Court Opinion

ID: 9651737
Source: CourtListenerOpinion
Date Created: 2023-08-23 16:33:56.856565+00
Date Added: 2024-06-11T18:12:38.668408
License: Public Domain

EVANS, Circuit Judge
(dissenting).
I have not been able to fully and satisfactorily reconcile the opinion in the McEachern case with the opinion in the Bull case, both notwithstanding the clarifying discussion in the majority opinion. At least I am not prepared to accept the controlling effect of the McEachern opinion on the previously-decided Bull case. In the Bull case [295 U.S. 247, 55 S.Ct. 695, 700, 79 L.Ed. 1421], strong language was used condemning the Government for opposing the allowance of the equitable practice of recoupment or set-off. It was said, “While here the money was taken through mistake without any element of fraud, the unjust retention (by the Government) is immoral and amounts in law to a fraud on the taxpayer’s rights. * * * Retention of the money was against morality and conscience.”
In the McEachern case, if we look behind the verbiage where niceties of distinction are somewhat hidden, the conclusion is inescapable that the Government was not permitted to invoke the recoupment or set-off doctrine against a tax*644payer who attempted to enforce his claim for overpayment of an income tax. I can not believe that the application of the recoupment or set-off doctrine turns upon who makes the claim for its application.
That the inferior courts have been quite generally confused by the two holdings is shown by the fact that the following cases have accepted the recoupment theory as announced in the Bull opinion. Crossett Lumber Co. v. United States, 8 Cir., 87 F.2d 930, 109 A.L.R. 1348; Gooch Milling Co. v. Comm., 8 Cir., 133 F.2d 131, reversed 320 U.S. 418, 64 S.Ct. 184; Mills v. United States, D.C., 30 F.Supp. 738; Dunigan v. United States, 23 F.Supp. 467, 87 Ct.Cl. 404; See also, Virginia Law Review, March, 1942.
In other cases (Hall v. United States, Ct.Cl., 43 F.Supp. 130; Lyeth v. Hoey, 2 Cir., 112 F.2d 4, 130 A.L.R. 830; Mohawk Rubber Co. v. United States, 25 F.Supp. 228, 88 Ct.Cl. 50; Rotenberg v. Sheehan, D.C., 48 F.Supp. 584) the McEachern opinion controls.
The Government argues that the Mc-Eachern case turned on the pleadings, no set-off or recoupment having been pleaded. The Commissioner, we infer, continues to apply the Bull case. The taxpayers also rely on the Bull case if they be benefited thereby but accept the McEachern decision if the Government is relying on recoupment. In other words, the Government here seeks to apply the doctrine of the Bull case there announced as follows: “A claim for recovery of money wrongfully exacted as taxes may be used by way of recoupment and credit in an action by the United States arising out of the same transaction, and this even though an independent suit against the Government to enforce the claim would be barred by the statute of limitations.”
Counsel for taxpayer argue, on the other hand, that the cases which have not followed the McEachern holding since its announcement were either wrongfully decided or the opinion in the McEachern case was not called to said courts’ attention. Other cases which hold contrary to their contention were decided before the McEachern opinion was announced and must be viewed as overruled. And finally counsel for taxpayer contend, and with force, that whether the effort to reconcile the Bull and the McEachern cases be persuasive or successful, the McEachern ruling is the later holding and inferior Federal courts must follow the latest decision of the Supreme Court.
This opinion is written to emphasize the necessity of further enlightenment by the Supreme Court—the only court that can clear the atmosphere with finality. The situation as it now exists, is vexatious, perplexing, and confusing. (Article by McConnell, Virginia Law Review, March, 1942.)
I am inclined to accept, because the fairest, the doctrine which permits either taxpayer or the Government to set off or recoup any valid claim he or it may have against the other. In other words, if the taxpayer has overpaid his taxes one year and has a deficiency tax on a subsequent year, then he should be permitted to set off the same. The same should apply if the situation is reversed and the taxpayer is seeking to recover on an overpayment which is off-set by a sum he owes as a deficiency in another year. It would in my opinion seem unnecessary and illogical to require a showing that the two claims arose out of the same transaction, save as the statute of limitations may affect the situation.
Here, it seems to me that the facts do involve, or at least arise out of, the same transaction. It may not be as clear a case of identity of transaction as the Bull case. In the Bull case, however, it is worthy of note that it was an inheritance tax overpayment which was being offset against an income tax deficiency. The transaction out of which the taxes arose was the same, but an inheritance tax overpayment gave rise to a cause of action quite different in several respects from a cause of action arising out of income tax deficiency assessment. But the court refused to recognize any such distinction in the nature of the causes of action as sufficient to prevent the application of the recoupment doctrine.
In the instant case it might be said that the claim of the .Government in re 1928 income taxes and the taxpayer’s 1933 overpayment of income taxes both turn on a mutual mistake as to the character of the alleged reorganization by which there was an exchange in 1928 of the fifty thousand shares of Brooklyn .Union Gas Company stock for $6,750,000 debenture bonds. It was, I believe, solely due to this mistaken conception on the part of the taxpayer and the Commissioner of Internal Revenue concerning the *645legal effect of the 1928 exchange of securities that the plaintiff avoided the $342,-180.50 which was in fact due and owing by it as income taxes for the year 1928.
It also seems to me clear that plaintiff’s payment in 1933 of income taxes in excess of the amount due from it to the Government, of $251,053.55 was due to, and arose from, a mistaken conception of the effect of said exchange of securities. The confusion in both instances arose out of the construction and application of the tax exempt reorganization statute which had been recently enacted and not judicially construed.
In other words, in both instances, liability arose because of a misconception of the legal effect of the so-called, but erroneously termed, tax exempt reorganization which took place in 1928. The transaction was there believed to be, but was not, a tax exempt reorganization. It is true the transaction by which the individual transactions which resulted in a profit, occurred in different years. So it was in the Bull case. On the other hand, it was the original theory of the taxpayer which the Government accepted which resulted in the escape of taxes in 1928. Plaintiff is perhaps correct in saying that it is not responsible for the defendant’s mistakes and that no deception was by it practiced. Taxpayer only made a legal contention which the Commissioner accepted, and which was in fact erroneous. Likewise, the taxpayer in 1933, misconstrued the reorganization statute and its overpayment arose through an erroneous assessment. However, in each instance, the sale was a part of a transaction which, in 1928, was first construed by taxpayer and the Commissioner as a tax exempt reorganization.
Moreover, the transaction in each case was the sale of debentures which were transferred as a part of the alleged tax exempt reorganization. In one sense, the 1933 transaction and the 1928 transaction were separate and independent. On the other hand, looking at the matter broadly and ignoring the form, I believe it was a closely related transaction which was a part of an alleged reorganization whereby the companies involved sought to end their joint holdings. See fact recital in United Light & Power Co. v. Commissioner, 7 Cir., 105 F.2d 866.
I confess that I am troubled by the effect of the Act of 1938. What did Congress intend by the last section of this amendment, when it said: “(f) * * * No adjustment shall be made under this section in respect of any taxable year beginning prior to January 1, 1932”? Section 820(f), 26 U.S.C.A. Int.Rev.Code, § 3801(f).
Did this amendment result in the denial of a right or the grant of a right?
It would seem to me that it was a clarifying statute, and so far as it applied, there was a time limit, to-wit, January 1, 1932, beyond which it did not go. If a right existed beyond that time or after, this statute added nothing. It applied only if no right existed, or if there was doubt and its application was limited to adjustments made after January 1, 1932.
In other words, it did not enlarge or lessen any right which accrued before January 1, 1932. If the Bull case governed the facts in this case, it was not affected by this Act, nor can this Act be invoked to make a case which did not exist before January 1, 1932.
We therefore return to the question of whether the two tax errors arose out of the same transaction. If they did, then the Bull case governs. If not, the application of the McEachern opinion enters the picture and we must decide the extent to which recoupment is limited and the effect of the limitation sections. Or was the McEachern opinion written on a background of on recoupment pleaded? Believing as I do that the 1933 tax overpayment grew out of the same transaction as resulted in the 1928 non-payment of a tax due, I apply the Bull case.
I also think the disputed questions should be settled by the Supreme Court. Then inferior courts, the U. S. Tax Court, all taxpayers, and the Government will thereby be made happy, or at least less unhappy and less disputant.