SUPREME COURT HOLDS THAT EQUITABLE RECOUPMENT DOES NOT GIVE DISTRICT COURT JURISDICTION AFTER EXPIRATION OF STATUTE OF LIMITATIONS.

SUPREME COURT HOLDS THAT EQUITABLE RECOUPMENT DOES NOT GIVE DISTRICT COURT JURISDICTION AFTER EXPIRATION OF STATUTE OF LIMITATIONS.

In 1975, Frances Dalm was appointed administratrix of her deceased former employer's estate. During 1976 and 1977, Dalm received fees totaling $37,000 from the estate. She also received two payments, $180,000 in 1976 and $133,813 in 1977, from the decedent's brother, Clarence Schrier, who wanted her to share in the estate because of her years of service to the decedent. Schrier filed a gift tax return in December 1976, reporting the $180,000 payment as a gift to Dalm. Dalm paid the $18,675 gift tax liability, plus penalties. No gift tax return was filed for the 1977 payment. Following an audit, the Service determined deficiencies in Dalm's 1976 and 1977 tax liabilities, contending that the payments from Schrier represented additional compensation for Dalm's services as administratrix and should have been reported as income. Dalm petitioned the Tax Court, arguing that the 1976 and 1977 payments were gifts. The parties settled the case for exactly one-half of the claimed deficiency. No claim for a credit or recoupment of the gift tax paid by Dalm was raised during the Tax Court proceedings. Immediately after the settlement, in November 1984, Dalm filed a refund claim for the gift tax paid in 1976. When the Service failed to act on the claim, she filed suit, seeking a refund of "overpaid gift tax." Dalm asserted that the court had jurisdiction under 28 U.S.C. section 1346(a)(1). The district court dismissed the suit for lack of jurisdiction, holding that the claim was not filed within the time limits prescribed in section 6511(a). The court rejected Dalm's contention that the suit was timely under the doctrine of equitable recoupment set forth in Bull v. United States, 295 U.S. 247 (1935). The Sixth Circuit reversed, finding that Dalm's claim satisfied all of the doctrine's requirements. It rejected the district court's characterization of Dalm's action as an independent lawsuit barred by the statute of limitations, reasoning that she could maintain an otherwise barred action for a refund because the government had asserted a timely claim of a tax deficiency based on an inconsistent legal theory. (For a summary of the Sixth Circuit's decision, see Tax Notes, February 20, 1989, p. 962.) Writing for the Court, Justice Kennedy, in an opinion joined by six justices, emphasized that 28 U.S.C. section 1346(a)(1)'s provision of broad district court jurisdiction over civil tax refund suits must be read in conformity with other statutory provisions conditioning the right to bring such a suit, including sections 7422(a) and 6511(a). Because Dalm did not file her claim for refund long after the limitations period expired, the majority reasoned that the district court was barred from entertaining her suit. The majority rejected the Sixth Circuit's conclusion that the equitable recoupment doctrine of Bull will support Dalm's suit in the absence of a statutory basis. In Bull, the majority explained, the executor sought equitable recoupment of the estate tax in an action for refund of income tax, over which the Court of Claims had undisputed jurisdiction. The only issue was whether the Court of Claims, in the interests of equity, could adjust the income tax owed to take into account an estate tax paid in error, which the petitioner could not recover in a separate, time-barred refund action. In contrast, the majority observed, "Dalm does not seek to invoke equitable recoupment in determining her income tax liability; she has already litigated that without raising a claim of equitable recoupment, and is foreclosed from relitigating it now." Reconciling its decision with Bull and Stone v. White, 301 U.S. 532 (1937), the majority stated: "Bull and Stone stand only for the proposition that a party litigating a tax claim in a timely proceeding may, in that proceeding, seek recoupment of a related, and inconsistent, but now time-barred tax claim relating to the same transaction . . . we have not allowed equitable recoupment to be the sole basis for jurisdiction." Allowing Dalm to maintain this suit would effectively override Congress' judgment "as to when equity requires . . . an exception to the limitations bar." But the majority cautioned against interpreting its holding as leaving taxpayers in Dalm's position powerless to invoke the doctrine of equitable recoupment, noting that both the Service and a court which has jurisdiction over a timely suit for refund may still consider an equitable recoupment claim for an earlier tax paid under an inconsistent theory on the same transaction. In dissent, Justice Stevens, joined by Justices Brennan and Marshall, declared: "the Court today . . . has undone equity by rendering an opinion true to neither the spirit nor the letter of American law." Characterizing Dalm's action as "one for the recoupment of a tax wrongfully collected," and not for the refund of tax overpaid, Justice Stevens concluded that 28 U.S.C. section 1346(a)(1) accords jurisdiction over Dalm's suit, and the terms of section 6511(a) do not divest it. Arguing that Bull should apply, Justice Stevens explained that the government, by initiating a proceeding to recover income tax based on the 1976 payment, waived the statutory bar precluding a claim for refund of the gift tax. "If it was not too late for the government to litigate the tax consequences of the 1976 payment," Justice Stevens reasoned, "it should not be too late for the taxpayer to do so. 'A different result here [is] a reproach to our jurisprudence.'"

Frances L. Dalm v. United States Tax Notes, February 20, 1989, p. 962

A divided Supreme Court has held in United States v. Dalm that the doctrine of equitable recoupment, standing alone, does not give a district court jurisdiction over a taxpayer's refund suit after the statute of limitations has expired.

In 1975, Frances Dalm was appointed administratrix of her deceased former employer's estate. During 1976 and 1977, Dalm received fees totaling $37,000 from the estate. She also received two payments, $180,000 in 1976 and $133,813 in 1977, from the decedent's brother, Clarence Schrier, who wanted her to share in the estate because of her years of service to the decedent. Schrier filed a gift tax return in December 1976, reporting the $180,000 payment as a gift to Dalm. Dalm paid the $18,675 gift tax liability, plus penalties. No gift tax return was filed for the 1977 payment. Following an audit, the Service determined deficiencies in Dalm's 1976 and 1977 tax liabilities, contending that the payments from Schrier represented additional compensation for Dalm's services as administratrix and should have been reported as income. Dalm petitioned the Tax Court, arguing that the 1976 and 1977 payments were gifts. The parties settled the case for exactly one-half of the claimed deficiency. No claim for a credit or recoupment of the gift tax paid by Dalm was raised during the Tax Court proceedings. Immediately after the settlement, in November 1984, Dalm filed a refund claim for the gift tax paid in 1976. When the Service failed to act on the claim, she filed suit, seeking a refund of "overpaid gift tax." Dalm asserted that the court had jurisdiction under 28 U.S.C. section 1346(a)(1). The district court dismissed the suit for lack of jurisdiction, holding that the claim was not filed within the time limits prescribed in section 6511(a). The court rejected Dalm's contention that the suit was timely under the doctrine of equitable recoupment set forth in Bull v. United States, 295 U.S. 247 (1935). The Sixth Circuit reversed, finding that Dalm's claim satisfied all of the doctrine's requirements. It rejected the district court's characterization of Dalm's action as an independent lawsuit barred by the statute of limitations, reasoning that she could maintain an otherwise barred action for a refund because the government had asserted a timely claim of a tax deficiency based on an inconsistent legal theory. (For a summary of the Sixth Circuit's decision, see Tax Notes, February 20, 1989, p. 962.) Writing for the Court, Justice Kennedy, in an opinion joined by six justices, emphasized that 28 U.S.C. section 1346(a)(1)'s provision of broad district court jurisdiction over civil tax refund suits must be read in conformity with other statutory provisions conditioning the right to bring such a suit, including sections 7422(a) and 6511(a). Because Dalm did not file her claim for refund long after the limitations period expired, the majority reasoned that the district court was barred from entertaining her suit. The majority rejected the Sixth Circuit's conclusion that the equitable recoupment doctrine of Bull will support Dalm's suit in the absence of a statutory basis. In Bull, the majority explained, the executor sought equitable recoupment of the estate tax in an action for refund of income tax, over which the Court of Claims had undisputed jurisdiction. The only issue was whether the Court of Claims, in the interests of equity, could adjust the income tax owed to take into account an estate tax paid in error, which the petitioner could not recover in a separate, time-barred refund action. In contrast, the majority observed, "Dalm does not seek to invoke equitable recoupment in determining her income tax liability; she has already litigated that without raising a claim of equitable recoupment, and is foreclosed from relitigating it now." Reconciling its decision with Bull and Stone v. White, 301 U.S. 532 (1937), the majority stated: "Bull and Stone stand only for the proposition that a party litigating a tax claim in a timely proceeding may, in that proceeding, seek recoupment of a related, and inconsistent, but now time-barred tax claim relating to the same transaction . . . we have not allowed equitable recoupment to be the sole basis for jurisdiction." Allowing Dalm to maintain this suit would effectively override Congress' judgment "as to when equity requires . . . an exception to the limitations bar." But the majority cautioned against interpreting its holding as leaving taxpayers in Dalm's position powerless to invoke the doctrine of equitable recoupment, noting that both the Service and a court which has jurisdiction over a timely suit for refund may still consider an equitable recoupment claim for an earlier tax paid under an inconsistent theory on the same transaction. In dissent, Justice Stevens, joined by Justices Brennan and Marshall, declared: "the Court today . . . has undone equity by rendering an opinion true to neither the spirit nor the letter of American law." Characterizing Dalm's action as "one for the recoupment of a tax wrongfully collected," and not for the refund of tax overpaid, Justice Stevens concluded that 28 U.S.C. section 1346(a)(1) accords jurisdiction over Dalm's suit, and the terms of section 6511(a) do not divest it. Arguing that Bull should apply, Justice Stevens explained that the government, by initiating a proceeding to recover income tax based on the 1976 payment, waived the statutory bar precluding a claim for refund of the gift tax. "If it was not too late for the government to litigate the tax consequences of the 1976 payment," Justice Stevens reasoned, "it should not be too late for the taxpayer to do so. 'A different result here [is] a reproach to our jurisprudence.'"

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SUPREME COURT HOLDS THAT EQUITABLE RECOUPMENT DOES NOT GIVE DISTRICT COURT JURISDICTION AFTER EXPIRATION OF STATUTE OF LIMITATIONS.