Buder: The Extent of Equitable Recoupment
4 Pages Posted: 29 Mar 2006
In Buder, in a refund action by the widow's estate for overpayment plus interest owing to its erroneous inclusion of a purported QTIP trust, the Eighth Circuit, affirming the district court, agreed that the government was entitled to the defense of equitable recoupment for unpaid estate taxes in the husband's estate because of that faulty QTIP election and allowance of a marital deduction. However, the appellate court, like the lower court, first discounted that amount to reflect that others - a charity and a daughter - who were not parties to the litigation and who were not beneficiaries of the trust, would have borne some of the husband's estate tax liability. Likewise, the Eighth Circuit denied the government interest on the equitable recoupment because of the particular circumstances of the case - that the government knew of the erroneous QTIP election and could have timely recovered the husband's estate tax deficiency.
The district court rejected the government's proffered authorities, E.I. du Pont and Rogers, as guidance on the issue of interest on an equitable recoupment. In E.I. du Pont, the Claims Court allowed the government to offset interest on the taxpayer's income tax deficiency for 1942 against the taxpayer's refund for interest paid on excess profits taxes deferred for that year. In Rogers, in an action by both parties for costs, which the court rejected, the court said, Nonetheless, on an alternative theory of recovery, which plaintiffs asserted to support their alternative claim, the court awarded plaintiffs $288,884 plus interest under the doctrine of equitable recoupment. Neither case discussed the issue of awarding interest on an equitable recoupment. Neither, however, did the Eighth Circuit in IES Industries, the case on which the district court in Buder relied.
If preventing unjust enrichment is the essence of the equitable recoupment defense, interest should be paid on those amounts to reflect the actual benefit the Buder sons received by not having the trust taxed in the husband's estate, as it should have been. However, if the government's culpability is a factor favoring a limited application of equitable recoupment, as the Eighth Circuit held, as a way of restricting the defense in Buder, it may not be unfair to deny the Government interest on the amount recouped.
Keywords: equitable recoupment, QTIP, marital deduction
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