UNITED STATES v. DALM

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ORAL ARGUMENT OF CHRISTINE DESAN-HUSSON PRO HAC VICE, ON BEHALF OF THE PETITIONER

Chief Justice Rehnquist: We'll hear argument next in Number 88-1951, United States v. Frances Dalm.

Am I pronouncing your name right?

Mr. Desan-Husson: Yes.

Unidentified Justice: Good.

It's written out here but I wasn't sure.

Mr. Desan-Husson: Thank you, Mr. Chief Justice, and may it please the Court:

The issue in this case is whether equitable recoupment can confer jurisdiction on a district court to hear a taxpayer's suit against the United States for a tax refund when that suit is otherwise barred as untimely.

The short answer is no.

Equitable recoupment is a defensive doctrine.

Its logic operates to reduce a claim, a currently owed claim or debt.

It operates in litigation about the amount of that claim, litigation over which a court already has jurisdiction.

Equitable recoupment must operate in this way because an equitable doctrine cannot expand the jurisdiction of a district court beyond its statutory limits.

Here, Sections 7422 and 6511 of the Internal Revenue Code make it clear that no suit for a tax refund may be maintained against the United States unless a refund claim for that tax has been timely filed.

The refund claim for the gift tax at issue here was untimely, and nothing in the doctrine of equitable recoupment changes that.

The dispute... this dispute began because of the tax treatment of a lump sum payment received by the respondent in 1976.

At that time, she was serving as the administrator of her former employer's estate.

She received two lump sum payments from the brother of her employer and the beneficiary of his estate.

In 1976 she received $180,000.

A gift tax return was filed and the respondent paid a gift tax of approximately $20,000.

In 1977 she received approximately $133,000.

No return or gift tax was paid on that.

Unidentified Justice: Do you know why there was no gift tax return filed that year?

Mr. Desan-Husson: The record does not reflect that.

Unidentified Justice: Maybe I should ask your opponent.

Mr. Desan-Husson: Yes, you could.

Unidentified Justice: In theory, if the government later decides that income tax was owing on it, that it wasn't a gift, should the government give credit for the gift tax that was paid?

Mr. Desan-Husson: The government will give credit.

In fact, what happened in this case is that in 1983 the Internal Revenue Service determined that the amount was income and asserted the deficiency.

The Internal Revenue Service can't in the notice of deficiency just lop off a certain amount because the amount of the deficiency is statutorily defined.

So, that amount goes off in credits or recoupment can't be performed.

The Service could... does have the authority to settle a claim, at which point it may make... it may take into account the fact that a gift tax was paid.

Unidentified Justice: And there was some settlement here?

Mr. Desan-Husson: There was a settlement in this case.

In this case--

Unidentified Justice: Did that give credit in the settlement for the gift tax?

Mr. Desan-Husson: --It's unclear whether... the court of appeals decided that it was necessary to remand the case to determine whether or not the settlement had given credit for the gift tax.

It's clear that--

Unidentified Justice: But you do avow that one way or another credit will be given for the gift tax that was paid?

Mr. Desan-Husson: --Well, at this point I don't think any court has jurisdiction over this claim, this claim for a gift tax.

It's possible that credit was given in the settlement.

It's also possible that... a taxpayer can also file... pay a tax and file a refund claim.

Unidentified Justice: Right.

Mr. Desan-Husson: And at that point the IRS will give credit, will... it's given notice to taxpayers in its Revenue Ruling 7156 that it will at that point perform equitable recoupment.

So, it--

Unidentified Justice: Well, can... can that happen now?

Mr. Desan-Husson: --It can't happen now because the--

Unidentified Justice: Can or cannot?

Mr. Desan-Husson: --Cannot.

Cannot happen now.

The income tax deficiency... the way recoupment works is to reduce a currently owed debt.

So, it could have reduced the income tax deficiency.

And the administrative claim that would have been timely was an income tax administrative claim.

At that point, the Service could have reduced the administrative claim.

It doesn't have the authority to... to consider an untimely claim for the gift tax.

That would just have been a claim for a refund of gift tax, and that was outside of its authority.

The point is only that... that the taxpayer had to litigate the income tax deficiency and seek to reduce the amount of the income tax deficiency because the gift tax claim was untimely in 1985, which is when this claim... this claim began.

Unidentified Justice: May I just interrupt, if I may?

1984 I think it was, wasn't it, that they filed the--

Mr. Desan-Husson: Well, the... the district court suit was filed in '85.

But the... that's right, the administrative claim was filed in '84.

Unidentified Justice: --I thought the refund suit for the recovery of the gift tax was filed on December 1, 1984.

Mr. Desan-Husson: I believe it was November 1, 1984.

But, then, I was just saying the district court's was in '85.

Unidentified Justice: Which was before the deficiency matter had been concluded?

Mr. Desan-Husson: That's right.

Unidentified Justice: And is it correct that had the taxpayer at that time paid the income tax in dispute and filed a claim for refund that the taxpayer could have recovered the gift tax--

Mr. Desan-Husson: If she--

Unidentified Justice: --erroneously--

Mr. Desan-Husson: --If she had paid the income tax and filed the income tax refund, she could have--

Unidentified Justice: --She could have--

Mr. Desan-Husson: --Well, one... excuse me... once... once the claim was in the tax court, the tax court has jurisdiction over that claim.

Unidentified Justice: --Well, yes, but--

Mr. Desan-Husson: If she hadn't gone to tax court in 1983--

Unidentified Justice: --If instead of proceeding in the tax court--

Mr. Desan-Husson: --Right.

Unidentified Justice: --she had paid her income tax and filed a refund suit which had two counts in it.

Count one says I want the money back for the erroneously collected income tax; count two, I want the gift tax repaid also.

Would the gift tax claim have been timely?

Mr. Desan-Husson: I... I believe what would have happened is that the Service would have considered... the way you stated it, would have considered under number one that what in fact had happened was that the taxpayer was filing a refund claim for the income tax.

And it would then have used the gift tax, the payment of the gift tax, as an equitable reason why the income tax could be reduced.

So she would have gotten credit.

Unidentified Justice: It might have given her credit if... but would it have had the authority under your argument you make here to strike count 2 of her complaint and say it's too late to sue for the gift tax?

Mr. Desan-Husson: Yes.

I believe if count 2 constituted a gift tax refund claim, it wouldn't have had the authority to do otherwise.

It wouldn't have had the authority under its Section 6402 of the Code.

When--

Unidentified Justice: Assume for a moment that the income tax claim is $100,000 and the gift tax claim is $30,000, so we have... and she files the two counts.

And you say you could strike count one for 30 but would they then... could they then have defended the 100,000 on the ground... the $100,000 claim on the ground that there's... it's too late to get the 30 back?

Mr. Desan-Husson: --I don't think that the IRS would have done that.

I mean,--

Unidentified Justice: Well, I... are we relying on the good faith or sort of the equitable judgment of the administrator or did she have a right?

I'm asking if she had a right at that time--

Mr. Desan-Husson: --She did have a right.

Unidentified Justice: --to 30,000?

Mr. Desan-Husson: And if... if for some reason the Service hadn't given her the... hadn't reduced the $100,000 by $30,000, she could have filed suit in the district court.

Unidentified Justice: And she could have--

Mr. Desan-Husson: And the district court would--

Unidentified Justice: --And she had a right to prosecute successfully a refund claim for the $30,000?

Mr. Desan-Husson: --I wouldn't call it a refund claim.

I think... the distinction that--

Unidentified Justice: Well, she had a right to recover $30,000.

Mr. Desan-Husson: --She had a right to have her income tax reduced by $30,000.

Unidentified Justice: So she could do it by an independent action but not by way of a counterclaim.

That's what it boils down to.

Mr. Desan-Husson: She couldn't do it by way of an independent action for the gift tax.

Unidentified Justice: But as a separate count she could.

Mr. Desan-Husson: What I'm trying to--

Unidentified Justice: Well, okay.

Mr. Desan-Husson: --What I'm trying to... the distinction I'm trying to draw is that the difference between an independent suit for the gift tax and a suit for the income tax is not a subtle distinction.

It's a distinction on which jurisdiction rests.

Specifically, the Tucker Act gives the district courts jurisdiction over a tax refund suit.

However, that jurisdiction is expressly limited by provisions of the Internal Revenue Code.

Section 7422(a) provides that no suit or proceeding shall be maintained in any court for a tax refund unless an administrative claim has been duly filed according to relevant law.

Now, Section 6511(a) of the Code in turn specifies that an administrative claim for a refund must be filed within three years of the time the return is filed or within two years of the time a return is paid.

That is, the limiting words of the statute are express and make it explicit--

Unidentified Justice: Yes, but it seems to me if you read those as you... literally, that would bar her refund claim for the 30,000 even if she'd filed it in connection with an income tax refund claim.

Mr. Desan-Husson: --Well, the theory of equitable recoupment... I mean, it could be that--

Unidentified Justice: Because it's not a defense anymore at this point.

She's not a defendant.

She is now the plaintiff seeking money.

Mr. Desan-Husson: --Under... the Court explained in Bull that it considered her a defendant.

That is, as the Court put it in Bull, a collection... there could be a hypothetical collection action by the government in which equitable recoupment was raised as a defense.

But under current revenue procedures the government goes ahead and summarily collects tax, and the refund suit for that tax is functionally a defense.

It's the taxpayer's opportunity to litigate the amount of the income tax deficiency due.

So that in that refund action, in an action here for the income tax deficiency, the taxpayer could raise an equitable recoupment claim and it would be functioning according to this Court's reasoning in Bull as a defense.

It would be an equitable reason why the income tax should be reduced.

Now, I would note that--

Unidentified Justice: Could a claim like that ever be not just kind of a recoupment or... but lead to an affirmative recovery against the government on the basis--

Mr. Desan-Husson: --No.

No.

Recoupment is always limited by the amount of the affirmative claim.

Unidentified Justice: --Well, it... it is an affirmative recovery against the government in the sense that you're talking about a suit for a refund.

Mr. Desan-Husson: In the sense that the government--

Unidentified Justice: She's paid the tax and she is... she can sue to get back the amount of the gift tax, although it would not be described as a refund of the gift tax, it would be described as a recoupment and, therefore, a reduction of her income tax.

Mr. Desan-Husson: --That's right.

I mean, the government would have to write her a check because it already had her money.

I was--

Unidentified Justice: And perhaps... perhaps you think that you have been through this with Justice Stevens, but I want to make sure I understand it.

Your position is that if she had filed a suit for a refund... I know she didn't, but suppose she had paid the income tax, filed the suit for a refund, would she have had a right... a right... to recoup the gift tax previously paid even though the gift tax... even though the statute of limitations had long since run?

Mr. Desan-Husson: --Yes.

Unidentified Justice: Yes, she would have had that right?

Mr. Desan-Husson: Yes, she would have.

And--

Unidentified Justice: Now, what if... if in Justice Stevens' hypothetical instead of the income tax being $100,000 and the gift tax $30,000, the income tax is $100,000 and the gift tax $200,000, could she possibly have recovered more than $100,000 from the government?

Mr. Desan-Husson: --No.

No.

I mean, in any other way the gift tax... the claim for the gift tax as an independent... as a counterclaim in that kind of situation, is barred.

And in this... in that situation this taxpayer is not in any different posture than any other taxpayer for whom the statute of limitations has barred.

And she's simply lost a meritorious claim.

Unidentified Justice: Well, in that situation the government wouldn't have... wouldn't have sought to convert a $200,000 gift tax into a $100,000 income tax anyway.

I mean--

Mr. Desan-Husson: Well,--

Unidentified Justice: --presumably the IRS would have been quite happy to have her pay the gift tax instead of the properly due income tax.

Mr. Desan-Husson: --Well, presumably they would have assessed whatever they thought the correct deficiency was.

Unidentified Justice: That lawyers are required to answer hypothetical questions from judges.

[Laughter]

Well, but... but under your theory I suppose the government would not have been diffident about asking for a deficiency for the extra $100,000.

That's exactly what happened here.

Mr. Desan-Husson: That's right.

That's right.

Unidentified Justice: I'm sure that the Service has not been this charitable always, has it?

It certainly opposed Daniel Bull in his case.

Mr. Desan-Husson: Well, I don't think there's anything in the record in this case that indicates that the Service acted incorrectly.

Unidentified Justice: Well, the... Daniel Bull is an old client.

[Laughter]

And I remember how the Service opposed it rather vigorously.

Mr. Desan-Husson: Well, the decision was correct in Bull.

To play this out a little further--

Unidentified Justice: While you're interrupted, could I ask you one other question--

Mr. Desan-Husson: --Oh.

Unidentified Justice: --about the fact?

Is it the government's theory... I guess about a third of the estate is... we're treating as income here if we... at least, that's the impression I get... that this was income... taxable as income because it was on account of services that she'd performed during the decedent's lifetime, or is this supposedly an executor's fee or an administrator's fee?

Mr. Desan-Husson: It was supposedly an executor's fee.

Unidentified Justice: A third of the estate?

Mr. Desan-Husson: That's right.

Unidentified Justice: Wow.

Mr. Desan-Husson: That's right.

And that was litigated in the tax court.

Unidentified Justice: And that's--

Mr. Desan-Husson: But that's not before the Court.

Unidentified Justice: --Yeah.

I see.

Mr. Desan-Husson: To play this out a little farther, just to make sure that the theory... I'm getting across the theory, once the respondent petitioned the tax court, she was in a forum that this court has considered to be without equitable powers to apply equitable recoupment.

In theory she could have raised her equitable recoupment claim there because she at least would have been in the middle of the right litigation.

She would have been in litigation about the income tax deficiency and she could have argued that the income tax should be recomputed because it didn't correctly reflect equitable reasons, in this case the fact that a gift tax had already been paid.

The district... the tax court would have had jurisdiction and this case would have been about whether it could apply equitable recoupment and it would have been about Gooch Milling, the old case in this Court.

But that case turned on somewhat different facts and there may have been an argument.

In short, the respondent could have raised her claim in the district court; she could have attempted to raise her claim in the tax court.

What she couldn't do was conduct her challenge to the income tax deficiency--

Unidentified Justice: Let me just say... I'm sorry to keep interrupting.

You say she could have attempted to raise it.

I got the impression from your briefs that it was not at all clear that she could raise it.

Mr. Desan-Husson: --That's the Gooch Milling case.

My only point was that in theory she could raise it.

In fact, I think that case... that case turned on very different facts, and their reasoning was quite specific to the facts.

And there is a reasonable legal argument.

Unidentified Justice: Well, is the... is the government making an unqualified representation that in this set of facts if she had raised it in the tax deficiency proceeding, she could have... it would have been proper?

I didn't understand--

Mr. Desan-Husson: It would have been proper to raise it.

Unidentified Justice: --Okay.

Mr. Desan-Husson: I'm not... I'm not taking any position on what the result would be.

Unidentified Justice: Well, you can always raise anything.

I mean, it was proper for her to file--

Mr. Desan-Husson: I just mean--

Unidentified Justice: --the refund suit, too.

But--

Mr. Desan-Husson: --Excuse me.

I just--

Unidentified Justice: --you're just saying she ought to lose.

And I think you're also saying she could have raised it but she would have lost.

Mr. Desan-Husson: --I just mean jurisdictionally.

That our main point here is that the district court didn't have jurisdiction over this... this case.

Unidentified Justice: But I'm... I have the distinct impression that they would have denied the claim in the tax deficiency proceeding because it's not a proceeding on which you get refunds of incorrectly paid tax--

Mr. Desan-Husson: I think that the... it wouldn't have been a refund.

It would have been a recoupment claim.

And I think that the litigation then would have gone up on whether this court followed Gooch Milling or not is a different question.

I was only trying to make the jurisdictional point and I don't mean to convert this into a discussion of what the recoupment powers of the tax court are.

In any event, what the respondent couldn't do was conduct the entire litigation about the income tax deficiency and then, independently of that challenge, raise the gift tax refund claim later.

Nothing but the income tax--

Unidentified Justice: --But again, it wasn't later.

It was before that case was over.

Mr. Desan-Husson: --Right.

It doesn't matter.

It could have been concurrently--

Unidentified Justice: All right.

Mr. Desan-Husson: --with the income tax litigation.

It would have been separate from that litigation.

And once that litigation was going... in fact, in this case it's exceptionally clear.

There's a provision in the Code, Section 6512, which provides that once a petition has been filed in the tax court no suit for recovery of any part of the tax at issue there can be filed in another court.

Unidentified Justice: Which means, if I understand it correctly, had she'd filed her gift tax refund case the day the government asserted the deficiency, your same argument would be made here?

Mr. Desan-Husson: That's right.

Unidentified Justice: Yeah.

Mr. Desan-Husson: That's right.

Unidentified Justice: Okay.

Mr. Desan-Husson: It's barred.

And this provision makes it clear that once you're in tax court, you have to litigate out completely the income tax deficiency in that court.

So that there was no... there could be no other litigation, no subsequent litigation after the tax court proceeding about any part of the income tax deficiency.

Or, conversely, if in fact in substance this proceeding was about the income tax deficiency in order to be consistent with equitable recoupment theory, then it violated this provision of the Internal Revenue Code that says all... that that litigation had to be in the tax court.

The court of appeals had no jurisdiction to reach the equities of the situation here.

But it's worth noting that Congress' decision to limit jurisdiction in this case is also based on the equities as well as on other needs of the government.

Statutes of limitation are necessary to promote values of repose and finality.

We recognize that they can work harshly in individual cases, but Congress has decided that's the price it's willing to pay to increase the fairness of the entire system.

In this case, I would maintain that the situation is not as troubling as in many others because Respondent was actually in a better position that other taxpayers.

This was the type of overpayment that she had a chance to recoup.

She had alternatives available to her.

We've already talked about the alternatives in court and I've reviewed the administrative alternatives.

In short, Respondent had her opportunity to litigate the amount of the income tax deficiency.

Nothing about the defenses that could have been raised in that litigation give the courts jurisdiction over this litigation.

Unidentified Justice: And so it was just a... just a bad oversight not to claim recoupment when they were talking about settling the income tax claim?

Mr. Desan-Husson: That's right.

It was a very big mistake.

I think it was a jurisdictional mistake.

Unidentified Justice: They... they could claim that alternatively.

That is, they could claim recoupment without admitting that... that it was properly not a gift tax.

Mr. Desan-Husson: Yes.

Yes.

That's what the taxpayer claimed in Bull.

I would like to reserve the remainder of my time.

Unidentified Justice: Very well, Ms. Desan-Husson.

Mr. Pierce.

ORAL ARGUMENT OF ROBERT B. PIERCE ON BEHALF OF THE RESPONDENT

Mr. Pierce: Mr. Chief Justice and Honorable Justices, may it please the Court:

With the Court's permission, I would like to very briefly restate the salient facts to bring this matter into perspective, and it will be very short.

In December of 1976 Frances Dalm believed she had received a gift and a check was sent to IRS on the premise that a gift tax was due.

That was in December of 1976.

In 1983 the government asserted an income tax deficiency against Frances stating that she owed $160,000 in income tax plus penalties and interest that at that time would amount to approximately $300,000.

Now, contrary to the nuances in the government's brief--

Unidentified Justice: Mr. Pierce, may I... may I interrupt you?

The same routine was not gone through in 1977 was it?

No gift tax return was filed?

Mr. Pierce: --No.

No, Your Honor.

Unidentified Justice: And why... why the difference in treatment of the two years?

Mr. Pierce: The... the first question, why was a gift tax not filed in 1977.

The gift tax is a tax that falls on the donor and I believe it is in the record in the tax court proceeding that at that time Clarence Schrier had had an automobile accident and became incompetent.

It was the duty of the donor to file a gift tax return.

That's why the gift tax return in '77 was not filed.

Unidentified Justice: Of course, the donee is also liable secondarily.

Mr. Pierce: The donee is liable secondarily.

Unidentified Justice: Who took the initiative with respect to the '76 return?

Mr. Pierce: Clarence Schrier.

Unidentified Justice: Uh-huh.

Mr. Pierce: All right.

Contrary, as I was saying, Your Honor, to the nuances in the government's brief that in 1983 that Frances could have filed a protective claim for refund of gift tax, that's an abstraction.

At that time she could not do that because the time had expired then.

So she couldn't do it.

Unidentified Justice: Well, could... could she have paid the income tax deficiency and filed suit in district court seeking the setoff on--

Mr. Pierce: Your Honor--

Unidentified Justice: --on the gift tax as paid.

Mr. Pierce: --you're getting to the heart of the issue.

The answer is no, and the reason--

Unidentified Justice: Why not?

Mr. Pierce: --and the reason the answer is no is that she could not pay $300,000 and go to tax court... I mean, go to the district court or the court of claims.

And, as a matter of fact--

Unidentified Justice: You mean she lacked the money--

Mr. Pierce: --She lacked the money to do that.

Unidentified Justice: --to pay the deficiency?

Mr. Pierce: That is correct.

And, as a matter of fact, Your Honor, as I was going to get into the real world, the majority of the taxpayers today cannot pay the tax first and then go to the district court.

They are financially unable.

They, therefore, go to the tax court without paying the tax.

That's the reason, the basic reason, for going to the tax court.

So... and that is exactly what happened here.

Now, on November 1, 19... in 1984 she did petition the tax court, and after approximately two day's trial the parties settled the matter for exactly one-half the amount the amount the government claimed.

That $80,000 plus interest then was paid, and that was done prior to the tax court settlement becoming final and--

Unidentified Justice: And there was never any mention in those settlement proceedings, or anything else, about the gift tax that had been paid?

Mr. Pierce: --There... there had been, yes.

And I think--

Unidentified Justice: Yes, what?

Mr. Pierce: --there's an allegation in the petition that the gift tax had been paid as well, yes.

Unidentified Justice: Well, was there any claim that the Service should... should recognize that they were trying to tax to... the same event twice and that they should grant equitable recoupment?

Mr. Pierce: There was a claim in the petition that the government had received an economic benefit to which it was not entitled.

There was oral claims for equitable recoupment.

Unidentified Justice: Well, then why... why shouldn't the settlement figure represent a settlement of everything that was involved?

Mr. Pierce: Because the government and the revenue officials threw out, denied, any credit whatsoever of the gift tax for the erroneous... to the income tax... the gift tax being erroneous only upon collection of the second tax.

Unidentified Justice: But if I sue you one count in contract and one count in tort and we... in the middle of the trial we settle for a stipulated amount of $80,000 without specifying, both those claims are barred thereafter, aren't they?

Mr. Pierce: No, Your Honor.

Both claims--

Unidentified Justice: What's your authority for that?

Mr. Pierce: --What is my authority--

Unidentified Justice: What is your authority for saying both of those claims are not barred?

Mr. Pierce: --Number one, the tax court does not have jurisdiction over equitable recoupment.

This court--

Unidentified Justice: Well, so it couldn't... you filed this complaint and alleged the government had gotten money was... but it could... the tax court couldn't have given you any relief in it?

Mr. Pierce: --The tax court had no jurisdiction over the doctrine of that--

Unidentified Justice: Why did you make the allegation?

Mr. Pierce: --Because it was a fact, Your Honor.

Unidentified Justice: Well, that isn't really the reason you ordinarily put something in a pleading.

There are lots of facts you don't put in pleadings.

Mr. Pierce: We believed it was very unfair.

We believe it was unfair, as this Court has held in one single transaction, which this is and which the government admits... one taxable transaction, two taxes on inconsistent legal theories.

And we believe it was unfair and... and the authority, Your Honor, the answer... the answer to that is that the taxpayer had a cause of action.

And that cause of action... she has been denied a hearing on the merits of that substantive right given to her by this Court in the Bull doctrine.

And that's the authority for the situation.

Unidentified Justice: I don't find it persuasive.

Mr. Pierce: All right.

Unidentified Justice: Mr. Pierce, how did you ever effect a settlement in the tax court, 50 percent of the asserted deficiency?

It sounds like a good deal to me.

Mr. Pierce: It was a very poor deal, Your Honor.

And it was a poor deal--

Unidentified Justice: That's all the money that he had.

The government probably settled for all they could get.

Mr. Pierce: --It was a poor deal for the taxpayer for the simple reason that he could not take the chance of losing and going bankrupt.

And so prior to this... prior to the litigation in the tax court that... the IRS people would not even discuss settlement.

It was only after trial when they became aware, in my opinion, that they were going to lose and so they would settle.

But they refused any credit for the gift tax.

And I think that... I think that that is a direct answer to your question, Your Honor.

In any event--

Unidentified Justice: Well, why did you settle?

Mr. Pierce: --Why did the taxpayer settle?

Unidentified Justice: Yeah.

Mr. Pierce: The taxpayer settled because--

Unidentified Justice: If you thought you were going to win--

Mr. Pierce: --Because they would have been bankrupt if they had lost, and that was the taxpayer's very words.

Unidentified Justice: --Well, but if they... do you suppose on review if they had... if they had lost, do you suppose on review... and the government wanted to collect the income tax... don't you suppose you could have claimed equitable recoupment in reviewing the tax court?

Mr. Pierce: No, Your Honor.

Unidentified Justice: Why not?

Mr. Pierce: Because--

Unidentified Justice: You say the tax court didn't have jurisdiction to rule on it.

Some court must have jurisdiction on it.

Mr. Pierce: --We believe the district court has jurisdiction to rule on it.

Unidentified Justice: You mean later.

Mr. Pierce: Yes.

Unidentified Justice: How about on review of the tax court?

Mr. Pierce: I don't believe so.

I don't believe that the court of appeals would accept a case that you would raise the doctrine at that point of time when the tax court lacked jurisdiction.

And it seems to me pretty clear that the tax court did not have jurisdiction.

We agree with the government's brief in that respect, that the tax court did not have jurisdiction over the doctrine.

Unidentified Justice: So you say... you say that this is the only way that you could get equitable recoupment and that you... there was no way, as long as you didn't have money to pay the tax, that you could have--

Mr. Pierce: That is correct, Your Honor.

This--

Unidentified Justice: --tried to exercise the setoff?

Mr. Pierce: --That is correct, Your Honor.

This is the only way.

I would like to point out in my mind how the issue has been narrowed by the government's reply brief.

And in the government's reply brief, it... it flows well and it's good, but we think superficially.

We think if you look beneath the surface of that brief, it's not on a very solid foundation.

Unidentified Justice: But is it... is it clear in this record that... that the IRS in the course of settlement absolutely refused any recognition of the prior payment of the gift tax?

Mr. Pierce: Absolutely.

Absolutely.

I was there.

And that's a factual issue.

Unidentified Justice: Well, I know you were there, but does the record show it?

I didn't know that the--

Mr. Pierce: I don't... I don't know that the record will show it.

It would have to be on testimony.

It is a factual issue, and that is why the court of appeals remanded the case for that purpose to the district court.

But I'm trying to answer Your Honor as to what the facts were.

Unidentified Justice: --What did... the court of appeals remanded to see if... if what?

That the government had refused--

Mr. Pierce: Yes.

Yes, Your Honor.

For that... for that limited factual determination.

Unidentified Justice: --Well, the... so you did claim in the court of... I see.

All right.

Go ahead.

Mr. Pierce: I... I would like to point out some of the government's concessions in their reply brief that I think narrows the issue for this Court.

Now, the government, in their reply brief, said that she, Frances Dalm, could properly have invoked Bull's doctrine of equitable recoupment to diminish the amount of the income tax deficiency by the amount of the gift tax she had paid.

In short, they have admitted that the basic elements of equitable recoupment are present in the Dalm situation.

They admit one taxable event.

They admit two taxes, two different taxes, on the same transaction.

So, those essential elements are admitted in this case.

Unidentified Justice: But what... what... how would you describe the one transaction?

Mr. Pierce: One transaction is the receipt of the money in 1976.

That receipt of money--

Unidentified Justice: Taxed twice.

Mr. Pierce: --has been subjected to two inconsistent treatments, inconsistent taxes... that one single transaction.

Those are the tests set by this Court for equitable recoupment, and the government in their reply admits that that's present in this case.

They summarize their admissions on page 10 of their reply brief, where they say that both the payment of the gift tax and the later assessment of a deficiency--

Unidentified Justice: The brief only has eight pages, as I see it.

Their reply brief.

Mr. Pierce: --Their reply brief.

Unidentified Justice: I only see... I thought you said page 10.

Mr. Pierce: It's page 10 of the government's reply brief on the writ of certiorari.

Unidentified Justice: Oh, the--

Mr. Pierce: This is on the merits, Your Honor.

On the merits.

Unidentified Justice: --Merits.

Mr. Pierce: And they state that both the payment of the gift tax and the later assessment of a deficiency and payment of the income tax concerned one transaction that could have been examined in all its aspects without offending the policies underlying the statute of limitations.

Now, I'd like to point out our area of disagreement and our area of agreement here.

The area of disagreement, and it's a big area, a tremendous area, is that tax... that by going to the tax court that Frances Dalm gave up her substantive right of equitable recoupment.

The areas of agreement are that by virtue of a 1926 law, which was a statute enacted before this Court determined the Bull case, that the tax court decisions become final as to the taxes brought before it.

We agree with that proposition.

We further agree with the government's proposition that the tax court lacked jurisdiction over the doctrine of equitable recoupment.

Now, with that it seems to me the issue comes right into focus.

And the issue is may a taxpayer be denied a hearing of a substantive right by going to the tax court which had no jurisdiction to hear it on the merits.

That is the issue, and that is scary to me.

The government's argument is very scary.

They treat this as a normal situation.

They treat this... this situation abstractly, as academic.

It isn't.

It's a fundamental doctrine of a fairness established by this Court.

That's precisely what it is.

And that's... that's... they are not treating it that way.

What they are saying... and the only way I can illustrate it would be as if Congress had enacted a law that provided that the only way any of us could... could contest a government deficiency would be to pay the tax and then go to the tax court or the court... or the district court.

And that means only the extremely rich would ever be able to hear... have a hearing on the merits.

And that is exactly where their argument leads us.

And that is not true because this is a cause of action that this court has held is a right, a fundamental right, and protected by due process.

And we submit that is exactly what this situation is.

Unidentified Justice: Has the government assessed you... assessed your client some income taxes with penalties and interest?

Mr. Pierce: Yes, Your Honor.

Unidentified Justice: And if you hadn't gone to the tax court, what would the government have done?

I suppose they would have what... put--

Mr. Pierce: The government would have put them out of business.

They would have come and taken their property.

And that would be it.

Unidentified Justice: --Well, at that point would you have had any way of asserting your setoff?

Mr. Pierce: No, Your Honor, we would not because the only method of doing it would be to pay the tax in full.

You have no right to go to the district court without payment of the tax in full, and that includes the interest.

Unidentified Justice: Uh-huh.

Mr. Pierce, you don't really say this is a due process right, do you?

I mean,--

Mr. Pierce: Oh, yes, Your Honor.

Unidentified Justice: --don't you think the government could say any erroneous taxes you pay, too bad?

They could tell you if you pay a tax... if you pay a gift tax that you didn't owe, that's not our fault, it's your fault?

Don't you think the government could say that?

Would that violate due process?

Mr. Pierce: No, Your Honor, I'm not saying that.

I'm saying that--

Unidentified Justice: Well... Well, if they can do that, then I assume you could... you could disallow... you could disallow recoupment entirely, couldn't you?

If you... I mean, that's... that's... Bull was less than that.

If it was a constitutionally required case.

Mr. Pierce: --No, you could not.

Your Honor, the doctrine of equitable recoupment is a substantive right, and without that there would be a denial of due process.

Unidentified Justice: What's your case--

--[inaudible] authority that stands for that proposition?

Mr. Pierce: For the proposition that it would be a lack of due process?

Unidentified Justice: That Bull... you're saying Bull was required by the Constitution, I take it.

Mr. Pierce: No, I'm... no.

I'm... I'm saying that in the Bull case itself, that Court held that the right of equitable recoupment was a substantive right.

At page--

Unidentified Justice: Well, what if it was?

I... I'll stipulate that it was his substantive right.

But that doesn't prove that it's a substantive right that is required to be accorded by the Constitution.

It's one that the Court found existed.

But that doesn't mean it has to be expanded so that you can assert it in all circumstances.

Mr. Pierce: --No, Your Honor.

Not in all circumstances.

Only in the circumstance where you have a single transaction and where that single transaction has been subjected to two taxes inconsistency... inconsistently.

Now, what you have when the government collects the second tax... you have a cause of action, and you have a cause of action at that time only.

The cause of action comes about by the collection of the second tax.

It didn't come about in 1976 because Frances Dalm thought she had paid a proper tax.

It came about came about when a second tax was collected.

And this Court has held, as we've stated in our brief, that a cause of action is a right that is protected by due process provisions.

And I believe that was the Zimmerman case, and I'm sure there must be other cases on that point.

And that--

Unidentified Justice: Well, even... even the Bull case, Counsel, says that the taxpayer has a right of restitution, but nevertheless, he may be without a remedy.

Mr. Pierce: --Your Honor, I would refer to Judge Hand in the Elbert case, that I believe was way before his time, where he said one does not lose a remedy by going to a forum where the remedy in fact did not exist.

And that is precisely this situation.

Frances Dalm did not lose her remedy by going to the tax court when that remedy did not exist in that court.

I would... I think that case and Judge Hand's decision in that concurring opinion becomes very relevant because if you could take the Dalm situation from the present and lift it up and put it back into the Elbert situation, Judge Hand held that the district court had jurisdiction.

The majority court did not hold in that case that there was no jurisdiction of the district court because of an untimely claim.

The majority in that court held merely that the taxpayer by going to the tax court could not then later contest the income tax, which we agree.

The majority opinion there merely held that there was no jurisdiction because there was no allegation that a gift had been paid and equitable recoupment was not proper on the merits.

But it is here in Dalm, as the government admits.

And if you would take this case and put it right over there, you would have a decision for the respondent in this case.

And I think the case is very material.

I... I disagree with the government's statement when they challenged Judge Hand's statement that this Court held that the statute of limitations is tolled by... in the Bull case.

This Court did not hold that.

In the Bull case you had a situation where the taxpayer had been subjected to an estate tax.

The revenue people increased the value of the property and subjected it to an additional estate tax and then the petitioner taxpayer argued that because the government had done that by virtue, in effect, of estoppel they could not take inconsistent positions and assert an income tax that was inconsistent.

And this Court merely said that that does not toll the limits of the statute of limitations.

But the way the government states it takes that statement out of context.

It takes it completely out of context.

What has happened here is that we have done no violence to the statute of limitations because we have pursued the action when the cause of action arose.

And I think it's fundamental that no statute of limitations begins to run until the cause of action accrues.

It's impossible.

And that alone would be a denial of due process, it seems to me.

And I would--

Unidentified Justice: And what was the total... what was the total income tax claim?

$300,000?

Mr. Pierce: --The... the principal was $160,000.

Unidentified Justice: And... but with penalty and interest?

Mr. Pierce: With penalties and interest you'd have approximately $300,000 at that time.

Unidentified Justice: And you settled it for 150?

Mr. Pierce: No.

It was settled for 80 plus interest, which was over 50 percent.

Unidentified Justice: Your cause of action really arose... I mean, this is... this is recoupment of... recoupment assumes recoupment of something that you had a cause of action for.

I think, to be realistic about it, your cause of action arose when you erroneously paid the gift tax and had a cause of action for unjust enrichment of the government of sorts.

And... and basically what's going on here is an extension of the statute of limitations within which you can assert that cause of action.

And the issue we're debating is whether that cause of action to extend the statute of limitations can only be asserted in certain contexts or, as you contend, must be able to be asserted in all contexts.

But I think that's quite different from whether you're being deprived of a cause of action.

You could have filed for a refund of that gift tax the day after you paid it on the basis that it was erroneously paid.

Mr. Pierce: But it wasn't erroneously paid, Your Honor.

There was no reason to believe it was erroneously paid.

Unidentified Justice: Well, it was in fact.

They didn't know it was, but... but in fact it was.

Mr. Pierce: In fact it was not.

It only became erroneous when the government collected the second tax.

It wasn't erroneous at that time.

It was the collection of the second tax that gave--

Unidentified Justice: But it was not determined to have been erroneous until... until it was determined that an income tax was due instead of a gift tax.

But, in fact, the gift tax shouldn't have been paid.

Isn't that right?

Mr. Pierce: --Our position is that it was a gift.

Our position throughout is that it was a gift.

Unidentified Justice: You... you were wrong.

I mean, that's--

Mr. Pierce: No, Your Honor, we were not wrong.

We were not wrong.

It was settled on litigations hazards.

That's what happened here.

It was settled on litigation hazard.

And the cause of action arose at that time when they collected the second tax through the doctrine of equitable recoupment that this... this Court gave birth to in the Bull case.

Unidentified Justice: --Well, no court has ruled that you were wrong?

Mr. Pierce: Not really.

No, Your Honor.

Unidentified Justice: Not really.

After a two-day trial you settled it?

Mr. Pierce: That is correct, Your Honor.

That is absolutely correct.

And that's the situation.

I think the government's position becomes very scary to me because it is a denial of due process, and that's what this issue comes to.

Unidentified Justice: The government just wants the statute of limitations applied equitably to all taxpayers, it says, so that everybody gets a fair shake in the tax thing.

You're trying to come in at a time when the statute of limitations has run.

And you're trying to take advantage of the Bull case but it seems to me you want to expand that.

Mr. Pierce: No, Your Honor.

The issue is not whether the doctrine should be expanded, as the government seeks to have you believe.

The issue here is whether it's going to be drastically restricted to--

Unidentified Justice: Well, but--

Mr. Pierce: --where it virtually has no existence.

Unidentified Justice: --It was fairly drastically restricted in Rothensies, wasn't it?

Mr. Pierce: I believe Rothensies restricted the doctrine to... to where it should have been restricted, to this Dalm situation.

To one single transaction, one taxable event.

Two taxes on inconsistent legal theories, precisely this situation, which they admit... all they say is that we had an opportunity to pay the tax, which is not true because we couldn't pay the tax.

And that... that's an unreal world.

The real world out there is taxpayers cannot pay the tax first.

Congress has given the right--

Unidentified Justice: At least, many of them can't.

Mr. Pierce: --Most of them can't.

Most of them can't.

That's why you have the system the way we have it.

Unidentified Justice: Mr. Pierce, you're arguing now that the gift tax was not wrongly paid?

Mr. Pierce: We... We--

Unidentified Justice: If it was not wrongly paid, what is your basis for recoupment?

Mr. Pierce: --Because of the collection of the second tax on an inconsistent theory treating it as an income tax transaction.

Unidentified Justice: Therefore you must assume it was wrongly paid.

I mean, whether it was adjudicated by the earlier court or not, the whole theory of your case is that the gift tax was wrongly paid.

Isn't that right?

Mr. Pierce: The whole theory of the case is that... is the doctrine of equitable recoupment, Your Honor.

Unidentified Justice: Well, whichever one it was--

Mr. Pierce: That is--

Unidentified Justice: --it doesn't justify two taxes.

Mr. Pierce: --That's correct.

Absolutely.

Unidentified Justice: It was either a gift tax... it was either a gift or an income.

Mr. Pierce: One tax.

That is correct.

Unidentified Justice: And there was supposed to be one tax, not two.

Mr. Pierce: That is correct.

I would... I would state... I think... I've got five minutes and I'd probably just like to state and use Justice O'Connor's language in discussing equitable estoppel.

I would paraphrase her language and say that the government's interest in the simplistic interpretation of the statute of limitations here is outweighed by the taxpayer's countervailing interest in some medium, some reliable standard of honor and reliability in dealing with IRS.

And that's what you have here.

You have an unfairness.

You don't have... you don't have tax administration on a high plane.

You're going to a lower level.

And the Bull court opted for a higher plane of tax administration.

I believe that it's an absolute certainty this Court give moral instructions for future guidance because if you don't, the revenue people will collect the most tax without regard to principle, and that's exactly what they'll do.

I think that my time is about up, and I'd merely conclude to say that my grandfather said that... he was a circuit rider minister... said that a man, if he had anything to say, he could say it in 30 minutes, and I believe that's true and I've said it.

And I think we're right and I certainly hope you decide the case for Frances.

Unidentified Justice: Thank you, Mr. Pierce.

Ms. Desan-Husson.

Let me.

Go ahead.

Go ahead.

One of Mr. Pierce's points, as I understood it, was that if instead of going into the tax court the respondent here had been able to pay the tax and go into the district court, she would now be in a position to recover what she wants here whereas she isn't, under your view, having gone to the tax court.

What's your response to that?

REBUTTAL ARGUMENT OF CHRISTINE DESAN-HUSSON PRO HAC VICE, ON BEHALF OF THE PETITIONER

Mr. Desan-Husson: If she had gone to the district court before going to the tax court, and if the claim in the district court had been a claim for the income tax deficiency, she could raise equitable recoupment.

Once she went to the tax court, provision 6512 precludes further litigation about the income tax deficiency in the district court.

So, she couldn't have done that.

As far as sort of the larger point about the unfairness of the tax--

Unidentified Justice: Well, if she had paid the tax and... and went in for an income tax refund--

Mr. Desan-Husson: --Right.

Unidentified Justice: --she could have raised the recoupment?

Mr. Desan-Husson: That's right.

Unidentified Justice: Yes.

Mr. Desan-Husson: That's right.

Unidentified Justice: How about the larger point?

Mr. Desan-Husson: The larger point I was just going to make is that I think... I mean, Congress decided that collecting taxes first and settling disputes later was the way it was going to build the revenue code.

And the IRS actually has the authority to work out installment payments, and if that had become necessary--

Unidentified Justice: Should we--

Mr. Desan-Husson: --I guess that would have been... that would have been the way to guard access to the district court.

Unidentified Justice: --Can we judge this case on the assumption that the Internal Revenue Service did not give any credit in the settlement for the prior payment of the gift tax?

Mr. Desan-Husson: You can do that, yes, because the--

Unidentified Justice: The... our adversary said they... it was urged that the Service give credit and that was denied.

Mr. Desan-Husson: --It's unclear.

The only thing I can say from the record is--

Unidentified Justice: But, anyway, we judge the case as though there was no credit given?

Mr. Desan-Husson: --Yes.

Unidentified Justice: Well, is that entirely accurate to... you have an $80,000 payment... and what more about it do you know than that?

That there was no credit expressly given.

Mr. Desan-Husson: That's all... that's all we know.

All I'm saying is that it's irrelevant to the equitable recoupment... to whether the statute of limitations had run on the gift tax claim, exactly what was decided in the settlement.

The point is that the court didn't have jurisdiction to reach that question.

Unidentified Justice: So you say it's irrelevant whether they gave credit or not.

Mr. Desan-Husson: That's right.

That's right.

If the Court has no further questions--

Chief Justice Rehnquist: Thank you, Ms. Desan-Husson.

The case is submitted.

Print this transcript Transcript: 

Argument of Speaker

Mr. Speaker: The opinion of the Court in No. 88-1951, United States against Dalm will be announced by Justice Kennedy.

Argument of Justice Kennedy

Mr. Kennedy: United States versus Dalm is a tax case.

In 1976 and 1977, the respondent, Frances Dalm, receives two payments from the estate of her deceased employer.

She treated both payments as gifts and paid gift tax on one of the payments.

Some years later, while auditing her income tax returns, the IRS determines that the payment should have been treated as income for her services as administratrix of the estate.

She challenged the IRS determination that she owed additional income tax in the Tax Court.

Now, this litigation over her income tax liability eventually settled with Dalm paying some additional income tax.

Based upon the income tax payments, Dalm filed a claim for refund of the gift tax.

The IRS denied her claim and she sued in Federal Court for a refund.

She contended that under the theory of equitable recoupment, she was entitled to a refund of the gift tax because the estate tax payments have been taxed twice under inconsistent theories.

The District Court dismissed her suit on the ground that the statute of limitations for seeking a refund of the gift tax are already run.

The Court of Appeals for the Sixth Circuit reversed holding that the doctrine of equitable recoupment applied and constituted an exception to the statute of limitations.

In an opinion filed today with the Clerk, we reverse the judgment of the Court of Appeals.

We hold that the doctrine of equitable recoupment is not an exception to the statute of limitations and does not by itself grant the District Court jurisdiction to entertain a refund suit.

The doctrine maybe used to reconcile inconsistent taxes when one of the taxes is properly within the court’s jurisdiction.

But in this case, Dalm litigated her liability for income tax and then in a separate proceeding, attempted to litigate her equitable recoupment claim.

The doctrine of equitable recoupment cannot justify such a fragmented approach.

Justice Stevens has filed a dissenting opinion in which Justices Brennan and Marshall join.