Court Opinion

ID: 9641279
Source: CourtListenerOpinion
Date Created: 2023-08-22 17:27:35.461902+00
Date Added: 2024-06-11T18:10:36.376890
License: Public Domain

CLARK, Circuit Judge
(dissenting).
The interesting, if difficult, problem here presented requires us first to interpret and reconcile Supreme Court decisions which *9the Court itself does not regard as conflicting. Lewis v. Reynolds, 284 U.S. 281, 52 S. Ct. 145, 76 L.Ed. 293, and Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421, broadly favored the use, by way of equitable recoupment to either the taxpayer or the United States, of claims for taxes or for refunds, though barred by lapse of time from affirmative enforcement. This same rule was applied in Stone v. White, 301 U. S. 532, 57 S.Ct. 851, 81 L.Ed. 1265, and Mc-Eachern v. Rose, 302 U.S. 56, 58 S.Ct. 84, 82 L.Ed. 46, the leading cases here. In Stone v. White, supra, application of the principle allowed the United States to recoup, as against a claim for refund made by a plaintiff who was the beneficiary of a trust, a tax claim which was formally due from the trustees, but was eventually payable out of the income of the trust. Mc-Eachern v. Rose, supra, restated the principle, but held it could not apply against the express provisions of a statute. The conclusion is clear that equitable recoupment of otherwise outlawed claims for taxes or tax refunds will be had unless the tax law expressly forbids.
This conclusion seems a justified one under the federal revenue laws. Indeed, it is directly in line with the policy of the Revenue Act of 1938, the new § 820, 52 Stat. 581, 26 U.S.C.A., Internal Revenue Code, § 3801, of which was intended to “take the profit out of inconsistency” and substitute the theory of “correct adjustment,” even at a comparatively late date, for theories of partial limitation, estoppel, and other attempts to secure quick repose for tax claims. Maguire, Surrey and Traynor, Section 820 of the Revenue Act of 1938, 48 Yale L.J. 509, 528-532, 719; 39 Col.L.Rev. 460; 52 Harv.L.Rev. 300.1 On the other hand, the theory of limitation applied in the opinion herewith results in a special exemption from the estate tax of a substantial estate subject thereto for the mere reason that the taxing authorities made a wrong guess (as it turned out in Lyeth v. Hoey, 305 U.S. 188, 59 S.Ct. 155, 83 L.Ed. 119, 119 A.L.R. 410) as to the proper theory of taxation applicable to the situation.
My brothers find this prohibition against equitable recoupment here by ascribing a broad general content to the words of the statute, § 609(a) of the Revenue Act of 1928. Their argument is not without persuasive force; but I feel that it does less than justice to the decisions, particularly Stone v. White, and leaves some of the statutory provisions unexplained. If the prohibited credit of § 609(a) includes an estate tax credit under circumstances such as here disclosed, it is clear that the term comprises any tax claim under the federal revenue acts. That, I believe, is clearly contrary to the spirit of Lewis v. Reynolds and Stone v. White; nor does it take note of the limited reach of the McEachern case. And I do not believe Stone v. White can be disposed of by saying merely that the credit there was due from “a third person,” i.e., the trustee. Unless the government’s claim was equitably due from the plaintiff beneficiary, there would have been no ground for recoupment in any event. But the amount claimed by the government was due in the last analysis from the plaintiff, § 609(a) did not in terms apply, and hence the recoupment was allowed. This was true even though there — unlike our case — both claims arose out of income tax matters, as to which the commissioner has specific authority to make credits and refund of any balance. § 322(a), Revenue Act of 1928.2 McEachern v. Rose, however, was within the terms of § 609(a) and § 322(a), since it involved a credit for income taxes due from the plaintiff.3
Moreover, the language of § 609(a) does not lend itself readily to such a broad interpretation of its terms. Had it been intended to prohibit any credit for any federal tax after the period of limitation had run, the natural course would have been to express this prohibition directly. Thus it could have been provided that a barred tax could be neither affirmatively collected nor *10used as an offset against the taxpayer’s claim for refund. But this statement seems studiously to have been avoided. Instead the statute refers to the converse situation, to make void not the barred claim, but the refund credit. This backhanded form of statement is not clear unless it is read as emphasizing the administrative process of making a credit. A direct payment of the barred claim is made recoverable under the earlier section, § 607; so here it is added that the attempt to make a credit towards it is simply a void act.
Such careful use of terms would be unusual if credit meant substantially any tax claim, as my brothers view it. It does, however, tie in with the limited,and careful use of the term credit in the revenue laws, where it does not appear as a synonym for general setoff. It does appear in § 322(a) with reference to the income tax only as pointed out above; its use elsewhere is limited. The only reference to credits for overpayment of the estate tax seems to be made to the special case where the Board of Tax Appeals has found that the executor has made an overpayment. 26 U.S.C.A. § 512, Int.Rev.Code, §§ 910-912, which by its very limitations suggests the restricted connotation of the word.4
In the revenue laws, therefore, the word credit seems to be a word of art, having a specific denotation, rather than a word of broad and indefinite generality. This is more than a mere matter of adding or subtracting payments or refunds, or of the. form which the checks to settle the balance should take. It is a matter, of substance, tp wit, what agency of government has the responsibility of' passing on difficult questions of equitable recoupment beyond the fairly simple situations covered by section 322(a). To date the principles of such re-coupment have been only partially developed by the Supreme Court. It seems, therefore, that those,are problems for the courts. Indeed,'the Board of Tax Appeals has held that it has no authority to apply principles of recoupment, Heyl’s Appeal, 34 B.T.A. 223, and this view, I take it, is supported by United States ex rel. Girard Trust Co. v. Helvering, 301 U.S. 540, 57 S. Ct. 855, 81 L.Ed. 1272.
I conclude, therefore, that the commissioner has no general power to make a credit of one tax against another of quite different kind. This would explain and justify the peculiar wording of § 609(a) referred to above. If his power of making credits is thus limited to the situation disclosed in § 322(a), we can understand the words “in any one year,” following the word “liability” in § 609(a), an expression without meaning when applied to taxes not assessed on the yearly basis. Hence I believe that in the present case recoupment is not forbidden by the statute.5 Compare Paul & Mertens on Taxation (1938, Cum. Supp.) § 53.17.
But even if I am wrong in this analysis of § 609(a), I should think the credit here was not outlawed at the time when it should be considered to accrue. For the estate tax in question could be enforced by a proceeding against a transferee by assessment or suit until November 21, 1936, section 316(b) (1), whereas the plaintiff’s claim for refund here is based upon a payment made October 6, 1936, and a claim filed November 4, 1936, and disallowed November 14, 1936.
Other objections made to the recoupment and to its amount as against this transferee were overruled by the District Court. Ly-eth v. Hoey, D.C., 27 F.Supp. 9, 10. I would reverse and allow the recoupment.

 Under this new statute the result of the McEachern case is no longer required. Cf. Kent in 27 Oalif.U.Ttev. 109, 155: “McEachern v. Rose * * * where the court reluctantly reached what it apparently regarded as an inequitable result under the compulsion of sections 607 and 609 of the 1928 Act, a compulsion now removed in such cases by section 820(b)(3).”

 Section 322(a) is in terms applicable only to the income tax; it provides that when there has been an overpayment of “any tax imposed by this [the income tax] title [chapter]” such amount overpaid may be credited against “any income, war-profits, or excess-profits tax * * * then due.”

 Compare Traynor, 33 Ill.L.Rev. 371, 395; 52 Harv.L.Rev. 496; Paul & Mertens on Taxation (1938, Cum.Supp.) g 53.17; also note 1, supra.

 The general provision allowing the commissioner to make refunds contains no express authority to make credits, though in 26 U.S.C.A., Int.Rev.Code, § 3770 (a) (2), section 607, Revenue Act of 1928, it is provided that an overpayment of a barred liability “shall be credited or refunded to the taxpayer,” a provision necessary to take care of credits under § 322(a), as well as refunds generally.

 The opinion relies upon § 609(b) to support its interpretation of § 609(a). As to this it may be suggested that (1) the meaning of § 609(b) construed in the light of other sections is by no means clear and (2) § 609(b) is not in terms limited as is § 609(a). Interpretation of § 609(b) is itself a problem which must await decision when the need therefor arises; I doubt if we can find from it much illumination for our present issue.