Court Opinion

ID: 9450433
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:47:51.077668+00
Date Added: 2024-06-11T17:32:19.365741
License: Public Domain

COWEN, Chief Judge
(dissenting).
With deference to the majority, I do-not find support in the decisional law for two basic premises upon which the court’s opinion is based: First, the opinion differentiates between two types of recoupment situations: (a) where both the taxpayers’ claim and the Government’s setoff concern a tax for the same year by the same taxpayers and (b> *631where there is an attempt to set off a tax liability for one year against that for another or to set off a tax liability of one taxpayer against that of a second taxpayer. I agree that this distinction is helpful in deciding whether there is present a set of facts in which recoupment has generally been permitted. However, it is not apparent how the distinction is relevant in resolving the problem whether equitable considerations are appropriate in a decision to permit or deny recoupment. I do not find that the case law reflects any difference in the equitable nature of the causes of action in the two situations. I believe that a lack of ■due diligence by the party asserting the setoff is equally germane in either situation.
Second, the court’s opinion holds flatly that in the first situation described .above, there is no room for the court to look at the “equities” involved in a particular ' case. I disagree because I do not find that the defense of lack of dili.gence or laches by the party asserting ■the setoff or seeking recoupment was presented or considered in the cases relied upon by the majority.
Further, I cannot agree that a decision :in favor of plaintiffs under the peculiar facts of this case would, as a practical ■.matter, spell the end of recoupment.
Contrary to the majority view, I believe that the case law, by implication and rationale, indicates that equitable ■considerations are germane to a decision -as to whether the bar of the statute of .limitations should be lifted in a case involving facts similar to those which are presented here.
A suit for the refund of taxes is an equitable action for money had and received, indebitatus assumpsit. Stone v. White, 301 U.S. 532, 534, 57 S.Ct. 851, 81 L.Ed. 1265 (1937); see also, Note, 24 Va.L.Rev. 81 (1937). The ultimate issue presented by the cause of action is whether the taxpayer overpaid his taxes; this places in issue, at the minimum, the entire tax liability for the same tax for the same year.1 Lewis v. Reynolds, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293 (1932); Cuba R. Co. v. United States, 254 F.2d 280 (2d Cir. 1958), cert. denied, 358 U.S. 840, 79 S.Ct. 64, 3 L.Ed.2d 75; United States v. Pfister, 205 F.2d 538 (8th Cir. 1953). A recovery on the defense asserted here (called “equitable recoupment”) will not support an affirmative money judgment on behalf of the Government, but serves to reduce, pro tanto, the refund claim, Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 299, 67 S.Ct. 271, 91 L.Ed. 296 (1946).
However, it does not follow from the decisions cited above that, in every case where the Government attempts to recoup an item on the same tax return as the principal claim, the court must allow the defense to be asserted. Several aspects of the basic cause of action and the defenses thereto are also relevant in determining when equitable recoupment should be permitted. A suit for the refund of taxes is equitable in nature and subject to equitable defenses and the de*632fenses must conform to equitable standards. In Stone v. White, 301 U.S. 532, 537, at pp. 534, 535, 57 S.Ct. 851, at pp. 852, 853, the Supreme Court commented:
“The action, brought to recover a tax erroneously paid, although an action at law, is equitable in its function * * *.
“Its use to recover upon rights equitable in nature to avoid unjust enrichment by the defendant at the expense of the plaintiff, and its control in every case by equitable principles, established by Lord Mansfield in Moses v. Macferlan, 2. Burr. 1005 (K.B. 1750), have long been recognized in this Court. * * * It is an appropriate remedy for the recovery of taxes erroneously collected, * * *. The statutes authorizing tax refunds and suits for their recovery are predicated upon the same equitable principles that underlie an action in assumpsit for money had and received. * * * Since, in this type of action, the plaintiff must recover by virtue of a right measured by equitable standards, it follows that it is open to the defendant to show any state of facts which, according to those standards, would deny the right, * * * even without resort to the modern statutory authority for pleading equitable defenses in actions which are more strictly legal, * *
For proper perspective, the nature of a tax refund suit in relation to other forms of litigation should be considered. The usual plaintiff-defendant role is reversed. When an item of tax is in issue, the taxpayer pays and then sues to get his money back. The rules of distraint and levy available after an administrative determination of tax liability provide a sufficient impetus for the “pay- and-then-sue” chronology. The basic characteristics of this procedure were summed up in Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 at pp. 699-700 (1935) at pp. 259-260,
“ * * * Once the tax is assessed [by the administrative agency], the taxpayer will owe the sovereign the amount when the date fixed by law for payment arrives. * * * The statute might remit the government to an action at law wherein the taxpayer could offer such defense as he had. A judgment against him might be collected by the levy of an execution. * * * the sovereign has resorted to more drastic means of collection. The assessment is given the force of a judgment, and if the amount assessed is not paid when due, administrative officials may seize the debtor’s property to satisfy the debt.
“* * * the usual procedure for the recovery of debts is reversed in the field of taxation. Payment precedes defense, and the burden of proof, normally on the claimant, is shifted to the taxpayer. * * * But these reversals of the normal process of collecting a claim cannot obscure the fact that after all what is being accomplished is the recovery of a just debt owed the sovereign.”
It should be noted that in the action at bar, were the Government to be the plaintiff suing to collect the tax attributable to the penalty, it would have no means of adding the time-barred item to its recovery. The plaintiff-defendant posture in refund actions has not escaped comment, Note, 24 Va.Rev. 81, 82 (1937); Note, 26 Texas L.Rev. 110, 112 (1947).
It has also become apparent that equitable recoupment has been less than warmly received by the Supreme Court and other Federal courts, because the defense avoids the statute of limitations. McEachern v. Rose, 302 U.S. 56, 58 S.Ct. 84, 82 L.Ed. 46 (1937); Rothensies v. Electric Storage Battery Co., supra; Wood v. United States, 213 F.2d 660 (2d Cir. 1954); Ford v. United States, 276 F.2d 17, 149 Ct.Cl. 558 (1960); see generally, 10 Mertens, Law of Federal Income Taxation §§ 58.41 and 58.42 (1958).
Upon this background, it is my opinion that the avoidance of the statute of limitations in order to permit equitable re*633coupment in an individual case is subject to and deserving of close scrutiny. Even in those cases where recoupment may be allowed, it need not be allowed if certain equitable considerations present in the factual pattern of the ease under consideration indicate that the defendant’s conduct was inequitable. This approach is not new.
In United States v. Bowcut, 287 F.2d 654 (9th Cir. 1961), the principal question decided was whether the “clean hands” maxim would bar recoupment. An absence of fair dealing by the Government, coupled with a general lack of diligence, appears to have prompted the denial of the recoupment of an erroneous refund in LaFollette v. United States, 176 F.Supp. 192 (S.D.Cal.1959).
In several other cases,2 the Government has been denied leave to amend its answer to plead the defense of recoupment. These cases turn on different criteria than are pertinent in the case at bar (i. e., they concern the effect of the amendment on the fairness of the proceeding). However, since leave to amend rests in the sound discretion of the court, these cases are at least indicative of careful control of the defense of equitable recoupment by the courts, particularly in light of the liberal rules regarding amendments of the pleadings.
In any case where the Government seeks recoupment, it seems appropriate to consider the lack of diligence on the part of the Internal Revenue Service in deciding whether to lift the bar of the statute of limitations. If the Service has had ample opportunity to scrutinize the facts pertinent to the taxability of the item in question and has reviewed such facts, there is far less reason to permit recoupment. McNaghten v. United States, 17 F.Supp. 509, 84 Ct.Cl. 349 (1937); Lyman v. United States, 22 F.Supp. 14 (D.Mass.1938). Cf. O’Connor v. United States, 76 F.Supp. 962 (S.D.N.Y.1948).
In the case at bar, we are faced with a lack of diligence by the defendant. Plaintiff Dysart’s 1954 income tax return and those of his two sisters were audited in three separate revenue districts. The care with which the audit was made and the extent to which the Government then had knowledge of the facts regarding the judgment is evidenced by the Government’s action in separating the interest from the principal amount of the judgment and in assessing a deficiency against the taxpayers on the ground that the interest was taxable as ordinary income. Again, after the proceeds of the second judgment were reported in plaintiffs’ 1957 tax return, a suit involving the same issues of fact and law as are raised by the defense in this case was filed in the Tax Court. Instead of litigating the question, the Government chose to settle. Thus the Government has neglected to utilize two opportunities it had to litigate the question within the period of limitations. There is no suggestion in the record that plaintiffs have withheld any information regarding the taxability of the item in question or have misrepresented any of the facts relating thereto. Nor is there any indication that the defendant now has facts or information which would better enable it to determine the taxability of the disputed item than it had in December 1956, when it accepted plaintiffs’ treatment of the proceeds of the judgment in the 1954 tax return.
In denying recoupment under circumstances where it appears that the Government was less negligent than here, this court in McNaghten v. United States, supra, 17 F.Supp. at page 515, 84 Ct.Cl. at page 361, stated:
“ * * * the Commissioner [of Internal Revenue] was bound by no interpretation of the law, except his own, with respect to the question before him. Moreover, all the facts necessary to a determination and as*634sessment of taxes against the trustees and the beneficiaries * * * were before him and fully known by him * * * before any statute of limitation would run against the legal assessment of any tax * * *. He simply neglected properly to assess the tax and permitted the limitation statute to-.run. There were no representations of any kind by plaintiffs that misled, or could have misled, the Commissioner, and there is no basis for estoppel.”
Again, in Lyman v. United States, supra, 22 F.Supp. at p. 15, where the court denied defendant’s motion for judgment on the pleading and disallowed recoupment, the court stated:
“ * * * if either the beneficiary of the trust or the government is to suffer a loss, in good conscience and equity, that loss should be borne by the government, sincé- its failure to assess a tax against the trust must be deemed to border on negligence, for it was acquainted with the setup of the trust instrument.”
As a consequence of the defendant’s negligence, the trial of the issues presented by its setoff has been delayed for years. The delay necessarily affects plaintiffs’ litigation posture for it casts upon plaintiffs the burden of proving the details of a transaction that had its origin more than 40 years ago. In such a situation, it is clear that the defendant is guilty of laches, an equitable principle which has often been invoked to defeat tardy suits against the Government.
I think it proper to balance the interest of plaintiffs in laying defendant’s stale claim to rest against whatever inequities there may be in permitting plaintiffs to recover, especially when the defendant has been less than diligent in asserting its claim and when there are no circumstances to indicate that plaintiffs’ right to a refund of the penalty is inconsistent with its treatment of the proceeds of the judgment. Under the facts before us, the following language-of the Supreme Court in Rothensies v. Electric Storage Battery Co., supra, 329 U.S. at p. 301, 67 S.Ct. at p. 273, seems-particularly appropriate:
“ * * * a statute of limitation is an almost indispensable element of fairness as well as of practical administration of an income tax policy.
“We have had recent occasion to point out the reason and the character of such limitation statutes. ‘Statutes of limitation, like the equitable doctrine of laches, in their conclusive effects are designed to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared. The theory is that even if one has a just claim it is unjust, not to put the adversary on notice to defend within the period of limitation and that the right to be free of stale claims in time comes to prevail over the right to prosecute them.’ ”
I am mindful of this court’s statement in Pond’s Extract Company v. United States, 134 F.Supp. 476, 133 Ct.Cl. 43. (1955), that “[t]he task of distinguishing between factual situations that warrant the application of equitable recoupment in tax cases is admittedly a difficult one, and the distinction when made in some cases will be a tenuous one.” However, after a review of the facts, I believe that defendant’s lack of diligence and the resulting adverse effect on plaintiffs’ case constitute appropriate grounds for refusing to lift the bar of the statute of limitations to permit the Government, to interpose its setoff. For these reasons, I would grant plaintiffs’ motion for summary judgment.
COLLINS, Judge, joins in the foregoing dissenting opinion.

. In this case, the recoupment involves the same taxpayers and the same tax year as the principal claim; the tax penalty is an addition to the tax, 26 U.S.C. (I.R.C.1939) § 294 (1952 Ed.) and as such is considered as part of the income tax for the taxable year. See Rev.Rul. 56-492, 1956-2 Cum.Bull. 949. We are here presented with the inner limits of the doctrine of equitable recoupment and are not concerned with its outer extremities, including its use when several taxpayers are involved, see e.g. Stone v. White, 301 U.S. 532 (1937); when several taxes are in issue, see e.g. Bull v. United States, 295 U.S. 247 (1935), and Jones v. Fox, 162 F.Supp. 449 (D.Md. 1957), and when several tax years are involved, see e.g. McEachern v. Rose, 302 U.S. 56, 58 S.Ct. 84, 82 L.Ed. 46 (1937), and Springfield Street Ry. Co. v. United States, 312 F.2d 754, 160 Ct.Cl. 111 (1963). Also, this case is not covered by the statutory mitigation sections, 26 U.S.C. (I.R.C.1954) §§ 1311-1315 (1958 Ed.), see e. g. Gooding v. United States, 326 F.2d 988 (Ct.Cl.1904).

. Koutzalm v. Brown, 95 F.2d 766 (6th Cir.1938), cert. denied 290 U.S. 641, 54 S.Ct. 60, 78 L.Ed. 557; Weiler v. United States, 191 F.Supp. 601 (N.D.Pa.1961); Dupont v. United States, 28 F.Supp. 122 (D.Del.1939).