case brief

Travis A. Wise
Case Brief
 
IES Industries, Inc. (“IES”) v. U.S.
349 F.3d 574, 2003
 
Procedural History:  Appeal from U.S. District Court for the Northern District of Iowa
 
Disposition:  Affirmed
 
Facts
 

·       In 1991 and 1992, IES recognized capital losses and sought to offset the gains earned in 1989 and 1990, claimed a foreign tax credit, and deducted other expenses in connection with the trades.
·       IRS challenged the losses and carrybacks and foreign tax credit as resulting from a sham transaction.
·       IES paid the taxes and filed suit for refund in District Court.  Court agreed with IRS that transactions were a sham; on appeal, court determined trades were not a sham.
 
Issue
 
Parties were unable to agree on a judgment for tax year 1992.  IRS believed it should be able to offset the refunds owed to IES for 1989, 1990, and 1992 with taxes owed for 1991 and 1992 related to the transaction in question.  IES claimed that the appellate court decision did not permit the district court to allow for the offset; that the Federal Rules of Civil Procedure (FRCP) did not allow the issue to be raised; and that the statute of limitations blocks the offset.
 
Rule
 

·       The appellate court, in its first review of the case, did not address the issue of offset and equitable recoupment. 
·       FRCP Rule 15(b) states that an issue not raised in the pleadings, but tried by express or implied consent of the parties, shall be treated as having been raised in the pleadings.
·       The court is permitted to disregard the statute of limitations in limited situations when two otherwise isolated transactions are viewed as a whole.  Lewis v. Reynolds held that although the statute of limitations may have barred an assessment and collection, it does not obliterate the right to retain payments already received that do not exceed the amount which might have been properly assessed; Stone v. White held that the court does have the ability to disregard a statute of limitations in order to further the public interest; and Bull v. U.S. held that recoupment is a defense arising out of a transaction upon which the plaintiff’s action is grounded.
 
Application
 
·       The appellate court, in its first review of the case, did not address the issue of offset and equitable recoupment.  Therefore, the district court did not violate the appellate court’s holding by allowing the IRS to offset the refund with additional taxes payable.
·       FRCP Rule 15(b) treats an issue as raised in the pleadings if tried by express or implied consent of the parties.  The court held that the IRS did not knowingly or intelligently relinquish the right to asset the offset argument, and therefore did not consent to trying the issue.  Further, the court held that IES was likely not surprised by the IRS raising the issue.
·       The court allowed the IRS to recoup otherwise barred taxes from IES’s overpayment because the court viewed the transaction giving rise to the tax liability as not separate and distinct from the transaction giving rise to the overpayment.  The court considered each trade as a whole, and therefore allowed the IRS to recoup the taxes owed with the later overpayment.
 
Conclusion
 
The court ruled that the IRS could offset the refunds owed to IES for 1989, 1990, and 1992 with taxes owed for 1991 and 1992 related to the transaction in question.

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