United States v. Dalm/Opinion of the Court

by Anthony Kennedy

Single transactions, it is well known, may be susceptible to different, and inconsistent, theories of taxation. In the case before us, the taxpayer treated moneys derived from her deceased employer's estate as a gift and paid gift tax on the transfer. Some years later, the Government contended that the money the taxpayer had received from the transaction was income. The taxpayer disagreed, and the Government's assertion of an income tax deficiency was the subject of proceedings in the United States Tax Court. The question presented is whether, the statute of limitations long since having run, the doctrine of equitable recoupment supports a separate suit for refund of the earlier paid gift tax after the taxpayer settled the Tax Court deficiency proceeding and agreed to pay income tax on the transaction. We hold that it does not.

* The taxpayer, Frances Dalm, is the respondent here. Dalm was appointed administratix of the estate of Harold Schrier in May 1975, at the request of Schrier's surviving brother, Clarence. It appears Dalm had been the decedent's loyal secretary for many years and that Clarence wanted her to take charge of the affairs of the estate and receive some of the moneys that otherwise would belong to him.

Dalm received fees from the estate, approved by the probate court, of $30,000 in 1976 and $7,000 in 1977. She also received from Clarence two payments, $180,000 in 1976 and $133,813 in 1977. Clarence and his wife filed a gift tax return in December 1976 reporting the $180,000 payment as a gift to Dalm, and in that same month Dalm paid the gift tax of $18,675. The Internal Revenue Service (IRS) later assessed an additional $1,587 in penalties and interest with respect to the transfer. The Schriers paid the penalties and interest in 1977, and were reimbursed by Dalm. But no gift tax return was filed with respect to the 1977 payment of $133,813.

After auditing Dalm's 1976 and 1977 income tax returns, the IRS determined that the payments from Clarence represented additional fees for Dalm's services as administratrix of the estate and should have been reported as income. The IRS asserted deficiencies in her income tax of $91,471 in 1976, and $70,639 in 1977, along with additions to the taxes under § 6653(a) of the Internal Revenue Code of 1954 (IRC), 26 U.S.C. § 6653(a) (1982 ed.). ^[1]

Dalm petitioned the Tax Court for a redetermination of the asserted deficiencies, as was her right under § 6213(a). In her petition, she argued that the 1976 and 1977 payments from Clarence were gifts to carry out the wish of the decedent that she share in the estate. After two days of trial, Dalm and the IRS settled the case, with the parties agreeing to a stipulated decision that respondent owed income tax deficiencies of $10,416 for 1976 and $70,639 for 1977. No claim for a credit or recoupment of the gift tax paid by Dalm was raised in the Tax Court proceedings, although there is some dispute whether the gift tax was one of the factors considered in arriving at the terms of the settlement. See n. 2, infra.

Immediately after agreeing to the settlement, Dalm filed an administrative claim for refund of the $20,262 in gift tax, interest, and penalties paid with respect to the $180,000 transfer in 1976. The claim was filed in November 1984, even though the IRC required Dalm to file any claim for a refund of the gift tax by December 1979. See § 6511(a). When the IRS failed to act upon her claim within six months, Dalm filed suit in the United States District Court for the Western District of Michigan, seeking what in her complaint she denominated a refund of "overpaid gift tax." Her complaint alleged that the District Court had jurisdiction under 28 U.S.C. § 1346(a)(1) (1982 ed.).

The Government moved to dismiss the suit for lack of jurisdiction and for summary judgment, arguing that the suit was untimely under the applicable statute of limitations. The District Court granted the Government's motions, rejecting Dalm's contention that her suit was timely under the doctrine of equitable recoupment as set forth in our opinion in Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 (1935), a case we shall discuss. The court held that equitable recoupment did not authorize it to exercise jurisdiction over "an independent lawsuit, such as this suit, . . . maintained for a refund for a year in which the statute of limitations has expired." App. to Pet. for Cert. 19a.

On appeal, the Court of Appeals for the Sixth Circuit reversed. 867 F.2d 305 (1989). The court found Dalm's claim satisfied all of the requirements for equitable recoupment expressed in our cases. It rejected the District Court's characterization of Dalm's action as an independent lawsuit barred by the statute of limitations, reasoning that she could maintain an otherwise barred action for refund of gift tax because the Government had made a timely claim of a deficiency in her income tax based upon an inconsistent legal theory. Id., at 311-312 (citing Kolom v. United States, 791 F.2d 762 (CA9 1986)). ^[2]

Because the approach taken by the Sixth and Ninth Circuits is in conflict with that adopted by Seventh Circuit, see O'Brien v. United States, 766 F.2d 1038 (1985), we granted certiorari, 493 U.S. 807, 110 S.Ct. 46, 107 L.Ed.2d 15 (1989), and now reverse.

The ultimate question in the case is whether the District Court had jurisdiction over Dalm's suit seeking a refund of the gift tax, interest, and penalties paid on the 1976 transfer. We hold that it did not.

In her complaint, Dalm invoked 28 U.S.C. § 1346(a)(1) (1982 ed.), under which a district court has jurisdiction over a "civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws." Despite its spacious terms, § 1346(a)(1) must be read in conformity with other statutory provisions which qualify a taxpayer's right to bring a refund suit upon compliance with certain conditions. The first is § 7422(a), which, tracking the language of § 1346(a)(1), limits a taxpayer's right to bring a refund suit by providing that

"[n]o suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof."

Second, § 6511(a) provides that if a taxpayer is required to file a return with respect to a tax, such as the gift tax, the taxpayer must file any claim for refund within three years from the time the return was filed or two years from the time the tax was paid, whichever period expires later. Read together, the import of these sections is clear: unless a claim for refund of a tax has been filed within the time limits imposed by § 6511(a), a suit for refund, regardless of whether the tax is alleged to have been "erroneously," "illegally," or "wrongfully collected," §§ 1346(a)(1), 7422(a), may not be maintained in any court. See United States v. Kales, 314 U.S. 186, 193, 62 S.Ct. 214, 217, 86 L.Ed. 132 (1941).

There is no doubt that Dalm failed to comply with these statutory requirements. The Schriers filed their gift tax return and Dalm paid the gift tax on the 1976 transfer in December 1976. She paid the penalties and interest on that tax in March 1977. Dalm did not file her claim for refund of the gift tax until November 1984, long after the limitations period expired. Under the plain language of §§ 6511(a) and 7422(a), the District Court was barred from entertaining her suit for a refund of the tax.

The Court of Appeals did not contest this analysis; indeed, it recognized that "[t]here is no statutory basis for permitting the recovery of a tax overpayment after the statute of limitations has expired." 867 F.2d, at 308. Despite the lack of a statutory basis for recovery, the court concluded that the doctrine of equitable recoupment permits Dalm to maintain an action to recover the overpaid gift tax. We disagree.

The doctrine of equitable recoupment was first addressed by us in our opinion in Bull v. United States, supra. There, the dispute centered on whether partnership distributions received by a decedent's estate after his death were subject to estate tax or income tax. After an audit, the executor of the estate included the sums in the estate tax return and paid the estate tax in 1920 and 1921. In 1925, the Commissioner of Internal Revenue notified the estate of a deficiency in the estate's income tax for the 1920 tax year, contending that the same distributions upon which estate tax had been paid should have been treated as income. The Commissioner, however, did not give credit for the estate tax earlier paid on the value of the distributions.

That same year, the estate petitioned to the Board of Tax Appeals for a redetermination of the deficiency. ^[3] After the Board sustained the Commissioner's deficiency determination, the estate paid the additional income tax and filed a claim for refund of the income tax paid. The Commissioner rejected the claim, and, in September 1930, the executor sued in the Court of Claims for a refund of the income tax. ^[4] In his petition to the Court of Claims, the executor argued (1) that the amount taxed was not income, so that the estate was entitled to a refund of the entire amount of income tax paid; and (2) alternatively, if the amount taxed was income, the Government should credit against the income tax due the overpayment of estate tax, plus interest, attributable to the inclusion of the amount in the taxable estate. The Court of Claims rejected both arguments.

We reversed, holding that the executor was entitled to a credit against the income tax deficiency in the amount of the overpayment of estate tax, with interest. 295 U.S., at 263, 55 S.Ct., at 701. We began by acknowledging that the executor had not filed a claim for refund of the estate tax within the limitations period, and that any action for refund of the tax was now barred. Id., at 259, 260-261, 55 S.Ct., at 699, 699-700. "If nothing further had occurred Congressional action would have been the sole avenue of redress." Id., at 261, 55 S.Ct., at 700.

What did occur, however, was that after the limitations period on the estate tax had run, the Government assessed a deficiency in the estate's income tax based upon the same taxable event, and the deficiency became the subject of litigation between the estate and the Government. We reasoned that a tax assessment is in essence an assertion by the sovereign that the taxpayer owes a debt to it; but that, because "taxes are the life-blood of government," it was necessary for the tax assessed to be collected prior to adjudication of whether the assessment was erroneous or unlawful. As a result,

"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." Id., at 260, 55 S.Ct., at 699.

Under our reasoning, the proceeding between the executor and the Government was in substance an attempt by the Government to recover a debt from the estate. The debt was the income tax that was owed, even though in fact it already had been paid. Had the Government followed the "usual procedure" of recovering debts by instituting an action at law for the income tax owed, the executor would have been able to defend against the suit by "demanding recoupment of the amount mistakenly collected as estate tax and wrongfully retained." Id., at 261, 55 S.Ct., at 700 (citing United States v. State Bank, 96 U.S. 30, 24 L.Ed. 647 (1878)).

"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." 295 U.S., at 262, 55 S.Ct., at 700.

We found it immaterial that, rather than the Government having to sue to collect the income tax, the executor was required first to pay it and then seek a refund. "This procedural requirement does not obliterate his substantial right to rely on his cross-demand for credit of the amount which if the United States had sued him for income tax he could have recouped against his liability on that score." Id., at 263, 55 S.Ct., at 701. ^[5]

Dalm contends that the only distinction between her case and Bull is the "meaningless procedural distinction" that her claim of equitable recoupment is raised in a separate suit for refund of gift tax, after she had litigated the income tax deficiency, while in Bull the claim of equitable recoupment of the estate tax was litigated as part of a suit for refund of that tax alleged to be inconsistent with the estate tax. A distinction that has jurisdiction as its central concept is not meaningless. In Bull, the executor sought equitable recoupment of the estate tax in an action for refund of income tax, over which it was undisputed that the Court of Claims had jurisdiction. See n. 4, supra. All that was at issue was whether the Court of Claims, in the interests of equity, could adjust the income tax owed to the Government to take account of an estate tax paid in error but which the executor could not recover in a separate refund action. Here, Dalm does not seek to invoke equitable recoupment in determining her income tax liability; she has already litigated that liability without raising a claim of equitable recoupment and is foreclosed from relitigating it now. See § 6512(a). She seeks to invoke equitable recoupment only in a separate action for refund of gift tax, an action for which there is no statutory authorization by reason of the bar of the limitations statute.

It is instructive to consider what the facts in Bull would have to be if Dalm's contention is correct that her case is identical to Bull in all material respects. The executor in Bull would have litigated the income tax liability, without raising a claim of equitable recoupment, in the Board of Tax Appeals and/or in the Court of Claims, with the Government winning in each forum. Then, having exhausted his avenues of litigating the income tax liability and paid the tax, the executor would have filed a claim for refund of the estate tax with the Commissioner, asserting equitable recoupment as the basis for the refund, with the Commissioner rejecting it as untimely. At that point, the executor would have brought suit for refund of the estate tax in the Court of Claims after the statute of limitations had run. Had the case come to us with those facts, we would have faced the issue presented here: whether the court in which the taxpayer was seeking a refund was barred from entertaining the suit. We can say with assurance that we were not presented with this issue in Bull and did not consider it. Even had the issue been raised, Bull itself suggests that we would have rejected Dalm's argument out of hand. See Bull, 295 U.S., at 259, 55 S.Ct., at 699 ("The fact that the petitioner relied on the Commissioner's assessment for estate tax, and believed the inconsistent claim of deficiency of income tax was of no force, cannot avail to toll the statute of limitations, which forbade the bringing of any action in 1930 for refund of estate tax payments made in 1921").

The only other decision in which we have upheld a claim or defense premised upon the doctrine of equitable recoupment is consistent with our analysis today. In Stone v. White, 301 U.S. 532, 57 S.Ct. 851, 81 L.Ed. 1265 (1937), a trust had paid the income it received from the corpus to its sole beneficiary and also paid the tax due on the income. After the statute of limitations governing the Government's right to collect the income tax from the beneficiary had run, the trust filed a timely suit seeking a refund of the income tax paid on the theory that the beneficiary, not the trust, was liable for the tax. We held that, given the identity of interest between the beneficiary and the trust, the Government could invoke equitable recoupment to assert its now-barred claim against the beneficiary as a defense to the trust's timely claim for a refund. Id., at 537-539, 57 S.Ct., at 853-54. As in Bull, there was no dispute that the court in which we allowed the doctrine of equitable recoupment to be raised had jurisdiction over the underlying action: the trust's timely action for a refund of income tax.

In sum, our decisions in Bull and Stone stand only for the proposition that a party litigating a tax claim in a timely proceeding may, in that proceeding, seek recoupment of a related, and inconsistent, but now time-barred tax claim relating to the same transaction. In both cases, there was no question but that the courts in which the refund actions were brought had jurisdiction. To date, we have not allowed equitable recoupment to be the sole basis for jurisdiction.

Under settled principles of sovereign immunity, "the United States, as sovereign, 'is immune from suit, save as it consents to be sued . . . and the terms of its consent to be sued in any court define that court's jurisdiction to entertain the suit.' " United States v. Testan, 424 U.S. 392, 399, 96 S.Ct. 948, 953, 47 L.Ed.2d 114 (1976) (quoting United States v. Sherwood, 312 U.S. 584, 586, 61 S.Ct. 767, 769, 85 L.Ed. 1058 (1941)). A statute of limitations requiring that a suit against the Government be brought within a certain time period is one of those terms. See United States v. Mottaz, 476 U.S. 834, 841, 106 S.Ct. 2224, 2229, 90 L.Ed.2d 841 (1986); Block v. North Dakota, ex rel. Bd. of Univ. and School Lands, 461 U.S. 273, 287, 103 S.Ct. 1811, 1819, 75 L.Ed.2d 840 (1983). "[A]lthough we should not construe such a time-bar provision unduly restrictively, we must be careful not to interpret it in a manner that would 'extend the waiver beyond that which Congress intended.' " Ibid. (quoting United States v. Kubrick, 444 U.S. 111, 117-118, 100 S.Ct. 352, 356-57, 62 L.Ed.2d 259 (1979)); Library of Congress v. Shaw, 478 U.S. 310, 318, 106 S.Ct. 2957, 2963, 92 L.Ed.2d 250 (1986); United States v. King, 395 U.S. 1, 4, 89 S.Ct. 1501, 1502, 23 L.Ed.2d 52 (1969) (waivers of sovereign immunity by Congress "cannot be implied but must be unequivocally expressed").

As we have determined, our previous equitable recoupment cases have not suspended rules of jurisdiction and so have not deviated from these principles. We likewise refuse Dalm's invitation to do so here. She seeks a refund not of income tax but of gift tax on which the return was filed and the tax paid in December 1976. For the District Court to have jurisdiction over her suit for refund, Dalm was required to file a claim for refund of the tax within three years of the time the gift tax return was filed or two years of the time the tax was paid, whichever period expires later. See §§ 6511(a), 7422(a). ^[6] There is no question but that she failed to do so. ^[7] Having failed to comply with the statutoryrequire ments for seeking a refund, she asks us to go beyond the authority Congress has given us in permitting suits against the Government. If any principle is central to our understanding of sovereign immunity, it is that the power to consent to such suits is reserved to Congress.

Our conclusion is reinforced by the fact that Congress has legislated a set of exceptions to the limitations period prescribed by §§ 7422 and 6511(a). In 1938, Congress adopted what are known as the mitigation provisions, now codified at §§ 1311-1314. These statutes, in specified circumstances, permit a taxpayer who has been required to pay inconsistent taxes to seek a refund of a tax the recovery of which is otherwise barred by §§ 7422(a) and 6511(a). It is undisputed that Dalm's action does not come within these provisions; were we to allow her to maintain a suit for refund on the basis of equitable recoupment, we would be doing little more than overriding Congress' judgment as to when equity requires that there be an exception to the limitations bar.

Our holding today does not leave taxpayers in Dalm's position powerless to invoke the doctrine of equitable recoupment. Both the Secretary, at the administrative level, see Rev.Rul. 71-56, 1971-1 Cum.Bull. 404 (revoking Rev.Rul. 55-226, 1955-1 Cum.Bull. 469), and a court which has jurisdiction over a timely suit for refund may consider an equitable recoupment claim for an earlier tax paid under an inconsistent theory on the same transaction.

The Court of Appeals reasoned that recoupment should be permitted because it effected, with respect to a single transaction, the recovery of a tax based upon a theory inconsistent with the theory upon which a later tax was paid. But to permit an independent action for recoupment because there is but one transaction is to mistake the threshold requirement for its rationale. It is true that our precedents allowing recoupment pertain to cases where a single transaction is subjected to inconsistent taxation, but the reason the statute of limitations is not a bar in those cases is that the court has uncontested jurisdiction to adjudicate one of the taxes in question. In such cases, a court has the equitable power to examine and consider the entire transaction:

"The essence of the doctrine of recoupment is stated in the Bull case: 'recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiff's action is grounded.' 295 U.S. 247, 262 [55 S.Ct. 695, 700]. It has never been thought to allow one transaction to be offset against another, but only to permit a transaction which is made the subject of suit by 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., 329 U.S. 296, 299, 67 S.Ct. 271, 272, 91 L.Ed. 296 (1946).

Here the Government asserted an income tax deficiency on a theory inconsistent with the theory upon which Dalm relied in paying gift tax. She chose to litigate the deficiency in the Tax Court, where she did not attempt to raise a recoupment claim. ^[8] She cannot choose this avenue to adjudicate the income tax consequences of the transaction, and then seek to reopen the matter and override the statute of limitations for the sole purpose of seeking recoupment. The controlling jurisdictional statutes do not permit her to do so.

The judgment of the Court of Appeals is therefore reversed.

It is so ordered.

Justice STEVENS, with whom Justice BRENNAN and Justice MARSHALL join, dissenting.

Notes

1. Unless otherwise noted, all statutory references are to the Internal Revenue Code of 1954 (26 U.S.C.), as amended.
2. In its opinion granting summary judgment to the Government, the District Court had suggested that an alternative ground for decision was that the only plausible explanation for the allocation of the agreed income tax liability between 1976 and 1977 in the Tax Court settlement was that the allocation reflected the previously paid gift tax on the 1976 transfer. The Sixth Circuit held that the District Court had erred in granting summary judgment on this issue, giving the taxpayer an opportunity to show the parties' intent in effecting the settlement. Accordingly, it remanded the case for further proceedings on this issue. 867 F.2d, at 312.
3. The Board of Tax Appeals, the forerunner to the United States Tax Court, was established by the Revenue Act of 1924 as "an independent agency in the executive branch of the Government." Revenue Act of 1924, Pub.L. 176, § 900(k), 43 Stat. 338. Under the Act, a taxpayer was permitted to challenge an income tax deficiency asserted by the Commissioner, prior to paying the deficiency, by way of a petition to the Board. See id., §§ 274, 900; Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 721, 49 S.Ct. 499, 501, 73 L.Ed. 918 (1929).
4. Before the enactment of the Revenue Act of 1926, there was no direct review of Board of Tax Appeals decisions. As a result, a taxpayer who lost in proceedings before the Board was permitted to sue in district court or the Court of Claims for a refund after payment of the deficiency. In effect, the refund suit, although nominally a separate proceeding, was a mechanism by which taxpayers could obtain review of Board decisions. See Old Colony Trust Co., supra, at 721-722, 49 S.Ct., at 501; Ferguson, Jurisdictional Problems in Federal Tax Controversies, 48 Iowa L.Rev. 312, 350-351 (1963). The Revenue Act of 1926 put an end to this circuitous process. First, it provided for direct judicial review of Board decisions in the courts of appeals. Revenue Act of 1926, ch. 27, § 1001(a), 44 Stat. 109. Second, the Act provided that, once a taxpayer had filed a timely petition with the Board, the taxpayer generally could not institute a new suit in another court for refund of the same tax. Id., § 284(d), 44 Stat. 67. Under our decision in Old Colony Trust Co., supra, at 725-728, 49 S.Ct., at 502-03, the Act did not apply to cases where, as in Bull, the taxpayer filed his or her petition with the Board and the Board had not issued a decision prior to the enactment of the Act in 1926. 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, 599, n. 20 (1986).
5. Since Bull, we have emphasized that a claim of equitable recoupment will lie only where the Government has taxed a single transaction, item, or taxable event under two inconsistent theories. See Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 299-300, 67 S.Ct. 271, 272, 91 L.Ed. 296 (1946); cf. Stone v. White, 301 U.S. 532, 57 S.Ct. 851, 81 L.Ed. 1265 (1937) (permitting the Government to invoke equitable recoupment as a defense against a claim for refund of income tax paid by a trust where there was a complete identity of interest between the trust and the beneficiary who had received the income, and a claim against the beneficiary for the income tax was then barred).
6. Justice STEVENS calls it a fiction to cast Dalm's action as a suit for refund. He creates instead a distinction between refund actions and suits for funds wrongfully retained. See post, at 620-621. Neither the IRC nor our authorities support the distinction. Section 6511(a) applies to claims for refund of a tax "overpayment." The commonsense interpretation is that a tax is overpaid when a taxpayer pays more than is owed, for whatever reason or no reason at all. Even in Bull, the case upon which the dissent relies to assert that retention of the gift tax is unjust or fraudulent, we described the inconsistent tax as being an "overpayment." See, e.g., 295 U.S., at 258, 262, 263, 55 S.Ct., at 699, 700, 701. The word encompasses "erroneously," "illegally," or "wrongfully" collected taxes, as those terms are used in 28 U.S.C. § 1346(a)(1) (1982 ed.) and § 7422(a).
7. In a final attempt to bring her refund suit within the statute, Dalm contends that her suit was timely. She argues that the gift tax was not paid for the purposes of § 6511(a) until 1984, when it was determined that she owed income tax on the same transaction under an inconsistent theory. So, she asserts, her cause of action for refund of gift tax did not arise until that time. We disagree. The most sensible interpretation of § 6511(a) is that a tax is paid when the taxpayer tenders payment of the tax to the IRS, not when the taxpayer discovers that the payment was erroneous. The very purpose of statutes of limitations in the tax context is to bar the assertion of a refund claim after a certain period of time has passed, without regard to whether the claim would otherwise be meritorious. That a taxpayer does not learn until after the limitations period has run that a tax was paid in error, and that he or she has a ground upon which to claim a refund, does not operate to lift the statutory bar.
8. We have no occasion to pass upon the question whether Dalm could have raised a recoupment claim in the Tax Court.