PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY, Plaintiff, v. UNITED STATES of America, Defendant., United States District Court, E.D. Tennessee, at Chattanooga., 334 F.Supp.2d 1029, No. 1:01 CV 116., July 7, 2004
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.
United States District Court, E.D. Tennessee, at Chattanooga.
334 F.Supp.2d 1029
No. 1:01 CV 116.
July 7, 2004.
Peter H. Winslow, Samuel A. Mitchell, Scribner, Hall & Thompson, LLP, Wash╜ington, DC, for Plaintiff.
Richard G. Jacobus, U.S. Department of Justice Tax Division, Washington, DC, for Defendant.
COLLIER, District Judge.
Plaintiff Provident Life and Accident In╜surance Company ("Provident Life") brought this action pursuant to 26 U.S.C. ╖ 7422(a) to recover federal income taxes and related interest collected from Provi╜dent Life for the tax year 1984 (Court File No. 1, Complaint). This Court has subject matter jurisdiction over this case pursuant to 28 U.S.C. ╖ 1346(a)(1), and venue is proper in this district pursuant to 28 U.S.C. ╖ 1402(a)(2). The parties stipulate Provident Life is entitled to a reduction in taxable income in the amount of $7,385,004 for the tax year 1984 and a resulting over╜payment and refund of 1984 taxes and assessed interest (Court File No. 28, Sum╜mary Judgment Stipulation ("Stip.") ╤ 12). At issue in this action, then, is the amount of refund to which Provident Life is enti╜tled.
Defendant United States of America ("United States") filed counterclaims in this action to recoup unassessed income tax liabilities for the tax years 1985 and 1986, and to thereby reduce Provident Life's refund, under the doctrine of equita╜ble recoupment and alternatively under the mitigation provisions of 26 U.S.C. ╖╖ 1311-1314 (Court File No. 24, Amend╜ed Answer and Counterclaims). The par╜ties subsequently stipulated to the dismiss╜al without prejudice of the United States' mitigation-based counterclaims because mitigation under those provisions is not ripe (Court File No. 26). Accordingly, the Court will DISMISS WITHOUT PREJU╜DICE Defendant's counterclaims based on mitigation under 26 U.S.C. ╖╖ 1311-1314, pursuant to Fed.R.Civ.P. 41(a), (c).
Before the Court are competing motions for summary judgment filed by Provident Life (Court File No. 27) and by the United States (Court File No. 30) regarding the United States' equitable recoupment coun╜terclaims for tax years 1985 and 1986. In ruling on these motions, the Court consid╜ered the parties' jointly filed stipulation of material facts and other statements (Court File No. 28), their supporting memoranda (Court File Nos. 29, 31), and their oppos╜ing memoranda (Court File Nos. 32, 33). The Court also considered the United States' supplemental opposing brief (Court File No. 34) and Provident Life's response to that submission (Court File No. 35). For the following reasons, the Court will GRANT Provident Life's motion for sum╜mary judgment for a refund of 1984 in╜come tax in the amount of $2,717,681 plus overpayment interest and statutory inter╜est (Court File No. 27) 1 and will DENY the United States' motion for summary judgment on its counterclaims for equita╜ble recoupment of unassessed income tax liabilities for 1985 and 1986 (Court File No. 30). Because no further matters will remain for adjudication, the Court will DI╜RECT the Clerk to CLOSE this case.
1. ═ The parties agree the reduction of Provident Life's taxable income for tax year 1984 results in a $2,717,681 overpayment of income tax for that tax year (Stip. ╤ 16).
I. STANDARD OF REVIEW
Summary judgment is proper where "the pleadings, depositions, answers to in╜terrogatories, and admissions on file, to╜gether with the affidavits, if any, show that there is no genuine issue as to any materi╜al fact and the moving party is entitled to a judgment as a matter of law." Fed. R.Civ.P. 56(c). Initially, the burden is on the moving party to conclusively show no genuine issues of material fact exist, Leary v. Daeschner, 349 F.3d 888, 897 (6th Cir. 2003), and the Court must view the evi╜dence and draw all reasonable inferences therefrom in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). However, the non╜moving party is not entitled to a trial merely on the basis of allegations, but must come forward with some significant probative evidence to support its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). If the nonmoving party fails to make a sufficient showing on an essential element of its case with respect to which it has the burden of proof, the moving party is entitled to summary judgment. Id. at 323, 106 S.Ct. at 2552.
The Court determines whether sufficient evidence has been presented to make an issue of fact a proper jury question, but does not weigh the evidence, judge the credibility of witnesses, or determine the truth of the matter. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986); Weaver v. Shadoan, 340 F.3d 398, 405 (6th Cir. 2003). The standard for summary judg╜ment mirrors the standard for directed verdict. Anderson, 477 U.S. at 250, 106 S.Ct. at 2511. The Court must decide "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Id. at 251-52, 106 S.Ct. at. 2512. There must be some probative evidence from which the jury could reasonably find for the nonmoving party. If the Court con╜cludes a fair-minded jury could not return a verdict in favor of the nonmoving party based on the evidence presented, it may enter a summary judgment. Id .; Lansing Dairy, Inc. v. Espy, 39 F.3d 1339, 1347 (6th Cir.1994).
II. RELEVANT FACTS
The facts of this case have been stipu╜lated by the parties and are undisputed. Provident Life is a life insurance company subject to federal income tax under the Internal Revenue Code, specifically 26 U.S.C. ╖╖ 801-818, as a calendar year tax╜payer (Stip. ╤╤ 1-2). At all times relevant to this action, Provident Life underwrote a group insurance program which provided life insurance, accidental death and dis╜memberment insurance, and excess major medical insurance for members of the American Medical Association ("the AMA insurance program") (Stip. ╤╤ 4, 18-19). Under an agreement with the AMA and a broker ("the Tripartite Agreement"), Prov╜ident Life agreed to "experience rate" the AMA insurance program (Stip. ╤╤ 20-23). According to the agreed upon experience rating plan, Provident Life applied a for╜mula to compare premiums received under the AMA insurance program with specified charges incurred during each policy year (Stip. ╤ 24). Premiums in excess of charges became "experience rating credits" subject to uses specified in the Tripartite Agree╜ment (Id.). By a greement the experience rating credits constituted a "premium sta╜bilization reserve" to ensure Provident Life was able to comply with state law and to meet its contractual obligations under the AMA insurance program (Stip. ╤╤ 26╜28, 31).
Certain group insurance policies within the AMA insurance program had policy years that did not correspond to the calen╜dar year (Stip. ╤ 32). At the end of each calendar year, Provident Life established a reserve for its estimated liability for expe╜rience rating credits for those group insur╜ance policies whose policy years had not yet expired as of December 31 ( Id .). These amounts were called "open-year ex╜perience rating credits" and the reserves for open-year experience rating credits were called "open-year credit reserves" (Stip. ╤╤ 32-33). For years in which Provi╜dent Life estimated its charges would ex╜ceed premiums as of its calendar year-end, it established on its books a negative liabil╜ity for the open-year experience rating credits (Stip. ╤ 32).
For calendar years 1984, 1985, and 1986, Provident Life computed the year-end bal╜ances in the AMA premium stabilization reserves that were attributable to open-year experience rating credits for the group insurance policies whose policy years did not end on December 31 (Stip. ╤ 25). To determine the year-end balances for 1985 and subsequent years, Provident Life considered facts that oc╜curred after December 31, 1984, the close of its 1984 tax year (Stip. ╤ 36). For tax years 1985 and 1986, the year-end balances for the open-year experience rating credit reserves were based upon premiums re╜ceived and specified charges incurred dur╜ing 1985 and 1986, respectively (Stip. ╤ 37-39).
Provident Life reported changes in its reserve for AMA insurance program open-year experience rating credits as part of its premium stabilization reserves under 26 U.S.C. ╖ 810(c), which was reclassified in 1984 as 26 U.S.C. ╖ 807(c)(6) (Stip. ╤ 44). In 1984, the open-year experience rating credit premium stabilization reserve for the AMA insurance plan decreased by $7,385,004 (Stip. ╤╤ 35, 45). Provident Life reported this amount as an income item under 26 U.S.C. ╖ 803(a)(2) on its consoli╜dated income tax return for tax year 1984 (Stip. ╤ 45). When Provident Life filed its 1984 consolidated income tax return and reported income attributable to the de╜crease in it open-year experience rating credit reserve, it could not have accounted for the year-end reserve balances for 1985 or 1986 (Stip. ╤╤ 40, 43).
In 1985 the open-year experience rating credit premium stabilization reserve in╜creased by $994,453, and Provident Life reported this amount as a deduction under 26 U.S.C. ╖ 805(a)(2) for the tax year 1985 (Stip. ╤╤ 35, 48). In 1986, the open-year experience rating credit premium stabiliza╜tion reserve increased by $3,011,210, and Provident Life reported this amount as a deduction for the tax year 1986 (1d.). Sim╜ilarly, for tax years 1987-1990 and 1992, Provident Life reported as deductions the year-end premium stabilization reserve balance increases attributable to AMA in╜surance program open-year experience rating credits (Stip. ╤ 48). In 1991 the year-end premium stabilization reserve balance decreased due to AMA insurance program open-year experience rating credit re╜serves, and Provident Life reported the decrease as an income item for tax year 1991 (Stip. ╤ 46).
The Internal Revenue Service ("IRS") examined Provident Life's tax returns for tax years 1986 through 1992, and the IRS concluded the AMA insurance program open-year experience rating credits were properly characterized as policyholder div╜idends that had not yet accrued as of December 31 each calendar year (Stip. ╤ 6). Because life insurance companies must ac╜count for policyholder dividends on an accrual basis under 26 U.S.C. ╖ 808(c), unac╜crued liability for policyholder dividends cannot be deducted for tax purposes until the dividends are either paid or accrued (Id.). Therefore, the IRS disallowed the deductions Provident Life reported for tax years 1986-1990 and 1992 reflecting year-end premium stabilization balance increas╜es attributable to AMA insurance program open-year experience rating credits (Stip. ╤╤ 5-6, 49). The IRS, however, did not adjust Provident Life's taxable income for 1984 or 1991, tax years for which the open-year experience rating credit premi╜um stabilization reserve decreased and Provident Life reported those decreases as income (Stip. ╤ 8). Further, the IRS did not adjust or disallow the deduction Provi╜dent Life reported in tax year 1985 or the entire deduction it reported in tax year 1986 (Stip. ╤ 9). The time for the IRS to assess additional taxes against Provident Life has expired for tax years 1985 and 1986, pursuant to 26 U.S.C. ╖ 6501(a) (Stip. ╤ 10). However, the time for Provi╜dent Life to seek a refund of taxes it overpaid for tax year 1991-due to the decrease in open-year experience rating credit premium stabilization reserves it re╜ported as income-remains open under 26 U.S.C. ╖ 6532(a), and Provident Life has filed a refund claim seeking reversal of the income item it reported (Stip. ╤╤ 46, 47).
In this action, Provident Life seeks a refund of certain income taxes paid for tax year 1984 on the theory that AMA insur╜ance program open-year experience rating credits should be treated as unaccrued pol╜icyholder dividends, consistent with the IRS's conclusion and adjustments for tax years 1986 through 1990 and 1992 (Stip. ╤ 11). 2 Likewise, the United States' claim for equitable recoupment of unas╜sessed tax liability for tax years 1985 and 1986 seeks to consistently treat the open-year experience rating credits as unac╜crued policyholder dividends by effectively disallowing the deductions Provident Life reported in tax years 1985 and 1986 based on increases in the open-year credit re╜serves. As noted before, the primary is╜sue presented by the parties' cross mo╜tions for summary judgment is whether the doctrine of equitable recoupment ap╜plies to allow the United States to recoup unassessed income tax liability for tax years 1985 and 1986-assessment of which is barred by the statute of limitations-from the refund due Provident Life for its overpayment of income tax for tax year 1984. First the Court will review the doc╜trine of equitable recoupment as applied in tax cases. Then the Court will explain why equitable recoupment does not apply in this case.
2. ═ Provident Life's pending refund claim for tax year 1991 also appears consistent with the treatment of open-year experience rating credits as unaccrued policyholder dividends.
A. Equitable Recoupment in Tax Cases
Under the doctrine of equitable recoupment "a party litigating a tax claim in a timely proceeding may, in that pro╜ceeding, seek recoupment of a related, and inconsistent, but now time-barred tax claim relating to the same transaction." United States v. Dalm, 494 U.S. 596, 608, 110 S.Ct. 1361, 1368, 108 L.Ed.2d 548 (1990) (emphasis added). The United States Supreme Court has emphasized "a claim of equitable recoupment will lie only where the Government has taxed a single transaction, item, or taxable event under two inconsistent theories." Id. at 605 n. 5, 110 S.Ct. at 1367 n. 5 (emphasis added). As distinguished from offset, equitable re╜coupment allows the IRS or a taxpayer to reduce a refund or a deficiency due for one tax year by an underpayment or overpay╜ment from a different tax year, but only in certain circumstances. IES Indus., Inc. v. United States, 349 F.3d 574, 581 & n. 6 (8th Cir.2003). To preserve and effectuate the purposes of limitations statutes in fed╜eral tax litigation, equitable recoupment is permitted only in narrowly defined cases. Id. at 581 (citing Rothensies v. Elec. Stor╜age Battery Co., 329 U.S. 296, 301-02, 67 S.Ct. 271, 273, 91 L.Ed. 296 (1946)).
The United States Supreme Court first approved the application of equitable re╜coupment in a federal tax case in Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 (1935). In Bull an estate received money from a partnership in which its decedent was a member, and it mistakenly paid estate tax rather than in╜come tax on that amount. Id. at 251, 260-61, 55 S.Ct. at 696, 700. Further, the estate did not file a timely claim for refund of the estate tax. Id . at 260-61, 55 S.Ct. at 700. When the United States brought a proceeding against the estate to collect the income tax due on the money it received from the partnership, the Court permitted the estate to raise its mistaken payment of estate tax on that money in defense be╜cause both the income tax deficiency claim and the time-barred estate tax overpay╜ment claim arose out of the same transac╜tion-the estate's receipt of money from the partnership. Id. at 261, 55 S.Ct. at 700. The Supreme Court explained "recoup╜ment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiffs action is grounded. 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 700-01.
The Supreme Court also addressed equi╜table recoupment in Stone v. White, 301 U.S. 532, 57 S.Ct. 851, 81 L.Ed. 1265 (1937). In Stone the tax authorities as╜sessed and collected income tax on the income of a trust estate from the relevant trustees when collection from the trust beneficiary, who properly owed the income tax, was barred by the statute of limitations. Id. at 533-34, 57 S.Ct. at 852. The trustees then brought a proceeding for refund of their income tax overpayment, and the United States raised the doctrine of equitable recoupment as a defense. Id. The Supreme Court recognized a single tax was due upon the particular income involved in the case and that the tax paid by the trustees should have been paid by the trust beneficiary. Id . at 535, 57 S.Ct. at 853. It further recognized the equitable principles involved in an action to recover erroneously paid tax, that the interests of the trustees and the beneficiary were aligned, and that denying the refund to the trustees would neither unjustly enrich the government nor harm the trustees or the trust beneficiary. Id. at 538-39, 57 S.Ct. at 854-55. The Stone court thus allowed the United States to use equitable recoup╜ment, based on a time-barred income tax deficiency claim, to reduce the refund for overpayment of income tax where the pro╜ceeding in which the defense was raised was itself timely and the refund claim and recoupment involved the proper tax treat╜ment of one particular income.
Some lower courts applying equitable recoupment in tax cases after Bull and Stone did not strictly observe the "same transaction" aspect of the doctrine. For example, in Dixie Margarine Co. v. C.I.R., 115 F.2d 445 (6th Cir.1940), a manufactur╜er paid stamp and license taxes on its food products from 1923 through 1931 pursuant to an erroneous application of the Oleo╜margarine Act. Id. at 446. In 1932 the manufacturer received a refund for the taxes it improperly paid from late 1925 through 1931, and the government as╜sessed an income tax deficiency based on the amount of that refund. Id. at 446-47. The manufacturer's claim for refund of taxes improperly paid from 1923 through late 1925 was time-barred, but the manu╜facturer raised this matter under the doc╜trine of equitable recoupment in defense to the United States' action for tax deficiency based on the 1932 refund. Id. The Board of Tax Appeals concluded the manufactur╜er could not recoup the taxes it overpaid from 1923 through late 1925, but the Sixth Circuit reversed that decision. Id . at 447. The Sixth Circuit stated the deficiency claim and the recoupment claim must arise out of the same transaction or subject matter for equitable recoupment to apply, and it held the manufacturer's claim for refund and the government's deficiency as╜sessment had a common origin in the erro╜neous application of the Oleomargarine Act to the manufacturer's products. Id. Thus, the case was remanded so the govern╜ment's deficiency assessment would be re╜duced by the manufacturer's refund of tax╜es erroneously paid in 1923 through late 1925, pursuant to equitable recoupment. Id. at 447-48.
The decision in Dixie Margarine was held to be "directly in point" by a district court and the reviewing Third Circuit pan╜el in Electric Storage Battery Co. v. Roth╜ensies, 152 F.2d 521, 524 (3d Cir.1945). 3 In Rothensies a taxpayer sought to recoup excise taxes it improperly paid from 1919 through 1922 to reduce the government's timely claim for an income tax deficiency assessed on the refund the taxpayer re╜ceived for the same kind of excise taxes it improperly paid from 1923 through 1926. Id. at 522-23. To evaluate whether equi╜table recoupment was proper, the Third Circuit considered whether the taxpayer's recoupment claim was part of the same transaction as the government's tax defi╜ciency claim. Id. at 523. The court con╜cluded the same transaction requirement was satisfied because the overpayment of taxes from 1919 through 1922 (years closed to examination by the statute of limitations) was due to improperly as╜sessed excise taxes on the same kind of merchandise and on the same improper theory as the excise taxes refunded to the taxpayer, on which the government's claimed income tax deficiency was based. Id. at 523. The Third Circuit held this logical connection between the govern╜ment's claim for tax deficiency and the taxpayer's recoupment claim was sufficient to satisfy the "same transaction" part of the equitable recoupment doctrine. Id. at 524. Explaining its decision, the court ob╜served recoupment is based on concepts of fairness and stated it saw no reason to hedge the same transaction requirement within close quarters, particularly where there is a logical connection between the main claim and the recoupment claim. Id. at 524.
3. ═ The Third Circuit in Rothensies noted Dixie Margarine was appealed from the Board of Tax Appeals and that the Supreme Court sub╜sequently held in C.I.R. v. Gooch Mill. & Elevator Co., 320 U.S. 418, 421-22, 64 S.Ct. 184, 186, 88 L.Ed. 139 (1943), the Board of Tax Appeals has no jurisdiction over equitable recoupment. Rothensies, 152 F.2d at 524. Nevertheless, the Third Circuit considered Dixie Margarine persuasive regarding the ap╜plication of equitable recoupment. Id .
The Supreme Court reversed the Third Circuit's decision in Rothensies, stating the decision below "misapprehends the limits on the doctrine of recoupment as applied to tax law and leads us to state more fully reasons for declining to expand the doc╜trine beyond the facts of [ Bull v. United States and Stone v. White ]." Rothensies v. Elec. Storage Battery Co., 329 U.S. 296, 301, 67 S.Ct. 271, 273, 91 L.Ed. 296 (1946). 4 The Court explained:
4. ═ The Supreme Court in Rothensies did not mention the Sixth Circuit's Dixie Margarine decision or its discussion of equitable recoup╜ment. In light of the Supreme Court's Roth╜ensies decision and the Court's recent discussion of equitable recoupment in United States v. Dalm, 494 U.S. 596, 110 S.Ct. 1361, 108 L.Ed.2d 548 (1990), t his Court doubts the value of Dixie Margarine's discussion of equi╜table recoupment.
It probably would be all but intolerable, at least Congress has regarded it as ill-advised, to have an income tax system under which there never would come a day of final settlement and which re╜quired both the taxpayer and the Gov╜ernment to stand ready forever and a day to produce vouchers, prove events, establish values and recall details of all that goes into an income tax contest. Hence a statute of limitation is an al╜most indispensable element of fairness as well as of practical administration of an income tax policy.
Id . (quoting two of its then recent deci╜sions, the Court noted the role of limita╜tions statutes in promoting justice by pre╜venting surprises through revival of stale claims. Turning to the impact of statutes of limitations in the field of taxation, the Court recognized "the taxpayer sometimes gets advantages and at other times the Government gets them. Both hardships to the taxpayers and losses to revenue may be pointed out. They tempt the equity-minded judge to seek for ways of relief in individual cases." Id. at 302, 67 S.Ct. at 273 (footnote omitted). The Court then directly rejected the Third Circuit's em╜phasis of fairness concepts in applying the equitable recoupment doctrine in tax cases, explaining the problems a broad applica╜tion of the doctrine would cause:
But if we should approve a doctrine of recoupment of the breadth here applied we would seriously undermine the stat╜ute of limitations in tax matters. In many, if not most, cases of asserted deficiency the items which occasion it relate to past years closed by statute, at least as closely as does the item involved here. Cf. Hall v. United States, 95 Ct.Cl. 539, 43 F.Supp. 130. The same is true of items which form the basis of refund claims. Every assessment of de╜ficiency and each claim for refund would invite a search of the taxpayer's entire tax history for items to recoup.
Id . at 302, 67 S.Ct. at 273-74.
Rothensies demonstrates the limits of equitable recoupment in tax cases. Ac╜cording to the Supreme Court, equitable recoupment does not "allow one transac╜tion to be offset against another, but only . . . permit[s] a transaction which is made subject of suit by a plaintiff to be exam╜ined in all its aspects, and judgment to be rendered that does justice in view of the one transaction as a whole." Id . at 299, 67 S.Ct. at 272. The Court's discussion of Bull and Stone demonstrates the impor╜tance of the "same transaction" aspect of the equitable recoupment doctrine. Ac╜cording to the Court, the one taxable event being examined in Bull was the receipt of money by executors, money that was near╜ly subjected to both income tax and estate tax. Id. at 300, 67 S.Ct. at 272. In Stone the refund claim and recoupment involved a single taxable event, the receipt of in╜come for a period by an estate. Id. By contrast, the matters examined in Rothen╜sies involved a timely filed claim for tax deficiency assessed for tax year 1935 (due to a refund the taxpayer received that year for overpayment of excises taxes paid from 1923 through 1926) and an equitable re╜coupment claim for overpayment of excise taxes for tax years 1919 through 1922, a refund claim otherwise barred by the stat╜ute of limitations. Id. at 298, 67 S.Ct. at 272. Although the taxpayer in Rothensies improperly paid the excise taxes from 1919 through 1926 on the same merchandise and due to the same misapplication of the excise tax provisions, Rothensies, 152 F.2d at 523, the Supreme Court held equitable recoupment of the earlier portion of over╜payment was not proper because those amounts sought in recoupment were not of the same transaction constituting the tax╜able event claimed upon by the plaintiff. Rothensies, 329 U.S. at 299, 67 S.Ct. at 272 ("In [ Bull and Stone ] a single transaction constituted the taxable event claimed upon and the one considered in recoupment.").
In 1990 the Supreme Court reiterated the limitations on the doctrine of equitable recoupment in federal tax cases in United States v. Dalm, 494 U.S. 596, 608, 110 S.Ct. 1361, 1368, 108 L.Ed.2d 548 (1990). In Dalm the taxpayer invoked equitable recoupment as the basis for the district court's jurisdiction over her action for re╜fund of a gift tax that was barred by the statute of limitations. Id. at 606, 110 S.Ct. at 1367. The Supreme Court denied the taxpayer's attempt to use equitable re╜coupment to avoid the effect of the statute of limitations on her claim for refund, stat╜ing equitable recoupment permits a party to seek recoupment of a time-barred tax claim relating to the same transaction al╜ready under examination in a timely filed proceeding. Id. Although the decision in Dalm centered on the jurisdictional ques╜tion whether equitable recoupment could provide an independent basis for asserting and reviewing a time-barred tax claim, the Court noted "a court which has jurisdiction over a timely suit for refund may consider an equitable recoupment claim for an earli╜er tax paid under an inconsistent theory on the same transaction." Id. at 610, 110 S.Ct. at 1369.
Recent cases applying equitable recoup╜ment in federal tax cases reflect the nar╜row scope and application of the doctrine and its "same transaction" requirement. In IES Industries, Inc. v. United States, 349 F.3d 574 (8th Cir.2003), the Eighth Circuit recognized equitable recoupment "does not permit 'one transaction to be offset against another,' but will allow a single 'transaction which is made the sub╜ject of suit by a plaintiff to be examined in all its aspects, and judgment to be ren╜dered that does justice in view of the one transaction as a whole.' " Id. at 582 (quot╜ing Rothensies, 329 U.S. at 299, 67 S.Ct. at 271). The facts in IES presented a diffi╜cult issue concerning the "same transac╜tion" requirement because the taxpayer conducted complicated trades of American Depository Receipts ("ADRs") involving the purchase and sale of the ADRs that generated a capital loss and the payment of related dividends that generated tax liability. Id . at 576, 582. The IRS initially denied the taxpayer any tax benefit relat╜ing to the ADR trades because it found them to be sham transactions without busi╜ness purpose. Id. at 576. When the Eighth Circuit rejected that analysis, the taxpayer sought refund of overpaid taxes for tax years 1989, 1990, and 1992 result╜ing from capital-loss carrybacks arising from the ADR transactions, and the Unit╜ed States sought to recoup time-barred taxes for foreign (ADR) dividends IES received in tax years 1991 and 1992. Id . at 576, 582. Rather than view the refund for capital-loss carrybacks due the taxpay╜er and the unassessed taxes owed on for╜eign dividends as arising from different transactions, the Eight Circuit determined the refund claim and the recoupment claim related to a single transaction, item, or taxable event. Id. at 582. Because the taxpayer treated each ADR trade in its entirety as a single transaction, and be╜cause the Eighth Circuit's previous rul╜ing-that the ADR trades had business purpose and were not sham transactions-depended upon viewing each ADR transac╜tion as a whole, the court concluded the ADR trades were a single transaction for purposes of equitable recoupment. Id . Therefore, the United States was permit╜ted to recoup time-barred taxes owed by the taxpayer in the timely refund proceed╜ing, under the doctrine of equitable re╜coupment. Id . at 576, 582.
In Coohey v. United States, 172 F.3d 1060 (8th Cir.1999), taxpayers sought a refund of the Alternative Minimum Tax ("AMT") they paid for tax year 1990, and the government asserted an equitable recoupment claim to recover the amount of AMT credit applied to the taxpayers in tax year 1991. Id. at 1062. The Eighth Cir╜cuit recognized equitable recoupment re╜quired a "single transaction" analysis when it stated "[u]nder the doctrine of equitable recoupment the offsetting amount from the year barred by the statute of limitations (in this case 1991) must be considered the same transaction if it arose from the re╜fund due Taxpayers in the year 1990." Id. at 1064 (emphasis in original). The Court held the AMT credit given to the taxpay╜ers in 1991 and the assessment of AMT due for 1990 clearly constituted a single transaction because the allowance of the 1991 credit was directly caused by the AMT assessed and paid in 1990. Id. Therefore, the United States was able to recoup the 1991 AMT credit from the re╜fund of AMT the taxpayers were due for tax year 1990, under the doctrine of equi╜table recoupment. Id. at 1065.
Finally, in Parker v. U nited States, 110 F .3d 678, 684 (9th Cir.1997), the Ninth Circuit prevented the United States from invoking equitable recoupment to reduce a tax refund due beneficiaries of a settle╜ment trust because it held the refund claim and the recoupment claim involved sepa╜rate transactions. Id. 679, 683. The bene╜ficiaries of the trust sought a refund of estate taxes paid from the corpus of the trust that were owed on a stepfather's estate, taxes paid on the erroneous theory the trust was part of the estate. Id . at 681-82. Agreeing the trust should not have been included in the stepfather's es╜tate, the United States argued the trust beneficiaries unjustly benefited because the trust should have been taxed in the mother's estate yet a claim for tax defi╜ciency against the mother's estate was time-barred. Id . at 682. Upon these facts, the Eight Circuit held the case in╜volved the tax treatment of two separate estates-the stepfather's and the mother's-rather than a single transaction or taxable event, so equitable recoupment could not apply. Id. at 683. The event giving rise to the beneficiaries' claim for refund was the death of the stepfather and the erroneous taxation of his estate. Id. at 684. A separate taxable event, such as the mother's death, resulted in tax liability for the mother's estate, so the government's recoupment claim on the mother's estate was based on that separate event. Id . The Court considered the Rothensies discus╜sion of equitable recoupment and stated courts could not "lump together related, but nonetheless separate transactions so that the facts of a case can be viewed as 'one transaction as a whole.' " Id. at 684. Despite the relation between proper taxa╜tion of the estates and whether the settle╜ment trust was properly included in the stepfather's estate or the mother's estate, that relation did not satisfy the single transaction requirement of equitable re╜coupment.
B. Equitable Recoupment Does Not Apply in this Tax Case
The United States' counterclaims seek to recoup unassessed income taxes from Provident Life for tax years 1985 and 1986 by effectively disallowing the deduc╜tions Provident Life claimed based on in╜creases in the year-end premium stabiliza╜tion reserve balances attributable to AMA insurance program open-year experience rating credits that Provident Life comput╜ed as of December 31, 1985, and December 31, 1986. Although the IRS determined these amounts are properly treated as unaccrued policyholder dividends that may not be deducted, the United States is time-barred from assessing tax on that theory because of the statute of limitations. Nev╜ertheless, the United States asserts the doctrine of equitable recoupment allows it to reduce Provident Life's refund for tax year 1984 by the unassessed tax liability due for tax years 1985 and 1986 attributable to the open-year experience rating credits.
The United States argues the 1984, 1985, and 1986 computation and tax treat╜ment of the AMA insurance program open-year experience rating credits for tax years 1984, 1985, and 1986 constitute a single transaction so that taxes due on the credits for 1985 and 1986 may be recouped from a refund due for tax improperly paid on the credits for tax year 1984. Under equitable recoupment, a time-barred tax claim (in this case, the United States' claims for 1985 and 1986 taxes) may be raised and considered during a timely tax claim proceeding (in this case, Provident Life's claim for refund of tax year 1984 overpayments) if the two claims require examination of a single transaction as a whole. Rothensies, 329 U.S. at 299, 67 S.Ct. at 272. Equitable recoupment does not allow one timely transaction to be off╜set against another, time-barred transac╜tion. Id . Because the refund Provident Life seeks and the recoupment the United States seeks are not based on a single transaction, item, or taxable event, see Dalm , 494 U.S. at 605 n. 5, 110 S.Ct. at 1367 n. 5, the Court concludes the doctrine of equitable recoupment does not apply. Therefore the Court will GRANT Provi╜dent Life's motion for summary judgment and will DENY the United States' motion for summary judgment.
Provident Life seeks and is entitled to a refund of income tax it overpaid for tax year 1984 because the decrease in open-year experience rating credit reserves computed as of December 31, 1984, is properly treated as unaccrued policyhold╜er dividends rather than as income. The transaction involved in Provident Life's claim for refund is the computation of open-year experience rating credit re╜serves as of December 31, 1984. In some ways, this transaction is related to other year-end calculations of open-year credit reserves, including the calculations de╜rived at the end of 1985 and 1986. First, under the Tripartite Agreement, Provi╜dent Life is required to calculate open-year experience rating credits and to ac╜count for reserves of these amounts ac╜cording to particular formulas and con╜tractual provisions. Computation of the credits and year-end reserve balances would involve similar or the same proce╜dures each year because Provident Life's obligation to properly compute and apply these credits was the same during each of the relevant years. Further, the year╜end balance for open-year experience rat╜ing credit reserves for 1984 carries over as the beginning balance for 1985. Therefore, the computation of open-year experience rating credits and the reserve balance as of December 31, 1984, would affect the year-end reserve balances in 1985, 1986, and beyond because the cred╜its are used to stabilize the AMA insur╜ance program premiums as the reserves accumulate and deplete over the course of multiple years.
Despite the relationship that exists be╜tween the open-year credit reserve calcula╜tions at the end of 1984, 1985, and 1986, the transactions to be considered in the United States' request to recoup unas╜sessed income tax liability for tax years 1985 and 1986 are not the same transac╜tion as the one at issue in Provident Life's claim for refund of income tax overpay╜ment for tax year 1984. The recoupment claims for 1985 and 1986 depend upon the year-end calculation of open-year experi╜ence rating credits for those two individual years and the resulting effect the calcula╜tions had on the reserve balances. All the facts regarding premiums paid and charges incurred for the 1985 calculation and the 1986 calculation happened after the end of tax year 1984. While the re╜serve balances for 1985 and 1986 were superficially affected by the starting balance for 1985 provided by the 1984 year╜end balance, the computation and tax treatment of open-year experience rating credits for 1985 and 1986 are wholly sepa╜rate transactions from the computation and tax treatment of credits for 1984. The United States' counterclaims seek to offset overpayment of income tax based on the 1984 calculation of open-year experience rating credit premium stabilization re╜serves with the deficiency of income tax based on the 1985 and 1986 calculations of those reserves, but this is not permitted by equitable recoupment. The United States' claim for 1985 and 1986 taxes is closed by the statute of limitations, and equitable recoupment is not available to the govern╜ment because it does not seek a recoup╜ment on the same transaction, item, or taxable event as Provident Life's claim for refund of taxes it overpaid for tax year 1984.
The result in this case, required by clear Supreme Court precedent, may be criti╜cized based on concerns of the consistent application of income tax provisions and fairness on a micro level. For tax years 1984 through 1992, Provident Life calculat╜ed open-year experience rating credits for the AMA insurance program and reported them as income or deductions, depending upon whether the related reserve de╜creased or increased during the tax year. The IRS subsequently determined the credits are properly treated as unaccrued policyholder dividends that cannot be de╜ducted, and it disallowed most of the de╜ductions Provident Life initially claimed. When this action concludes, the AMA in╜surance program open-year experience rating credits will have been properly treated as unaccrued policyholder divi╜dends for tax years 1984, part of 1986, 1987 through 1990, and 1992. The only exceptions to this consistent tax treatment occur in tax years 1985, part of 1986, and 1991. 5 For tax years 1985 and part of 1986, these credits currently continue to be treated as deductible for two reasons: a tax deficiency was not assessed within the limitations period, and equitable recoup╜ment does not apply to resolve the incon╜sistency in this action. While inconsistent tax treatment of similar transactions, items, or events in a sequence of years is generally undesirable, the doctrine of equi╜table recoupment applies in limited cir╜cumstances involving only a single transac╜tion, and that situation is not present in this case.
5. ═ For tax year 1991, Provident Life is seeking in another proceeding to have the credits treated as unaccrued policyholder dividends rather than as income, consistent with the theory applied by the IRS and with the theory underlying Provident Life's claim for refund of the 1984 tax overpayment.
The situation and outcome in this case is similar to those present in Rothensies. The Rothensies case involved the improper payment of excise taxes over the course of several sequential tax years. The time for asserting a refund claim for the first few years expired, and the taxpayer received a refund of taxes it overpaid for tax years immediately following the years closed by the statute of limitations. When the Unit╜ed States asserted a deficiency against the taxpayer based on the excise tax refund the taxpayer received, the taxpayer unsuc╜cessfully asserted equitable recoupment to receive a refund of excise taxes it paid in the closed tax years. Despite the relation╜ship between the refund the taxpayer re╜ceived and the inconsistent excise tax treatment that continued to exist in the closed years, the same transaction require╜ment of equitable recoupment prevented the taxpayer from correcting the inconsis╜tency in the closed years. In this case, the United States rather than the taxpayer finds itself on the "losing" end of the stat╜ute of limitations in a tax case, but the Supreme Court contemplated this situation in Rothensies and specifically refused to expand the doctrine of equitable recoupment on concerns of consistency and fair╜ness in an individual case. Accordingly, this Court will accept the inconsistency that accompanies the proper application of the "same transaction" requirement of eq╜uitable recoupment and concludes the United States cannot prevail on its equita╜ble recoupment counterclaims because the doctrine does not apply under the circum╜stances of this case.
For the reasons stated above, the Court will DISMISS WITHOUT PREJUDICE the United States' counterclaims based on mitigation under 26 U.S.C. ╖╖ 1311-1314, pursuant to Fed.R.Civ.P. 41(a), (c). Fur╜ther, the Court will GRANT Provident Life's motion for summary judgment for a refund of 1984 income tax in the amount of $2,717,681 plus overpayment interest and statutory interest (Court File No. 27) and will DENY the United States' motion for summary judgment on its counterclaims for equitable recoupment of unassessed in╜come tax liabilities for 1985 and 1986 (Court File No. 30). Because no further matters will remain for adjudication, the Court will DIRECT the Clerk to CLOSE this case.
An Order shall enter.
In accordance with the accompanying memorandum, the Court GRANTS Provi╜dent Life's motion for summary judgment for a refund of 1984 income tax in the amount of $2,717,681 plus overpayment in╜terest and statutory interest (Court File No. 27) and DENIES the United States' motion for summary judgment on its coun╜terclaims for equitable recoupment of unassessed income tax liabilities for 1985 and 1986 (Court File No. 30). Further, the Court DISMISSES WITHOUT PREJUDICE the United States' counter╜claims based on mitigation under 26 U.S.C. ╖╖ 1311-1314, pursuant to Fed.R.Civ.P. 41(a), (c). Because no further matters re╜main for adjudication, the Court DI╜RECTS the Clerk to CLOSE this case.