that, under the rule of U.S. v. Jefferson Electric Co., supra, not only had it been rendered upon an erroneous theory but that the court was without jurisdiction, and declined to pay it. Negotiations followed in the course of which the plaintiff satisfied the Commissioner as to how much of the tax it had passed on to its customers, and agreed that that amount would be deducted from the judgment. This controversy was not settled until 1935, and then the judgment, so reduced, was paid.
I do not think it necessary to pass upon the defendant's present contention that the judgment was merely what it calls, a "purported" judgment -- no judgment at all, not a final or binding adjudication. The fact remains that, after its rendition, the Commissioner still contested, in good faith, the plaintiff's right to recover the full amount of the judgment and the plaintiff, for purposes of settlement and to obtain its money, apparently conceded at least that the Commissioner's position had some substantial merit, for it reduced its claim accordingly. Under these circumstances I think that the Government's contention is correct that the judgment lacked that absolute quality which would justify its accrual in any year prior to the final settlement of all controverted questions relating to the claim and that was the year in which payment was made.
Third. I think that the plaintiff is entitled to recoup against the deficiency assessment involved in this suit, the amount of excise tax illegally collected from it between 1919 and 1922.
Equitable recoupment is a rule of the law which diminishes the right of a party invoking legal process to recover a debt, to the extent that he holds money or property of his debtor, to which he has no moral right. Ordinarily a defensive remedy going only to mitigation of damages, it will be applied in favor of a taxpayer who has brought suit to recover an alleged overpayment of tax exacted by summary procedure or the threat of it. Bull v. U.S., 295 U.S. 247, 55 S. Ct. 695, 79 L. Ed. 1421.
In this case the government has money which it collected illegally from this taxpayer, against its protest, and which it has no right to retain. Only the statute of limitations stands in the way of the taxpayer's right to recover and the statute of limitation is not exactly a moral value. The rights and wrongs of the situation might be more complicated if the taxpayer's main contention was to be sustained, because then it would be retaining a tax benefit which only an erroneous guess as to the law by the Commissioner put into its pocket and of which only the statute of limitations prevented the collection; but as it is, apart from technical considerations, the equities are so plain as to admit of no disagreement among just and reasonable men. Every consideration of fair dealing demands that the taxpayer be credited as against its present liability with the taxes which it has been illegally compelled to pay, and I think that the decisions of the courts fully justify such a solution.
The defendant contends that the plaintiff can have no right to recoupment in this case for two reasons. The first is that recoupment lies only in respect of a claim arising from the same transaction as that which is the basis of the adverse claim. That the two transactons must bear some reasonably definite relation to each other is recognized in all the decisions. Here the question is whether the illegal assessments of excise taxes for the years 1919 to 1922 bear a sufficiently close relation to the subject matter of this suit, namely, the refund of illegal assessments and collections of taxes imposed under the same statute upon articles of the same description in subsequent years, to allow the application of the doctrine. The case of Dixie Margarine Co. v. Commissioner, 6 Cir., 115 F.2d 445, 447, is on all fours with the present case and rules that it does. The court, in that case, said "the claim for refund and the deficiency assessment had a common origin, namely, the erroneous application of the Oleomargarine Act to petitioner's product, and petitioner's claim is therefore available in recoupment." Here the erroneous application of the Revenue Act to the plaintiff's product (storage batteries) gave rise to overpayments of 1919 to 1922, the refunds for 1922 to 1926 and the deficiency assessment for 1935 when the illegal exactions were restored. Dixie Margarine Co. v. Commissioner, supra, is a ruling by the Circuit Court of Appeals for the Sixth Circuit and, while not absolutely binding upon this court, ought to be followed unless it appears to be clearly erroneous. Far from that, it appears to be directly in line with the trend shown by the decisions of the Supreme Court in Lewis v. Reynolds, 284 U.S. 281, 52 S. Ct. 145, 76 L. Ed. 293, Bull v. U.S., supra, and Stone v. White, 301 U.S. 532, 57 S. Ct. 851, 81 L. Ed. 1265, each of which marked a broadening of the scope of the doctrine and a step away from technical limitations upon it.
The other ground upon which the defendant denies the applicability of the doctrine of recoupment is the holding of McEachern v. Rose, 302 U.S. 56, 58 S. Ct. 84, 82 L. Ed. 46 to the effect that the limitation sections of the Revenue Act of 1928 preclude it. In that case the applicable sections were 607 and 609(a), 26 U.S.C.A. Int.Rev.Acts, pages 459, 460, in the present case, 609(b), but the distinction is immaterial.
Since the plaintiff can exercise the right of recoupment if no statutory provisions preventing it are applicable ( American Light & Traction Co. v. Harrison, 7 Cir., 142 F.2d 639), and since McEachern v. Rose, supra, holds that the limitation provisions of the Revenue Act of 1928, so far as applicable, do impose a bar, the only question is whether those provisions are retroactive, because, in the present case, the overpayments were made long before the Act of 1928. The precise point was decided by the District Court in West Virginia Pulp and Paper Co. v. McElligott, 40 F.Supp. 765, 771. The court said: "A consideration of this policy seems to indicate that Sections 607 and 609(a) should not be construed to have the retroactive effect of taking away the equitable defense of recoupment as applied to claims for refund of taxes assessed and paid before the enactment of those sections, which defense would otherwise be available." The defendant says simply that the West Virginia Pulp and Paper case is wrongly decided, and that both its rule and the plaintiff's position in the present case are clearly erroneous in that both are based on the proposition that recoupment is a substantive right whereas the defendant apparently considers it merely a procedural device. However, I think that it is a substantive right and I believe I may invoke the authority of Mr. Justice Roberts who said in Bull v. U.S., supra [295 U.S. 247, 55 S. Ct. 701, 79 L. Ed. 1421]: "This procedural requirement does not obliterate his substantial right to rely on his cross-demand for credit of the amount which, if the United States had sued him for income tax, he could have recouped against his liability on that score." At any rate I agree that the Revenue Act of 1928 should not be construed retroactively and does not take away the right of recoupment which the plaintiff in this case otherwise has. In his dissenting opinion in American Light & Traction Co. v. Harrison, 7 Cir., 142 F.2d 639, 645, Judge Evans came to the conclusion that the Section 820(f) of the Revenue Act of 1938, 26 U.S.C.A. Int.Rev.Code, § 3801(f), "No adjustment shall be made under this section in respect of any taxable year beginning prior to January 1, 1932." had not enlarged or lessened any right which accrued before January 1, 1932, and it will be noted as to this point he was not dissenting to anything said in the majority opinion. As to this, I am also in accord.
The plaintiff concedes that, if it is accorded recoupment, the government is entitled to a corresponding right to recoup the amount of income taxes and interest saved by the plaintiff during the years 1922-1926 together with the benefit received by the plaintiff in the saving of income taxes and interest during the 1919-1922 period. However, after allowing this and striking a balance, the government will still have in its hands more than the amount of taxes and interest which the plaintiff is endeavoring to recover in this suit.
Judgment may be entered for the plaintiff in the amount claimed.
Findings and Conclusions
I adopt, as special findings of fact, the facts in the stipulation or "Agreed Statement of Facts" filed by the parties.
I affirm all of the plaintiff's requests for findings of fact, all of which, except Nos. 4, 20, 21, 22 and 23, are based upon the stipulation.
I affirm all the defendant's requests for findings of fact except No. 9 which is denied as stated.
I affirm the plaintiff's requests for conclusions of law Nos. 5, 6, 7 and deny Nos. 1, 2, 3 and 4.
I affirm defendant's requests for conclusions of law No. 1 and deny Nos. 2 and 3.