Title: Indiana Dept. of State Revenue v. Smith

State: indiana

Issuer: Indiana Supreme Court

Document:

473 N.E.2d 611 (1985)
INDIANA DEPARTMENT OF STATE REVENUE, Inheritance Tax Division, Appellant (Petitioner below),
v.
Estate of Maud SMITH, Deceased, Appellee (Respondent below).
No. 285S40.

Supreme Court of Indiana.
February 5, 1985.
*612 Linley E. Pearson, Atty. Gen. of Indiana, Dan S. LaRue, Deputy Atty. Gen., Indianapolis, for appellant.
Jeanne S. Miller, Miller & Miller, New Haven, for appellee.
HUNTER, Justice.
This cause is before us upon the petition to transfer of respondent-appellee, the Estate of Maud Smith, Deceased (Estate). The Court of Appeals, Third District, reversed a lower court judgment in favor of the Estate concerning the amount of inheritance tax owed by the Estate. Indiana Department of State Revenue v. Estate of Maud Smith, (1984) Ind. App., 460 N.E.2d 980. We find that the Court of Appeals did correctly decide one issue in this case when they determined that the real property held originally by Maud Smith and her husband O. Clem Smith as tenants by the entireties and then transferred by them to their children, subject to the joint and successive life estates in the grantors, became wholly subject to the Indiana Inheritance Tax at the time of death of the last grantor.
However, we find that the Court of Appeals failed to consider the issue of whether the doctrine of equitable recoupment is applicable to this case. We therefore grant transfer and reverse. The opinion and decision of the Court of Appeals are hereby vacated, and appellee's petition to transfer is granted. The decision of the trial court is affirmed in part and the cause is remanded with instructions.
The facts in this case are not in dispute and were summarized by the Court of Appeals as follows:
Ind. Dept. of State Rev. v. Estate of Smith, 460 N.E.2d  at 981-82.
The Court of Appeals considered the following issue presented by the Indiana Department of Revenue:
Ind. Dept. of State Rev. v. Estate of Smith, 460 N.E.2d  at 982. They correctly considered our inheritance tax laws, as follows:
Ind. Dept. of State Rev. v. Estate of Smith, 460 N.E.2d  at 983.
The Court also considered a Tax Department ruling and a 1978 case upon which the Tax Department relied. The ruling, 45 I.A.C. 4-2-5 (1984 ed.), provides:
In the case of State, Department of State Revenue v. Union Bank and Trust Company, (1978) 177 Ind. App. 632, 380 N.E.2d 1279, the court held that whenever real estate which is owned by the entireties is transferred without valuable consideration, subject to joint and successive life estates in the grantors, the transfer is taxed in the estate of the last grantor to die. The court then concluded:
Ind. Dept. of State Rev. v. Estate of Smith, 460 N.E.2d  at 983-84.
We find that the Court of Appeals did correctly define the difference between our state inheritance tax law and the Federal Estate Tax and thus reached the correct result as to the time the value of the entire property was subject to the Indiana inheritance tax. Under Indiana law, the entire value of the Smith's property was subject to the Indiana inheritance tax at the time of Maud Smith's death, since the transferees took possession of the entire property at that time.[1]
However, we find that the Court of Appeals did not address the issue of equitable recoupment which was properly raised in appellee's brief and petition to transfer and is clearly applicable to this case. It is well settled in Indiana that courts of general jurisdiction have power to grant equitable relief, not only under statutes, but inherently, as necessary to the complete administration of justice. State ex rel. Root v. Circuit Court of Allen County, (1972) 259 Ind. 500, 289 N.E.2d 503; State ex rel. Uebelhor v. Armstrong, (1969) 252 Ind. 351, 248 N.E.2d 32.
The doctrine of equitable recoupment is an equitable exception to the statute of limitations where the application of the statute would work an egregious injustice. It has been applied in federal courts in both *615 tax collection and tax refund situations and it permits a taxpayer to offset a tax collected on a wrong theory against an assessment under a correct theory. 10 J. Mertens, The Law of Federal Income Taxation § 60.05 (1984 rev. ed.). Recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiff's action is based and therefore is applicable only to situations in which a single transaction constitutes the taxable event claimed upon and the one considered in the recoupment.
The doctrine has been applied by the United States Supreme Court in cases involving the erroneous collection of an estate tax and the denial of a refund of income tax. Bull v. United States, (1935) 295 U.S. 247, 55 S. Ct. 695, 79 L. Ed. 1421; Stone v. White, (1937) 301 U.S. 532, 57 S. Ct. 851, 81 L. Ed. 1265. The Supreme Court has emphasized that recoupment will only be applied when the various claims arise from the same transaction. They have explained that the doctrine of recoupment is "only to permit a transaction which is made the subject of suit by a plaintiff to be examined in all its aspects, and judgment to be rendered that does justice in view of the one transaction as a whole." Rothensies v. Electric Storage Battery Co., (1946) 329 U.S. 296, 299, 67 S. Ct. 271, 272, 91 L. Ed. 296, 299. Other courts have applied the concept of recoupment in tax cases where there has been an inconsistent treatment of the same item and rigid adherence to the statute of limitations would lead to unusually harsh and inequitable results. Vitt v. United States, (8th Cir.1983) 706 F.2d 871; First National Bank of Omaha v. United States, (8th Cir.1977) 565 F.2d 507.
In this case, the taxes in dispute on the death of O. Clem Smith in 1975 and on the death of Maud Smith in 1981 each pertain to the same tract of property and result from the same transaction which was the Smiths' transfer of their real property to their children in 1971. The fact that there was confusion as to the time part of the taxes became due does not change the fact that the basis of the taxes was the single transfer of one piece of property. Thus, in the circumstances of this case, the bar of the statute of limitations has resulted in inequitable consequences to the taxpayer, and a single transaction constitutes the taxable event claimed upon and the one considered in recoupment. Under these circumstances, recoupment is appropriate for Maud Smith's estate. In similar circumstances, a decedent's estate was allowed to recover an overpayment of tax and interest which resulted when more than half the value of certain property had been erroneously included in the decedent's husband's estate. Vitt v. United States, 706 F.2d  at 875.
On remand, the court is instructed to accurately determine the amount of overpayment of taxes made in 1975 due to the erroneous inclusion of one-half the property in O. Clem Smith's estate and interest on that amount up to the date the 1981 taxes were due. This is the amount of recoupment which the Maud Smith estate may deduct from the taxes which are due as the result of Maud Smith's death in 1981. In other words, neither side is to gain a windfall, and equity will place the parties as nearly as possible in the position they would have been in if the error in the 1975 tax payment had not been made.
For all of the foregoing reasons, transfer is granted and the opinion of the Court of Appeals is vacated. The cause is remanded to the trial court with instructions to determine the amount of recoupment which Maud Smith's estate may deduct from the 1981 tax payment. The judgment of the trial court in all other things is affirmed.
GIVAN, C.J., and DeBRULER, PRENTICE and PIVARNIK, JJ., concur.
[1]  The appellee contends that the Court of Appeals' decision conflicts with a prior decision, In re Grotrian, (1980) Ind. App., 405 N.E.2d 69. In that case the court held that the determination of the classification of a transferee takes place as of the date of the inter vivos deed. However, that holding concerning the time of determining the classification of a transferee does not affect our finding concerning the time the tax itself accrues. In fact, the Grotrian court stated: "Thus the gift took effect in 1942 even though the tax did not accrue until the transferors had died." In re Grotrian, 405 N.E.2d  at 72. There is no conflict here.