The Supreme Court first approved an application of the doctrine of equitable recoupment in Bull v. United States, 295 U.S. 247 (1935). In a case of first impression, the Tax Court (Menard, Inc. v. Commissioner, 130 T.C. No. 4 (2008)) held that under the doctrine of equitable recoupment, it had jurisdiction to offset an income tax deficiency with a tax paid even if the court lacks subject matter jurisdiction over the tax so paid.

Section 6214(b) was amended by the Pension Protection Act of 2006 by adding the last sentence to subsection (b) authorizing the Tax Court to apply the doctrine of equitable recoupment to the same extent as it is available in the district courts and Claims Court. (This amendment confirms the jurisdiction of the court to apply equitable recoupment which had split the courts of appeal. See conflict between the Sixth and Ninth Circuits). The Commissioner had argued that the Tax Court cannot apply the doctrine unless it has jurisdiction over the tax, i.e. income, estate and gifts, and excise tax. The Commissioner argued that this group does not include the “hospital tax” imposed by sections 3101 and 31111, 

Rejecting this argument, the Tax Court stated as a matter of policy, that the 2006 Amendment should be read in such a manner so as to eliminate confusion and to provide “simplification benefits to both taxpayers and the IRS.”


In a fully reviewed opinion, the United States Tax Court in the Estate of Christiansen v. Commissioner, 130 TC No.1 (2008) rendered what may become a landmark case dealing with “formula disclaimers.”

The decedent’s daughter made a formula disclaimer of everything in the estate in excess of $6,350,000.00. The excess passed to a charitable lead trust and a foundation. (As to the part passing to the trust, the charitable deduction was disallowed by the court on the ground that the disclaimant had an interest in the trust which itself was not disclaimed, violating Reg. § 25.2518-2(c) and  §25.2518-3(a)(b)).

The specific formula disclaimer clause provided “intending to disclaim a fraction or portion of the Gift, … hereby disclaims that portion of the Gift determined by reference to a fraction, the numerator of which is the Fair Market Value of the Gift … less $6,350,000.00, and the denominator of which is the Fair Market Value of the Gift….” Fair Market Value was defined as the value as finally determined for Federal Estate Tax purposes. The disclaimer clause also had a savings clause in which the disclaimant “…hereby takes such actions to the extent necessary to make the disclaimer…a qualified disclaimer.”

The Commissioner challenged the disclaimer as not being effective to pass the property to the foundation on two grounds: (1) The amount was subject to a contingency - as a conditioned subsequent and (2) the clause was void as contrary to public policy. As to the condition subsequent argument, the court held that the regulation (§ 20.2055-2(b)(1) which disallows a charitable deduction if the Gift is dependent upon the performance of an act precedent) does not apply. As the court noted, the transfer to the foundation occurred at the time of the disclaimer and was not contingent upon any event that occurred after the decedent’s death. 

As to the public policy discussion, the Commissioner cited the often-cited case of Commmissioner. V. Procter, 142 F.2d 824 (4th Cir. 1944). In Procter, the court voided a clause as contrary to public policy in that the clause would discourage collection of tax, would render the court’s own decision as moot by undoing the gift, and would upset a final judgment. Here, the Tax Court stated “This case is not Procter. The contested phrase would not undo a transfer, but only reallocate the value of the property transferred…” The court concluded that an increase in the charitable deduction to reflect the increase of the property passing to the charity “violates no public policy.”


On January 25, 2008 the Justice Department submitted a brief for the First Circuit, arguing that a district court erred in U.S. v. Textron Inc. and Subsidiaries, 507 F. Supp. 2d 138 (D.R.I. 2007) by refusing to enforce an IRS summons and in holding that tax accrual workpapers prepared by a public corporation for a regular financial audit required by federal securities laws are protected by the work product doctrine. The District Court in Textron was able to conclude that the IRS was not entitled to the tax-accrual workpapers because the court ruled that those workpapers had “little to do” with the determination of Textron’s tax liability and that disclosure “would put Textron at an unfair disadvantage” in disputes regarding its tax liability. 

In its brief the United States argues that the District Court’s determination that Textron’s tax accrual workpapers are protected work product (i) misapplies the Supreme Court’s Arthur Young, 465 U.S. 805 (1984) (holding that accountants’ tax-accrual workpapers were “highly relevant” to an IRS audit and were not protected by an accountant’s work-paper doctrine) decision, (ii) conflicts with the First Circuit’s work-product test set out in Maine, 298 F.3d 60 (1st Cir. 2002)(“documents should be deemed prepared for litigation and within the scope of the [work product rule] if, ‘in light of the nature of the document and the factual situation in the particular case, the document can be fairly said to have been prepared or obtained because of the prospect of litigation’”), and (iii) unnecessarily creates a conflict with the Fifth Circuit’s El Paso, 682 F.2d 530 (5th Cir. 1982), cert. denied, 466 U.S. 944 (1984) (no work-product protection for documents “assembled in the ordinary course of business, or pursuant to public requirements unrelated to litigation”) decision which has held that a company’s tax-accrual workpapers are not protected work product.

Treasury Suggests Congress Cut Us a Break

On February 4, 2008 as part of President Bush's proposed fiscal 2009 budget, Treasury suggested that Congress give tax return preparers a break.  Realizing the potential conflict between the client taxpayer and the preparer the Treasury made the following proposal: “The standard applicable to preparers when taking a position not disclosed on a return would be the substantial authority standard. Because the determination as to whether a transaction has a significant purpose of tax avoidance or evasion is inherently subjective to the taxpayer, the preparer standard applicable to tax shelters would also be substantial authority. However, a preparer would be required to have a reasonable belief that the position would more likely than not be sustained on the merits when taking a position with respect to a transaction determined to have a potential for tax avoidance or evasion to which section 6662A applies. The standard applicable to preparers for disclosed positions would remain at reasonable basis. No penalty would be asserted against a preparer if the preparer has reasonable cause and good faith. The proposal would be effective for returns prepared after January 1, 2008.”