## Facts

- The IRS determined PG&E had overpaid its 1982 federal income taxes and issued a refund in 1988 with statutory interest under 26 U.S.C. § 6611.
- The IRS miscalculated and overpaid PG&E more than $3.3 million in refund interest; neither party noticed at the time.
- PG&E later filed additional refund claims for tax year 1982.
- While processing the later claims, the IRS discovered the prior interest overpayment and, in 1992, administratively offset the earlier overpayment against the later refund and paid only the net amount.
- By the time PG&E challenged the offset, the two-year limitations period for the government to bring an erroneous-refund suit under 26 U.S.C. §§ 7405 and 6532(b) had expired.
- PG&E sued in the Court of Federal Claims seeking repayment of the offset amount and additional statutory interest, arguing the time bar on an affirmative erroneous-refund suit also barred any offset.

## Issues

1. Whether the United States may administratively offset an earlier erroneous statutory-interest overpayment against a taxpayer’s later refund claim even though the limitations period for an erroneous-refund suit under 26 U.S.C. § 6532(b) has expired.
2. Whether the statute of limitations governing affirmative erroneous-refund suits bars the government from asserting the overpayment defensively through setoff or equitable recoupment in refund litigation.
3. Whether permitting such a defensive offset is consistent with the jurisdictional limits and waiver of sovereign immunity applicable to tax refund suits in the Court of Federal Claims.

## Decision

- The Federal Circuit affirmed summary judgment for the United States.
- The court held the government could offset the earlier erroneous interest overpayment against PG&E’s later refund claim notwithstanding the expired limitations period for an affirmative erroneous-refund suit.
- The court held § 6532(b) limits the timing of affirmative suits under § 7405 but does not bar defensive setoff or equitable recoupment in response to a taxpayer’s refund claim.
- The court rejected PG&E’s argument that the statutory erroneous-refund scheme implicitly displaced the government’s common-law setoff rights.
- Because the offset was permissible, PG&E was not entitled to recover the offset amount or additional statutory interest.

## Legal Principles

- A statute of limitations barring an affirmative government action to recover an erroneous payment does not, without clear congressional direction, extinguish the government’s ability to assert the same matter defensively as setoff or recoupment.
- The United States retains a longstanding common-law right to set off debts owed to it against amounts it owes a claimant, unless Congress clearly abrogates that right.
- In a tax refund suit, the government may defend by showing that, accounting for relevant payments and liabilities, the taxpayer has no net overpayment; allowing defensive setoff does not expand the waiver of sovereign immunity or the court’s jurisdiction.
- Sections 7405 and 6532(b) provide a cause of action and time limit for affirmative erroneous-refund suits, but do not, by implication, bar offsets asserted defensively in refund litigation.

## Conclusion

The Federal Circuit held that the IRS could reduce PG&E’s later 1982 refund by offsetting an earlier erroneous overpayment of refund interest, even though the government could no longer sue affirmatively to recover that overpayment under the erroneous-refund statute of limitations.


Pac. Gas & Elec. Co. v. United States, 417 F.3d 1375 (Fed. Cir. 2005)