Bull v. United States

In Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 (1935), the Supreme Court allowed the taxpayer to seek equitable recoupment of a previously paid estate tax, but by means of a claim for a refund of a later-paid income tax, where the estate tax was paid on the same transaction on which the income tax was levied. Id. at 261-63. The Supreme Court reasoned that the statute of limitations did not bar suit for a refund of the income tax, even if the basis of the refund was overpayment due to payment of the previous estate tax. Id. The Supreme Court permitted a decedent's estate to recover estate taxes paid in 1921 in a district court action filed in 1930, following rejection of a claim for refund filed in 1928. The decedent was a member of a partnership when he died in February 1920. The executor included the decedent's share of partnership profits from January 1, 1920, to the date of death as an asset of the estate in the estate tax return. The IRS determined in 1921 that the decedent's share of profits for the remainder of 1920 was also an estate asset, and the executor paid additional estate taxes on that amount. However, in 1925 the IRS concluded, during an audit, that the decedent's share of partnership profit for the February-December 1920 period was income to the estate. In July 1925 the IRS made a deficiency determination of income tax for 1920 with no deduction for the estate taxes previously paid on the value of the decedent's partnership interest. The estate petitioned the Board of Tax Appeals (BTA) for a redetermination in September 1925. After the BTA upheld the deficiency determination, the estate paid the additional income tax and filed a claim for refund in July 1928. When the claim for refund was rejected, the executor filed suit in the Court of Claims in September 1930. In reversing the Court of Claims' denial of the estate's claim the Supreme Court held that the sums received by the estate as the decedent's share of partnership profits after his death were income to the estate, not part of the corpus of the estate. It was error to treat these sums as both assets of the estate and income to the estate under inconsistent theories. When the IRS determined that the profits for February-December 1920 were part of the corpus of the estate in 1921, the executor "had no reason to assume the Commissioner would adjudge the same sums income and taxable as such." Id. 295 U.S. at 258, 55 S.Ct. at 699. When the IRS made this latter determination in July 1925 the executor promptly protested that the same item "could not be both corpus and income of the estate." Id. It was not until the BTA ruled in the government's favor in April 1928 that the government had taxed the same transaction twice, providing the basis for a recoupment claim. It was then too late to file a claim for refund of the overpayment of estate tax. However, the estate paid the additional income tax and filed a claim for refund, insisting that the sums should have been treated as estate assets rather than income. In explaining the application of equitable recoupment, the Supreme Court noted that "the usual procedure for the recovery of debts is reversed in the field of taxation." Id. at 260, 55 S.Ct. at 700. An assessment has the force of a judgment and the burden of proof is shifted to the taxpayer even though the government is seeking to collect a debt and ordinarily would have the burden of proof. When the government began the new proceeding in July 1925 to collect income tax on the money previously taxed as part of the estate, the estate opposed full payment and demanded recoupment to the extent of the amount mistakenly collected as estate tax. Thus, although the estate had the burden of proof, since it was asserted in response to a deficiency determination, the recoupment claim was "in the nature of a defense arising out of some feature of the transaction upon which the plaintiff's action was grounded." Id. at 262, 55 S.Ct. at 700. By its action the government gave the estate a right to a credit or a refund. Although it could not assert this right in an independent action brought by it in 1930, the right had accrued and was available to the estate "since it was actionable and not barred in 1925 when the Government proceeded against the estate for the collection of income tax." Id. at 263, 55 S.Ct. at 701. "Such a defense is never barred by the statute of limitations so long as the main action itself is timely." Id. at 262, 55 S.Ct. at 700.