UNITED STATES OF AMERICA, PETITIONER V. FRANCES L. DALM No. 88-1951 In the Supreme Court of the United States October Term, 1988 The Solicitor General, on behalf of the United States of America, petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Sixth Circuit in this case. Petition for a Writ of Certiorari to the United States Court of Appeals for the Sixth Circuit TABLE OF CONTENTS Question Presented Opinions below Jurisdiction Statutory provisions involved Statement Reasons for granting the petition Conclusion OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a-16a) is reported at 867 F.2d 305. The opinion of the district court (App., infra, 17a-20a) is not reported. JURISDICTION The judgment of the court of appeals (App., infra, 21a-22a) was entered on February 8, 1989. On May 2, 1989, Justice Scalia extended the time to petition for a writ of certiorari to and including June 8, 1989. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTORY PROVISIONS INVOLVED Sections 6511 and 7422 of the Internal Revenue Code (26 U.S.C.) are set forth in pertinent part in a statutory appendix (App., infra, 23a-24a): QUESTION PRESENTED Whether the doctrine of equitable recoupment permits a taxpayer to maintain a suit against the United States for the recovery of an erroneous tax payment, when that suit is barred as untimely by Sections 7422 and 6511 of the Internal Revenue Code. STATEMENT 1. Respondent was appointed administratrix of the estate of Harold Schrier in May 1975. The appointment was made at the request of Clarence Schrier, the decedent's brother and sole beneficiary of the estate. The estate paid respondent fees of $30,000 in 1976 and $7,000 in 1977, which were approved by the probate court. Respondent also received from Clarence Schrier a payment of $180,000 in 1976 and a payment of $133,813 in 1977. In December 1976, Clarence Schrier and his wife filed a gift tax return reporting the $180,000 transfer in that year as a gift to respondent, and respondent paid the reported gift tax of $18,675. The Schriers subsequently were assessed $1,587 in interest and penalties with respect to the 1976 transfer, which they paid and for which respondent reimbursed them. No gift tax return was filed respecting the 1977 payment. App., infra, 2a, 17a. On audit, the Internal Revenue Service (IRS) determined that the payments made by Clarence Schrier to respondent represented additional fees for her services as administratrix of the estate. The IRS accordingly asserted deficiencies in respondent's income tax for the years 1976 and 1977. Respondent petitioned the Tax Court for a redetermination of the asserted deficiencies, contending that the transfers of $180,000 and $133,813 were gifts from Clarence Schrier intended to carry out his brother's intention that respondent share in his estate. In September 1984, after two days of trial, the parties negotiated a settlement of the Tax Court case for one-half the amount of the asserted deficiencies (excluding penalties), applying $70,639 to pay the 1977 deficiency in full and applying the remaining $10,416 to the deficiency for 1976. App., infra, 2a-3a, 17a-18a. 2. In November 1984, respondent filed an administrative claim for refund of the $20,262 in gift tax, interest, and penalties paid with respect to the $180,000 transferred to her in 1976. App., infra, 3a. This claim was untimely since it was filed almost five years after the expiration of the three-year limitations period specified in Section 6511 of the Internal Revenue Code. /1/ After the IRS failed to act upon the claim within six months, respondent brought this refund suit in the United States District Court for the Western District of Michigan. The district court granted the government's motion to dismiss for lack of jurisdiction (App., infra, 17a-20a). The court rejected respondent's contention that the suit could be maintained under the doctrine of equitable recoupment set forth in Bull v. United States, 295 U.S. 247 (1935), even though the suit unquestionably was untimely under the applicable statute of limitations. Citing this Court's decision in Rothensies v. Electric Storage Battery Co., 329 U.S. 296 (1946), the court concluded that there is no authority for applying equitable recoupment in "an independent lawsuit, such as this suit, * * * maintained for a refund for a year in which the statute of limitations has expired" (App., infra, 19a). /2/ The court of appeals reversed (App., infra, 1a-16a). The court held that the doctrine of equitable recoupment allowed the taxpayer to bring the untimely suit because the payment of the gift tax was inconsistent with the treatment in the Tax Court settlement of the transfers as fees for services rendered. The court of appeals characterized this Court's decision in Rothensies v. Electric Storage Battery Co., supra, from which the district court had quoted, as narrowing the application of the equitable recoupment doctrine established in Bull v. United States, supra (see App., infra, 6a), but stated that "(t)he facts in Rothensies were quite different from those in Bull and the present case" (id. at 8a). Citing the Ninth Circuit's decision in Kolom v. United States, 791 F.2d 762 (1986), the court then stated that there are three prerequisites for the application of equitable recoupment (App., infra, 9a-10a): "There must be (1) a single transaction or taxable event, (2) that event must be subjected to two taxes based on inconsistent legal theories, and (3) the amount claimed in recoupment must be barred by limitations while the government's deficiency claim must be timely." The court held that these three criteria were satisfied. With respect to the third criterion, the court stated (id. at 10a-11a): "(Respondent's) refund action was not barred by the statute of limitations though filed more than three years after the gift taxes were paid. Her claim for recoupment related to the government's timely deficiency action and was timely as well for purposes of recoupment." /3/ REASONS FOR GRANTING THE PETITION The decision below marks a serious departure both from the jurisdictional framework established by Congress to govern tax litigation and from legal principles clearly established by this Court. There is no doubt that the instant suit is untimely under the statute of limitations that governs tax refund suits. And the doctrine of equitable recoupment does not eliminate that statutory bar to suit. A consistent line of cases of this Court, dating from Bull v. United States, 295 U.S. 247 (1935), as well as numerous court of appeals cases, makes clear that a claim of equitable recoupment must be raised in a timely suit. While the doctrine permits a taxpayer (or the government) to raise as an offset or credit a claim that would be time-barred if advanced as the ground for an independent lawsuit, it plainly does not allow a party to commence an action that is barred by the statute of limitations. If permitted to stand, the decision below would have deleterious consequences for the administration of the tax laws. It would relieve some taxpayers of the need to comply with the conditions prescribed by Congress for obtaining a refund, while taxpayers in other circuits would remain governed by the statute of limitations contained in the Code. And the approach of the court below would upset the goals of finality and repose that Congress sought to advance in establishing a definite statute of limitations for refund suits. Moreover, the uncertainty engendered by the decision below creates difficulties for taxpayers in having to decide whether to pursue their claims in the Tax Court or in district court without knowing how that choice will affect their entitlement to recoupment. It is therefore important for this Court to grant certiorari to correct the court of appeals' misinterpretation of this Court's precedents concerning equitable recoupment and to resolve the resulting conflict in court of appeals decisions. 1. a. Petitioner's refund suit is unquestionably barred by the statute of limitations. Section 7422(a) of the Code provides that no refund suit "shall be maintained in any court * * * until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard." Section 6511(a) of the Code provides that, in the case of a tax (such as the gift tax) with respect to which a return is required, such a claim for refund must be filed "within 3 years from the time the return was filed or 2 years from the time the tax was paid." Section 6511(b)(1) provides that no credit or refund shall be allowed or made unless a timely claim has been filed. Respondent did not file a claim for refund until 1984, long after the expiration of the three-year period prescribed by Section 6511. Accordingly, under the statutory framework erected by Congress, the district court lacked jurisdiction to entertain respondent's refund suit. See, e.g., United States v. Mottaz, 476 U.S. 834, 841 (1986); United States v. Garbutt Oil Co., 302 U.S. 528, 533-535 (1938). b. The doctrine of equitable recoupment provides no basis for district court jurisdiction where suit is barred by the statute of limitations. The applicability of that doctrine to tax cases has its source in this Court's decision in Bull v. United States, supra. In that case, the decedent had provided that his estate would continue to receive a share of the earnings from a partnership for a specified period following his death. On audit of the estate tax return, the Commissioner determined that those post-death partnership earnings were part of the value of the partnership interest includible in the gross estate. Subsequently, after additional estate tax had been paid to reflect this increase in the value of the gross estate, the Commissioner determined that the same post-death partnership earnings were also includible in the estate's gross income for income tax purposes. The estate paid the income tax deficiency asserted, but thereafter filed a timely refund claim and brought suit for the recovery of that income tax payment. The Court of Claims denied the claim for refund of income tax, finding that the partnership earnings were correctly treated as income of the estate. The court also rejected the estate's alternative contention that, if these earnings were income, it should receive a refund of the estate tax that was paid, finding that it could not consider this claim because the time for filing a refund claim for the estate tax had expired. See 295 U.S. at 254; 6 F. Supp. 141 (Ct. Cl. 1934). This Court reversed. The Court held that, even though the time for filing an independent claim for refund of the estate tax had expired, the doctrine of equitable recoupment permitted the executors to credit the overpayment of estate tax against the correctly-assessed income tax liability that was directly at issue in that refund suit. Although the Court permitted the estate in Bull to reduce its total tax liability by crediting an estate tax payment that could no longer be the subject of a refund suit, the Court made clear that the doctrine of equitable recoupment does not override the jurisdictional bar imposed by a statute of limitations. Rather, the doctrine permits a time-barred claim to be raised only in a defensive way -- by seeking an offset or credit against a tax that is the subject of a timely-filed action over which the court properly has jurisdiction. The Court explicitly stated that the inconsistent treatment that the estate suffered in Bull "cannot avail to toll the statute of limitations" (295 U.S. at 259). It noted therefore that, even though "(r)etention of the (estate tax overpayment) was against morality and conscience" (id. at 260), once the taxpayer had failed to seek a refund of estate tax within the limitations period, "(i)f nothing further had occurred Congressional action would have been the sole avenue of redress" (id. at 261). The estate's ability to recoup the overpayment of estate tax arose only because that claim could be raised defensively in a timely-filed proceeding to determine the estate's income tax liability arising out of the same transaction. The Court summarized the operation of the doctrine of equitable recoupment as follows (id. at 262 (emphasis added)): If the claim for income tax deficiency had been the subject of a suit, any counter demand for recoupment of the overpayment of estate tax could have been asserted by way of defense and credit obtained notwithstanding the statute of limitations had barred an independent suit against the Government therefor. This is because recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiff's action is grounded. Such a defense is never barred by the statute of limitations so long as the main action itself is timely. In sum, although the facts in Bull are similar to those of the instant case in many respects, they differ in one critical respect -- viz., that, in contrast to this case, the suit in Bull was instituted to recover a tax payment for which a timely refund claim had been filed, and the court therefore had jurisdiction over the action. In subsequent cases, this Court has adhered to the clearly stated position that the doctrine of equitable recoupment can be invoked only to assert a credit against another tax -- one that is the subject of either a timely refund claim and refund suit or a pending collection suit brought by the government. In Stone v. White, 301 U.S. 532 (1937), the Court held that the government also is entitled to invoke the doctrine of equitable recoupment in a timely refund suit by raising an offsetting claim that would be time-barred if raised in an independent suit. The Court explained (id. at 538-539): "The statutory bar to the right of action for the collection of the tax does not prevent reliance upon a defense which is not a set-off or a counterclaim, but is an equitable reason, growing out of the circumstances of the erroneous payment, why petitioners ought not to recover." Subsequently, in Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 302 (1946), the Court rejected an attempt to invoke equitable recoupment, on the ground that the allegedly inconsistent claims did not arise out of the same transaction. The Court stressed the importance of statutes of limitations, even though in some cases their application may yield what appears to be an inequitable result (id. at 301-303), and it expressed its concern that a broad expansion of the doctrine of equitable recoupment beyond the facts of Bull "would seriously undermine the statute of limitations in tax matters" (329 U.S. at 302). The Court concluded (id. at 303): "If there are to be exceptions to the statute of limitations, it is for Congress rather than for the courts to create and limit them." Thus, the decisions of this Court make clear that equitable recoupment may be invoked only to seek a credit against a related tax claim being litigated in a timely action; it does not provide a basis for ignoring the statute of limitations and bringing a time-barred action, as respondent did in this case. /4/ c. As the Court pointed out in Rothensies, Congress has the power to create exceptions to the statute of limitations in order to ameliorate inequities caused by inconsistent tax treatment of the same transaction. In the wake of Bull, Congress took action in this regard, adopting the "mitigation provisions" now set forth at Sections 1311-1314 of the Code. See Section 820 of the Revenue Act of 1938, ch. 289, 52 Stat. 581. These complex provisions delineate various circumstances under which, in cases of inconsistent treatment, a tax year closed by the statute of limitations will be reopened for the correction of an error. See generally Willis, Some Limits of Equitable Recoupment, Tax Mitigation, and Res Judicata: Reflections Prompted By Chertkof v. United States, 38 Tax Law. 625, 633-640 (1985); Maguire, Surrey, and Traynor, Section 820 of the Revenue Act of 1938, 48 Yale L.J. 509 & 719 (1939). But the application of the mitigation provisions is limited by their terms (see especially Section 1312), and the provisions plainly do not provide a blanket exemption from the otherwise applicable statute of limitations in all cases in which a double tax liability has been imposed with respect to a single transaction. Thus, in situations not covered by the mitigation provisions (such as this case), the doctrine of equitable recoupment may still be invoked, but it may be used only to obtain a credit against another tax being litigated in a timely action. If the court below were correct in holding that equitable recoupment permits a taxpayer to bring an independent time-barred action, then the mitigation provisions, which permit such an independent action only in limited circumstances, would be superfluous, and the restrictions imposed by Congress upon the mitigation remedy would be meaningless. /5/ Hence, the very existence of the mitigation provisions demonstrates that the court below has misapplied the doctrine of equitable recoupment. 2. a. The courts of appeals generally have recognized that, under Bull, equitable recoupment does not authorize a taxpayer to maintain an independent suit that is barred by the statute of limitations. On three separate occasions, the Court of Claims has rejected a taxpayer's attempt to invoke that doctrine as a basis for allowing a time-barred suit for refund. See Ellard v. United States, 228 Ct. Cl. 815 (1981); Brigham v. United States, 470 F.2d 571, 577 (Ct. Cl. 1972), cert. denied, 414 U.S. 831 (1973); Evans Trust v. United States, 462 F.2d 521, 525-526 (Ct. Cl. 1972). The court explained in Evans Trust that accepting the taxpayer's contention would have gone well beyond the doctrine established in Bull because the taxpayer was "attempting to use recoupment not in its traditional form as a defense to an asserted deficiency, but as an independent ground for reopening years now closed by the statute of limitations" (462 F.2d at 526). The Seventh Circuit recently rejected the same contention in O'Brien v. United States, 766 F.2d 1038, 1048-1051 (1985). In that case, the IRS had placed a higher value on shares of stock for estate tax purposes than that reported on the return; applying that value as the basis for the taxpayer's computation of gain realized from the subsequent disposition of those shares would have entitled him to an income tax refund, but the time for filing such a refund claim had expired. /6/ Like respondent here, the taxpayer in O'Brien filed an untimely refund claim and brought suit to recover the income tax overpayment; he argued in the alternative that the claim should be allowed either under the mitigation provisions or under the doctrine of equitable recoupment. The Seventh Circuit rejected both theories. The court stated that "it is clear that the doctrine (of equitable recoupment) does not lift the limitations bar to taxpayer's refund suit" (766 F.2d at 1048) because, in contrast to Bull, the taxpayer was seeking to invoke the doctrine to maintain an independent, time-barred action, not as a defense in an action that was timely filed. The court explained that "the doctrine requires some validly asserted deficiency or refund against which the asserting party desires to recoup a time-barred refund or deficiency * * * and requires the timeliness of the underlying action against which a party seeks to employ recoupment" (766 F.2d at 1049). The court then summarized its holding as follows (ibid.; footnote omitted): Attempts by taxpayers to utilize the doctrine to revive an untimely affirmative refund claim, as opposed to offset a timely government claim of deficiency with a barred claim of the taxpayer, have been uniformly rejected. * * * Plaintiff has invoked the doctrine in this precise manner and therefore the district court's holding that equitable recoupment permits the taxpayer's time-barred refund claim must be reversed. O'Brien's untimely refund suit in 1983 asserts recoupment affirmatively to recover an erroneously paid tax and does not seek to offset the amount of a properly asserted and timely deficiency. b. The consistent adherence of the courts of appeals to Bull and its prohibition against the use of equitable recoupment to nullify the statute of limitations' bar to an independent action was disturbed in 1986 by the Ninth Circuit's decision in Kolom v. United States, 791 F.2d 762. In that case, the IRS disputed the year for which the taxpayer had reported and paid certain minimum tax liability, arguing that it should have been reported in 1972, not 1973. After litigation in the Tax Court, its determination of a deficiency for 1972 was upheld. The taxpayer, who had allowed the time for filing a refund claim for 1973 to expire, sought to file an untimely claim in reliance on the mitigation provisions. The Ninth Circuit held that the mitigation provisions were inapplicable but it then proceeded to rule on its own motion (see id. at 766 n.10) that the taxpayer's refund suit could be maintained under the doctrine of equitable recoupment. Ruling without the benefit of briefing on the equitable recoupment issue, the court reasoned that the doctrine may be invoked to nullify the statute of limitations whenever the government has been "unjustly enriched" by inconsistent treatment of a single transaction (id. at 766-767), and it accordingly applied the doctrine to allow the taxpayer's independent time-barred suit. /7/ The court of appeals below has now followed the Ninth Circuit's approach in Kolom and discarded the established principle that equitable recoupment may be invoked only as a defense or credit in a timely-filed action. Respondent could have planned her litigation so as to enable her to claim a credit for the gift tax overpayment under a theory of equitable recoupment in a timely-filed income tax refund suit (see pages 17-18, infra), but she did not pursue that option and the court of appeals has erred in holding that the doctrine can nullify the jurisdictional bar against an independent suit that is established by a statute of limitations. Not only does the court's ruling conflict with this Court's decisions in Bull and its progeny, it presents a direct conflict in the circuits with O'Brien and with the Court of Claims cases, which are binding precedent in the Federal Circuit. The court of appeals' attempts to reconcile the contrary decisions are completely unpersuasive. With respect to the Court of Claims cases, the court of appeals stated that "at least one element required for the application of recoupment was missing" (App., infra, 14a), without acknowledging that the defect identified by the Court of Claims in each of the cases was the attempt to invoke equitable recoupment, not as a defense, but as an independent basis for jurisdiction over a time-barred refund suit (see page 11, supra). Similarly, the Seventh Circuit's decision in O'Brien cannot be reconciled with the decision in this case. The court below sought to distinguish O'Brien on the ground that the refund suit was not addressed to a tax for which a timely deficiency had been asserted; rather, the taxpayer had voluntarily paid the tax in question when he filed his return (see App., infra, 11a-13a). But this factual distinction is immaterial. First, the decision in O'Brien nowhere suggests that the absence of a deficiency notice played any role in the court's decision; to the contrary, the opinion focuses entirely on the taxpayer's misguided attempt to invoke equitable recoupment to maintain an independent time-barred suit. Second, it is not apparent why the issuance of a timely deficiency notice should be a prerequisite to an equitable recoupment claim; indeed, this proposition cannot be squared with this Court's decision in Stone v. White, supra, where the government was permitted to claim equitable recoupment in the taxpayer's timely refund action although the government's independent claim to a deficiency was time-barred. Third, the Seventh Circuit's opinion itself demonstrates that it would not agree with the basis for decision proffered by the court below. According to the court below, the absence of a timely deficiency notice absolutely barred the taxpayer in O'Brien from raising an equitable recoupment claim in any manner; the Seventh Circuit, however, noted that he could have raised such a claim in a timely estate tax refund action (766 F.2d at 1050). /8/ Rather, the Seventh Circuit's holding in O'Brien rests squarely and entirely on the ground "that the doctrine (of equitable recoupment) cannot be used 'as an independent ground for reopening years now closed by the statute of limitations' (citing Evans Trust v. United States, 462 F.2d at 526), and requires the timeliness of the underlying action against which a party seeks to employ recoupment" (766 F.2d at 1049). /9/ In sum, the decision below clearly conflicts with the governing precedent in the Seventh and Federal Circuits. 3. The decision below, if permitted to stand, will disrupt the sound administration of the tax laws. The decision would have the effect of "completely undercutting" the statute of limitations in a discrete class of cases (see Andrews, Modern-Day Equitable Recoupment and the "Two Tax Effect:" Avoidance of the Statutes of Limitation in Federal Tax Controversies, 28 Ariz. L. Rev. 595, 625, 626 n.193 (1986)), thereby permitting the courts to entertain lawsuits in defiance of the limitations on jurisdiction and on suits against the United States that have been specifically established by Congress. The decision below would thus undermine the goals of finality and repose that Congress sought to advance by establishing a statute of limitations for taxpayer refund suits. As this Court has noted in cautioning against undue expansion of the equitable recoupment remedy, "a statute of limitation is an almost indispensable element of fairness as well as of practical administration of an income tax policy" (Rothensies v. Electric Storage Battery Co., 329 U.S. at 301). Moreover, the decision of the court of appeals effectively nullifies not only the limitations provisions of the Code, but also the detailed mitigation provisions enacted by Congress in 1938 because it makes equitable recoupment identical to mitigation -- in that it allows an independent suit otherwise barred by the statute of limitations -- but permits its invocation irrespective of whether the situation falls within the circumstances in which Congress determined that mitigation should be permitted. The court of appeals' departure from fundamental jurisdictional principles is compounded by the clear conflict that it has created with decisions in other circuits. As matters now stand, similarly situated taxpayers will receive disparate treatment depending upon the circuit in which they reside. Taxpayers residing in the Sixth and Ninth Circuits will be able to claim a refund based on inconsistent treatment by the IRS of the same transaction, notwithstanding the fact that the claim is barred by the limitations provisions of Sections 6511 and 7422 of the Code, while taxpayers in the Seventh Circuit -- and other circuits that follow the clear import of this Court's precedents -- will be unable to maintain such a refund suit because of the statutory bar. Moreover, the uncertainty that the decision below introduces into the law of equitable recoupment creates serious problems for taxpayers and practitioners in managing tax litigation. In Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418 (1943), this Court held that the predecessor of the Tax Court, the Board of Tax Appeals, lacked jurisdiction to consider the taxpayer's equitable recoupment claim, and it is generally believed that this restriction applies to the Tax Court today. /10/ Thus, if a taxpayer desires to raise an equitable recoupment claim of the kind approved by this Court in Bull, he is well advised not to invoke the jurisdiction of the Tax Court to contest the deficiency (in the tax against which he proposes to offset or recoup the claimed overpayment), but rather to pay the deficiency and bring a timely refund suit in district court or the Claims Court. See Andrews, supra 28 Ariz. L. Rev. at 614-615; Willis, supra, 38 Tax Law. at 641-642 & n.130; O'Brien v. United States, 766 F.2d at 1050 & n.15. The appropriateness of that tax advice, however, is cast into doubt by the decision in this case. Under the court of appeals' view of equitable recoupment, a taxpayer runs no risk by contesting the timely deficiency notice in the Tax Court; he can still raise his equitable recoupment claim by filing an untimely, independent refund suit in district court, as respondent did here. Thus, the disarray in the circuits poses a dilemma for a taxpayer, or tax practitioner, in an uncommitted circuit who wishes to preserve his right to seek equitable recoupment, but would prefer to litigate in a prepayment forum. Conservative tax advice would counsel that he forgo his right to prepayment forum in order to preserve his ability to raise equitable recoupment, even if the payment of the deficiency in order to be able to bring a refund suit poses a financial hardship. On the other hand, if the decision below is correct, incurring that financial hardship is unnecessary. It is thus important from the standpoint both of the government and of taxpayers and tax practitioners for this Court to resolve the uncertainty that has been engendered over the scope of equitable recoupment. Accordingly, this Court should grant certiorari and reaffirm that the equitable recoupment doctrine recognized in Bull does not authorize the maintenance of an action that is barred by the statute of limitations. CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted. KENNETH W. STARR Solicitor General SHIRLEY D. PETERSON Assistant Attorney General LAWRENCE G. WALLACE Deputy Solicitor General ALAN I. HOROWITZ Assistant to the Solicitor General GILBERT S. ROTHENBERG CHARLES BRICKEN Attorneys JUNE 1989 /1/ Unless otherwise noted, all statutory references are to the Internal Revenue Code of 1954 (26 U.S.C.), as amended (the Coe or I.R.C.). /2/ The district court also observed that the Tax Court settlement appeared designed to reflect the prior payment of gift tax, and therefore that respondent in any event would not be entitled to a refund of that tax (App., infra, 20a). The court also stated that, pursuant to Section 6512(a) of the Code, institution of the Tax Court proceeding for 1976 barred this suit for refund of 1976 taxes (ibid.). /3/ The court of appeals also held that the district court could not grant summary judgment for the government on the alternative ground that the 1976 Tax Court settlement reflected the gift tax overpayment (App., infra, 14a-16a). The court of appeals remanded for factfinding on the itent of the parties to the Tax Court settlement (id. at 16a). /4/ See generally Andrews, Modern-Day Equitable Recoupment and the "Two Tax Effect:" Avoidance of the Statutes of Limitation in Federal Tax Controversies, 28 Ariz. L. Rev. 595, 598-613 (1986); id. at 625 ("Under the doctrine of equitable recoupment, the barred claim is only usable to reduce or wipe out the open claim, but no more."); Willis, Some Limits of Equitable Recoupment, Tax Mitigation, and Res Judicata: Reflections Prompted By Chertkof v. United States, 38 Tax Law. 625, 633-640 (1985); id. at 633 ("Recoupment, rather than extending the statute of limitations to correct a perceived injustice, permits a wronged party to recoup the loss against a sum still open to litigation."); id. at 635 ("a recoupment claim must not be an independent counterclaim, but must instead be a defense to the main action"). /5/ Indeed, the Ninth Circuit in Kolom v. United States, 791 F.2d 762 (1986), the case upon which the court below relied (see page 13, infra), essentially acknowledged that the mitigation provisions become superfluous if equitable recoupment is expanded to permit a taxpayer to maintain an independent action that is barred by the statute of limitations. The court there stated (791 F.2d at 766 n.10): "The doctrine of equitable recoupment essentially requires the same criteria necessary to prove application of the mitigation provisions, the mitigation provisions requiring proof of even further criteria." /6/ The taxpayer had received shares of stock from his father that were later included in the father's gross estate as gifts in contemplation of death (see I.R.C. Section 2035). The estate valued the stock at $215 per share for this purpose, and the taxpayer used that same value as his basis in the stock for purposes of computing gain on the subsequent liquidation of the corporation. The IRS asserted an estate tax deficiency, claiming a higher value for the shares in question. The ensuing Tax Court litigation brought by the estate resulted in valuation of the stock at $280 per share. If the same value were applied to the shares for purposes of computing the gain realized on the liquidation, the taxpayer would have been entitled to a refund of part of the income tax he had paid on the reported gain. But the taxpayer failed to file a timely income tax refund claim to protect his position pending the outcome of the estate tax dispute. /7/ The holding in Kolom was criticized in the one law review article on equitable recoupment published subsequent to the decision. See Andrews, supra, 28 Ariz. L. Rev. at 626 n. 193: The Ninth Circuit is simply incorrect in this regard because if equitable recoupment is a permissible basis for a refund suit for the barred year rather than the open year, then it completely undercuts the statute of limitation. That this is true is evident from the fact that, in such case, it no longer operates merely to diminish the opposing party's right to recover, but, instead, is serving as an independent ground for obtaining a refund that is directly barred by a statute of limitation. /8/ The court below also mistakenly read one footnote in O'Brien as supporting the use of equitable recoupment to maintain an independent time-barred claim (App., infra, 12a-13a). That footnote in O'Brien merely notes the settled proposition that a taxpayer can raise equitable recoupment as an offset not only in a collection suit by the United States, but also in a refund suit that the taxpayer has commenced to challenge an asserted tax liability that he has paid, so long as the refund suit is timely. See 766 F.2d at 1049 n.13. Bull itself involved the invocation of equitable recoupment in a refund suit brought by the taxpayer. /9/ The court in Kolom devised a different -- and equally misguided -- theory for distinguishing O'Brien, arguing that the Seventh Circuit rejected the equitable recoupment claim for failure to satisfy the "single transaction" requirement and because there was not an identity of interest between O'Brien and the estate (791 F.2d at 768). In fact, the Seventh Circuit specifically stated that it did not find the claim deficient on those grounds (766 F.2d at 1050 & n.16), and it took pains to emphasize that its holding was necessary to maintain "the rule against reopening closed tax years" (id. at 1051 n.17). /10/ The Tax Court is a legislative court of limited jurisdiction that is not invested with the inherent power of an Article III court. The Tax Court has held that it is subject to the rule of Gooch Milling. See Estate of Van Winkle v. Commissioner, 51 T.C. 994, 999-1000 (1969); Estate of Garber v. Commissioner, 17 T.C.M. (CCH) 646 (1958), aff'd on another issue, 271 F.2d 97 (3d Cir. 1959). See also Rothensies v. Electric Storage Battery Co., 329 U.S. at 303; 4 B. Bittker, Federal Taxation of Income, Estates and Gifts Paragraph 115.2.7, at 115-24 to 115-25 (1981). APPENDIX