900(g), 1025 of the Revenue Act of 1924, ch. 234,

43 Stat. 297, 308-309, 337, 348. As a consequence, the

district court in Bull properly had jurisdiction over the in-

come tax refund suit.

That is not the case here. As noted in our opening brief

(Br. 13 n.6), the law no longer allows a taxpayer resort to

two different forums to contest the same income tax defi-

ciency. Sections 284(d), 1001-1003 of the Revenue Act of

1926, ch. 27, 44 Stat. 67, 109-110, made the decisions of

the Board of Tax Appeals (now the Tax Court) final, sub-

ject only to appellate review by the courts of appeals and

this Court. Thus, once respondent filed a petition in the

Tax Court for redetermination of her income tax liability

for 1976 and 1977, she was precluded from thereafter -

suing for a refund in respect of that liability. I.R.C.

§ 6512(a); Elbert v. Johnson, 164 F.2d 421 (2d Cir. 1947);

Andrews, Modern-Day Equitable Recoupment and the

“Two Tax Effect:” Avoidance of the Statutes of Limita-

tion in Federal Tax Controversies, 28 Ariz. L. Rev. 595,

599 n.20, 614-615 (1986). To circumvent this obstacle,

respondent instead filed a tardy claim and brought suit for

a refund of the gift tax she had paid. Because that claim

was time-barred, the district court lacked jurisdiction and

properly dismissed the suit.

Far from being a “meaningless procedural distit.ction”

(Resp. Br. 2), the difference between filing a timely claim

(as did the taxpayer in Bull) and failing to file such a claim

(as did respondent here) is the difference between preserv-

ing jurisdiction in the district court to consider a claim of

equitable recoupment and failing to preserve that jurisdic-

tion. Indeed, with proper attention to the significance of

that difference, equitable recoupment remains fully avail-

able under modern procedure -- contrary to respondent’s

contention that only her position would maintain the

vitality of the doctrine. If instead of proceeding in the Tax

Court, respondent had paid the 1976 and 1977 income tax

4

deficiencies and then brought a timely refund suit in

district court or the Claims Court, she could properly have

invoked Bulfs doctrine of equitable recoupment to

diminish the amount of the income tax deficiency by the

amount of the gift tax she had paid.? Having failed to

follow this available course, however, she should not now

be heard to complain about the consequences that attend

her choice of forum and remedies.’

2. Respondent next argues that her action was, in fact,

timely. According to respondent, since no gift tax was ac-

tually due in 1976, there was no “payment” of gift tax in

that year for purposes of Section 6511 of the Code.

Rather, without citation of authority, respondent asserts

that when two taxes have been paid with respect to a single

transaction under inconsistent theories of taxation, the

“improper tax” somehow “becomes paid” —and therefore

triggers the running of the limitations period — only at the

time that the proper tax has been determined. Resp. Br. 6.

“Accordingly, respondent contends that her cause of action

“arose” only in 1984 when the income tax was collected

(Resp. Br. 8) because “the gift tax only became refundable

upon the payment of income tax on the same sum of

money because then and only then was the gift tax over-

paid.” Resp. Br. 7 (emphasis in the original).

Respondent’s view accords neither with the statute nor

with common sense. There is no statutory support for the

notion that some taxes are not deemed paid until actions

2 Hence, there is no basis for respondent’s assertion that she has had

“no fair opportunity to be heard.” Resp. Br. 9.

> Indeed, to allow respondent to maintain an untimely suit in the

district court after litigating her income tax deficiency in the Tax

Court would give respondent “two bites at tl: apple” of reducing her

liability on the “single transaction” or taxable event that she asserts is

at issue. To the contrary, Congress determined in 1926 to limit tax-

payers to one forum of their choice.

5

by the government make it clear that the payments were

erroneous. To the contrary, Section 6511 of the Internal

Revenue Code states simply that the limitations period on

filing a claim for refund runs “3 years from the time the

return was filed or 2 years from the time the tax was paid,”

whichever period expires later. Consistently with the plain

language, a tax is “paid” under the Code when the Com-

missioner receives a check in payment of the tax (unless

the check is subsequently dishonored). See I.R.C. §§ 6151,

6311.

Common sense does not support the notion that no pay-

ment of gift tax occurs when a tax so labeled is paid on an

item that does not warrant it; rather, a gift tax has simply

been paid erroneously. Payment of an income tax in this

case did not “render{} the original payments improper”

(Resp. Br. 7)—to the extent they were improper, they were

improper and refundable from the time the original gift

tax payments were made. Payment of the second tax sim-

ply made evident the improper nature of the first tax. Even

at that time, a remedy is readily at hand—a claim of

equitable recoupment could properly have been raised in

the context of a suit for refund of the second tax (a course

respondent did not follow).

A contrary holding —that an erroneous tax has not been

paid until it has been determined whether the payment was

erroneous— would eviscerate the statute of limitations,

which by its very nature is intended to bar untimely tax re-

fund claims without consideration of the question whether

* A taxpayer can also file a protective claim for refund or obtain an

extension of the limitations period from the IRS if there is reason to

believe that there will be a determination after the expiration of the

limitations period that will bear on his or her right to refund. See M.

Sahzman, /RS Practice and Procedure § 11.08(3| (1981); 1.R.C.

§ 651 1(c); O’Brien v. United States, 766 F.2d 1038, 1041 n.3 (7th Cir.

1985).

6

the taxes sought to be refunded were properly imposed.

And, if respondent were correct, the mitigation provisions

enacted by Congress would be superfluous, as no limita-

tions period would bar correction of inconsistent tax treat-

ment of income.

In a further attempt to support her claim that the instant

suit is timely, respondent argues (Resp. Br. 9) that the

government “has waived any sovereign immunity by bring-

ing an action [i.e., by asserting income tax deficiencies for

1976 and 1977] against the Dalms,” and has thereby

“opened itself up to claims of recoupment against that

deficiency.” To be sure, Congress has waived sovereign

immunity and provided taxpayers with remedies when tax

deficiencies are asserted against them. Respondent chogse

to take advantage of this waiver by proceeding in the Tax

Court (instead of in a district court or the Claims Court

following payment of the tax) to challenge the imposition

of income tax deficiencies against her. But, as we have ex-

plained (pp. 3-4, supra), respondent’s choice of the Tax

Court forum precluded her from claiming equitable re-

coupment against the income tax deficiency.°

> Respondent errs in relying (Resp. Br. 7-8) on Elbert v. Johnson,

164 F.2d 421 (2d Cir. 1947); indeed, the holding in that case accords

with our position. The taxpayers there sought to recover a prior gift

tax payment by invoking equitable recoupment in a Tax Court pro-

ceeding concerning income tax liability arising out of the same trans-

action. The Tax Court determined that it lacked jurisdiction to grant

equitable recoupment. 164 F.2d at 423; see Commissioner v. Gooch

Milling & Elevator Co., 320 U.S. 418 (1943). The taxpayers then

sought to raise the recoupment claim by filing an income tax refund

action. The district court dismissed for lack of jurisdiction; the court

of appeals affirmed. Assuming that the taxpayers could have raised an

equitable recoupment claim if they had filed suit without resorting

first to the Tax Court (Elbert, 164 F.2d at 423), the court held their re-

fund suit barred by Section 322(a) of the 1939 Code, 26 U.S.C. (1952),

the provision which at the time prohibited a refund action with respect

t)

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)

7

3. In Bull, this Court observed that the defense of

equitable recoupment is never barred by a statute of

limitations “so long as the main action itself is timely.” 295

U.S. at 262. Respondent contends (Resp. Br. 16-17) that

the “main action” for this purpose is the government’s

assertion of an income-tax deficiency. Because her suit

“follow(s} a timely assertion of a deficiency on the part of

the government,” respondent argues that it is not an “in-

dependent action” within the meaning of cases holding

that the doctrine of equitable recoupment cannot provide

an independent basis for jurisdiction over an otherwise

time-barred suit. Resp. Br. 13-16.°

Respondent’s argument fundamentally misconceives

how the doctrine of equitable recoupment operates. As we

explain in our opening brief (Br. 18-19), the “main action”

is an action over which the court properly has jurisdiction

(which requires, inter alia, that it be brought upon a timely

claim). A time-barred claim may be asserted in the main

action as a defense or offset against the timely claim under

the doctrine of equitable recoupment, provided that the

untimely claim arises from the same transaction as the

to a tax that was the subject of a prior Tax Court proceeding. (Th:-.

provision is currently codified at 1.R.C. § 6512(a).)

Respondent cites a passage that is dictum within a concurring opin-

ion. Resp. Br. 8 (citing Elbert, 164 F.2d at 425). The concurrence,

while right in result, is incorrectly premised on the assumption that

equitable recoupment can “toll” the limitations period for challenging

a previously paid tax, independent of timely litigation over a subse-

quently paid tax. To the contrary, this Court stated in Bull that incon-

sistent treatment of a particular transaction “cannot avail to toll the

statute of limitations.” 295 U.S. at 259.

* O'Brien v. United States, 766 F.2d 1038, 1048-1051 (7th Cir.

1985); Ellard v. United States, 228 Ct. Ci. 815 (1981); Brigham v.

United States, 470 F.2d $71, $77 (Ct. Cl. 1973), cert. denied, 414 U.S.

831 (1973); Evans Trust v. United Siates, 462 F.2d $21, $26 (Ct. Cl.

1972).

timely claim.’ Thus, under the rationale of Bull, a defi-

ciency asserted by the government may provide the basis

for a “main action” if the deficiency is actually assessed

and either the taxpayer fails to pay i and the government

brings a timely collection action thereon, or the taxpayer

pays the deficiency, files a timely claim for refund, and

then brings a timely refund suit. See Bull, 295 U.S. at

260-262. In either of these events, the pending refund or

collection suit would be the “main action” within the

meaning of Bull, and the taxpayer could seek to “recoup”

an appropriately related, time-barred refund claim against

the tax liability asserted by the government —as a defense

in the pending action challenging the government’s defi-

ciency determination.

On the other hand, as we have explained (U.S. Br. 28),

the existence of a timely asserted deficiency claim is

neither a necessary nor a sufficient element of an equitable

recoupment claim. Respondent thus overlooks the premise

of statements she quotes which note that equitable recoup-

ment “permits a taxpayer to recoup an erroneously paid

tax * * * against a timely and correctly asserted deficiency

by the government.” Resp. Br. 16 (quoting O’Brien v.

United States, 766 F.2d 1038, 1049 (7th Cir. 1985)). The

point of such statements is that equitable recoupment can

be invoked when there is a claim that is still being or can

properly be litigated—such as a deficiency that is still

“open” against which a time-barred overpayment can be

’ All of the cases invoked by respondent (see Resp. Br. 17 n.1) that

were cited in Su// make the same point that equitable recoupment is in

the nature of a defense. Hence, a recoupment claim does not resurrect

an untimely independent refund claim, rather, it reduces a presently |

owed debt. See Williams v. Neely, 134 F. 1, 5 (6th Cir. 1904)

(“Recoupment is the keeping back of something that is due because

there is an equitable reason for holding i.”).

9

recouped.* Here, respondent has effectively barred herself

from bringing a recoupment claim: after her petition in the

Tax Court, there can be no “open” deficiency that she can

continue to litigate. The Tax Court's determination of the

deficiency is final, and respondent’s subsequent suit can

only be an “independent action” on a time-barred claim.’

4. Respondent misperceives the thrust of our argu-

ment regarding the significance of the “mitigation provi-

sions” of the Internal Revenue Code (I.R.C. §§ 1311-

1314). Our position is not that those provisions provide

“the exclusive remedy when inconsistent positions of the

* in particular, respondent errs in relying on O'Brien as supporting

the notion that equitable recoupment can be invoked to confer

jurisdiction over an independent suit following the entry of a Tax

Court decision. See Resp. Br. 16-17 (quoting O'Brien, 766 F.2d at

1050). The court in O’Brien was positing only that the invocation of

equitable recoupment “might have been correct * * * in the 1975 [Tax

Court] proceeding which resolved the dispute over stock valuation for

estate tax purposes” — though invocation of the doctrine clearly was

not correct after that proceeding in an independent suit for an income

tax refund based on the corrected stock valuation Correctly identify.

ing the nature 0° equitable recoupment as a defense in a properly in-

stituted suit, the O’Brien court simply declined to determine “whether

the Tax Court currently possessed the equitable jurisdiction necessary

to apply the equitable recoupment doctrine.” 766 F.2d at 1050 0.15

* Respondent notes that her gift tax refund claim was filed before

the decision was entered in her Tax Court proceeding, arguing that her

claim is thus one in recoupment that survives as long as the claim

against which it may be asserted survives. Resp. Br. 17-18. Obviously,

80 long as the possibility remains that a court may obtain jurisdiction

over a suit brought on the main claim, the possibility also remains th’

an appropriaicly related, though tume-barred, claim might then be

asserted in that suit as a defunse against the main claim under the dow

trine of equitable recoupment. It in no way follows, however, that the

doctrine of equitable recoupment will support an independent action

brought on a time-barred claim merely because that claim was filed

while different proceedings on the main claim were sull pending

10

Internal Revenue Service subject a Taxpayer to double

taxation.” Resp. Br. 18-19. Rather, it is that if, as respond-

ent contends and the court below held, equitable recoup-

ment permits a taxpayer to bring an independent action on

a time-barred claim for a refund of taxes assertedly over-

paid merely because of inconsistent treatment by the Com-

missioner, it would have been pointless for Congress to

have enacted the mitigation provisioas because such ac-

tions could simply have been brought under the doctrine

carefully crafted restrictions that Congress imposed upon

the availability of relief under the mitigation provisions.

'® Respondent further asserts (Resp. Br. 20) that “the Government

seeks to use the statute of limitations in the precise manner dis-

sppeeves of ty Congsem,” thas bs ty ‘eA SERRE

taking inconsistent positions.” government, however,

taken inconsistent positions as respondent suggests. The here

inquiry into “all of [the] aspects” of the timely income tax

controversy. Rather, while she labels her claim one of

recoupment —i.e., one “in the nature of a defense” to the

income tax deficiency — she raises it after final determina-

tion of that deficiency. Such an action cannot be recon-

ciled with the policy of repose effectuated by statutes of

limitations. Further, respondent's stratagem would

multiply litigation that could have been resolved in one

suit. In any event, respondent’s policy-based plea cannot

negate the clear statutory language enacted by Congress

which bars suits for refund such as this one, filed long

after the challenged taxes were paid.

For the foregoing reasons, and those presented in our

opening brief, the judgment of the court of appeals should

be reversed.

Respectfully submitted.

KENNETH W. STARR

Solicitor General

JANUARY 1990