One thing
with a blog by a practicing tax CPA: you get a feel for whatever is going across
my desk at the moment.
Let’s get
historical and look at a Supreme Court case from 1935.
The case is Bull v United States. I kid you not.
Mr. Bull
died in 1920.
He was a
partner in a partnership.
His share of
the partnership profits through his date of death was $24,124. His share of the
profits for the rest of the year was $212,719.
The executor
filed an estate tax return (that is, the tax return on the net assets Mr. Bull
died with). That return included both the $24,124 and the $212,719. The
executor paid whatever the estate tax was.
The executor
then filed an income tax return for the estate.
COMMENT: Mr. Bull would have had a personal income tax return up to the day of his death. His estate would also have an income tax return, starting the day after he died. The estate would pay income tax until the assets were distributed (by will, contract or whatever). Whoever received the assets would pick-up their income tax consequence from that point on.
The executor
did not include the $212,719 representing Mr. Bull’s share of the profits after
his death.
COMMENT: The quirky detail here is that the partnership agreement allowed Mr. Bull to participate in profits for the year even after he died. I interpret that to mean that his estate would participate, as Mr. Bull could not do so personally. After all, he died.
The IRS
threw a conniption, arguing that the estate should have reported the $212,719
on its income tax return. The IRS assessed income taxes.
I think the
IRS is right: the partnership income after Mr. Bull’s death is (income) taxable
to his estate.
But I think
the IRS was wrong to include that same income on the estate (that is, his net
assets at death) tax return. Why? Simple: That income could not have been an
asset to Mr. Bull at death as it did
not exist as of the date of his death.
I say that
the executor paid too much estate tax.
The executor
agreed and wanted the taxes back.
Problem: too
much time had elapsed. The refund was barred under the statute of limitations.
The IRS had zero intention of refunding even a penny.
What to do?
There was
nothing in the tax law per se for a situation like this. Folks, this was the
1930s.
But we had a
tradition of English common law and equity. The Supreme Court acknowledged that
what was happening here was unfair.
The Supreme
Court reasoned:
· There is one transaction underlying
both tax situations.
· The IRS claim for a deficiency allows
for an argument of recoupment, since the overpayment and deficiency arose from
the same transaction.
· Recoupment as a defense is never
barred by the statute of limitations. It cannot, as it is a doctrine of equity.
If the
Supreme Court could not get to this result using the tax statutes available, it
would get to the result by introducing what has come to be known as “equitable
recoupment.”
The IRS had
to allow the estate to offset one tax against the other. Allowing two bites at
the same apple was inequitable. The key is that one transaction – the same
transaction – is triggering two or more taxes
Bull was – from what I understand – the
first time we see the equitable recoupment doctrine in tax law. In Bull it mitigated the otherwise severe
absolutism of the statute of limitations.
OK, this was
not a particularly thrilling day at my desk.
