## Facts

- Menard, Inc. (MI) paid substantial compensation to its president, CEO, and majority shareholder, John R. Menard.
- In prior deficiency litigation, the Tax Court recharacterized part of the compensation as unreasonable and therefore a disguised dividend, disallowing MI’s deduction and increasing Menard’s income.
- MI and Menard had paid hospital insurance (Medicare) taxes on the compensation amounts later recharacterized as dividends.
- After the merits decisions, the Commissioner submitted Rule 155 computations that did not credit or offset the previously paid Medicare taxes.
- MI and Menard objected, seeking equitable recoupment to offset their income tax deficiencies by the Medicare taxes paid on amounts no longer treated as wages.
- The refund-claim limitations period for those Medicare taxes had expired, and no refund claims were filed.
- While the case remained nonfinal, Congress amended I.R.C. § 6214(b) to expressly authorize the Tax Court to apply equitable recoupment.

## Issues

1. Whether the Tax Court, while redetermining an income tax deficiency, may apply equitable recoupment to offset that deficiency with a time-barred overpayment of hospital insurance (Medicare) taxes.
2. Whether applying equitable recoupment is permissible even though the Tax Court lacks original jurisdiction to determine deficiencies or overpayments of hospital insurance taxes.

## Decision

- The Tax Court held it could apply equitable recoupment in a deficiency case even if the offset relates to a tax over which the court lacks independent subject-matter jurisdiction.
- The court concluded the elements of equitable recoupment were satisfied and allowed an offset against MI’s and Menard’s income tax deficiencies equal to the Medicare taxes paid on the recharacterized amounts.
- The court sustained the taxpayers’ objections to the Commissioner’s Rule 155 computations and directed recomputation to reflect the offset.

## Legal Principles

- Under I.R.C. § 6214(b) (as amended effective for nonfinal cases), the Tax Court may apply equitable recoupment to the same extent as federal district courts and the Court of Federal Claims in civil tax cases.
- Equitable recoupment permits a time-barred overpayment to be asserted defensively as an offset against a related deficiency, rather than as an affirmative refund claim.
- The doctrine requires: (1) a time-barred overpayment asserted as an offset; (2) the overpayment and deficiency arise from the same transaction, item, or taxable event; (3) inconsistent taxation of that transaction, item, or event; and (4) if different taxpayers are involved, a sufficient identity of interest to treat them as one for this purpose.
- Applying equitable recoupment in a deficiency redetermination is ancillary to existing deficiency jurisdiction and does not create freestanding jurisdiction to adjudicate the barred tax liability.

## Conclusion

The Tax Court ruled that, in a properly before-the-court income tax deficiency case, it may use equitable recoupment to reduce the deficiency by time-barred Medicare tax overpayments arising from the same compensation payments that were recharacterized as dividends, and it ordered Rule 155 recomputations to include that offset.


Menard, Inc. v. Commissioner, 130 T.C. 54 (T.C. 2008)