Comm'r

*55 SUPPLEMENTAL OPINION

MARVEL, Judge: This matter is before the Court on petitioners' objection to respondent's proposed Rule 155¹ computations submitted in response to our holdings in Menard, Inc. v. Commissioner, T.C. Memo 2004-207 (Menard I), and Menard, Inc. v. Commissioner, T.C. Memo 2005-3 (Menard *56 II). As discussed in greater detail below, in Menard I we held that petitioners are liable for income tax deficiencies for the taxable year ended (TYE) 1998. In Menard II we denied petitioners' motion for reconsideration.

The *7 issue we must decide is whether, under the equitable recoupment doctrine, petitioners are entitled to an offset against their income tax liabilities for TYE 1998 equal to the amount of so-called hospital insurance taxes that they overpaid pursuant to sections 3101(b) and 3111(b) on the portion of petitioner John R. Menard's compensation recharacterized in Menard I as a disguised dividend.

We adopt the findings of fact set forth in Menard I. For convenience and clarity, we repeat below the facts necessary for the disposition of this matter, and we supplement those findings with additional facts as appropriate.

Menard, Inc. (Menards), was incorporated in Wisconsin in 1962 and is engaged primarily in the retail sale of hardware, building supplies, paint, garden equipment, and similar items. As of the trial date, Menards had approximately 160 stores in nine Midwestern States and was one of the nation's top retail home improvement chains.

John R. Menard (Mr. Menard) served as president and chief executive officer of Menards and has been a controlling shareholder of Menards since its incorporation. During the period in question, Mr. Menard owned approximately 89 percent of Menards's *8 voting and nonvoting stock.

Menards is an accrual basis taxpayer and has a fiscal year ending January 31 for tax and financial reporting purposes. On October 15, 1998, Menards timely filed Form 1120, U.S. Corporation Income Tax Return, for TYE 1998. On October 12, 2001, respondent sent to Menards a notice of deficiency with respect to its TYE 1998. Menards timely petitioned this Court seeking a redetermination of the deficiency.

Mr. Menard is a cash basis taxpayer with a taxable year ending December 31. Between March 30 and April 15, 1999, Mr. Menard timely filed Form 1040, U.S. Individual Income Tax Return, for 1998. On October 12, 2001, respondent sent a separate notice of deficiency to Mr. Menard with respect to *57 1998. Mr. Menard timely petitioned this Court seeking a redetermination of the deficiency.

The two cases were consolidated for trial, briefing, and opinion. Following a trial and the submission of posttrial briefs, we issued our opinion in Menard I holding, among other things, that Menards was not entitled to a business expense deduction for a significant portion of the compensation it paid to Mr. Menard for 1998 because the compensation was unreasonable, was not paid entirely *9 for personal services, and was properly characterized as a disguised dividend to Mr. Menard. Separately, we sustained respondent's determination that Mr. Menard was liable for an income tax deficiency to the extent that Menards's payment of certain expenses on Mr. Menard's behalf was unreasonable and constituted a constructive dividend to Mr. Menard.

After we issued our opinions in Menard I and Menard II, we received and filed respondent's computation for entry of decision pursuant to Rule 155 in each of these consolidated cases. Respondent concluded that (1) Menards owed an income tax deficiency of $ 5,720,334 and a penalty of $ 188,295.60, and (2) Mr. Menard owed an income tax deficiency of $ 921,491 and a penalty of $ 184,298.20. Petitioners filed a notice of objection to respondent's Rule 155 computations in which they alleged that Menards's correct income tax deficiency and penalty amounts were $ 5,523,488.20 and $ 188,295.60, respectively, and that Mr. Menard's correct income tax deficiency and penalty amounts were $ 724,645 and $ 184,298.20, respectively. ^2*10

The parties' deficiency computations for both Menards and Mr. Menard differ by $ 196,845.81, which is the amount of hospital insurance tax (hospital tax) that Mr. Menard and Menards contend they overpaid pursuant to sections 3101(b) and 3111(b), respectively. ^3*11 Petitioners contend that, consistent with our holding in Menard I recharacterizing a portion of the compensation that Menards paid to Mr. Menard as a *58 constructive dividend, they overpaid so much of the hospital tax that they remitted to the Commissioner during 1998 as was attributable to the constructive dividend. Petitioners argue that, under the doctrine of equitable recoupment, they are entitled to offset the amount of their hospital tax overpayments against their respective income tax deficiencies for TYE 1998 and that they have met all of the requirements necessary to establish their equitable recoupment defense. ⁴

Respondent maintains that the Court lacks the authority under the equitable recoupment doctrine to offset petitioners' income tax deficiencies by the amounts of their overpaid hospital taxes because we lack jurisdiction over hospital tax deficiencies and overpayments. Respondent contends that hospital taxes play no role in the determination of a deficiency within the meaning of section 6211 and that neither additional hospital tax liabilities nor hospital tax overpayments are included in a computation for entry of decision because we lack *12 jurisdiction over hospital taxes. According to respondent, applying equitable recoupment in this case "would allow petitioners to slip through a back door to challenge a tax they could not directly petition the Court to review."

Respondent does not dispute the amount by which petitioners contend they overpaid their hospital taxes, nor does respondent dispute that the elements necessary for an equitable recoupment claim are present in this case. ⁵

Neither Menards nor Mr. Menard filed a claim for a refund of the hospital taxes that they overpaid. The period of limitations for filing a refund claim has now expired with respect to both petitioners.

We have not yet entered decisions in these cases, and consequently no decision has become final within the meaning of section 7481.

These cases present an issue of first impression *13 regarding the scope of our authority to apply the doctrine of equitable recoupment. Specifically, we must decide whether the tax that is the subject of a litigant's equitable recoupment defense must be one over which we have deficiency and overpayment jurisdiction under sections 6211 and 6212.

Like other Federal courts, the Tax Court is a court of limited jurisdiction, and it may exercise its jurisdiction only to the extent authorized by Congress. Naftel v. Commissioner, 85 T.C. 527, 529 (1985). Section 7442 expressly provides that the Court and its divisions shall have such jurisdiction as is conferred on them by the Internal Revenue Code and by laws enacted after February 26, 1926. See Adams v. Commissioner, 70 T.C. 446, 447 (1978); Chatterji v. Commissioner, 54 T.C. 1402, 1406 (1970).

Petitioners each received a notice of deficiency, and they invoked our jurisdiction by filing a petition for redetermination of a deficiency under section 6213(a). Section 6214(a) grants us jurisdiction to redetermine the correct amount of a deficiency and to determine whether any additional amounts or any additions to tax should *14 be assessed. Section 6211(a) in relevant part defines the term "deficiency" as the amount by which the tax imposed by subtitle A (sections 1 through 1563) or subtitle B (sections 2001 through 2704), or chapter 41 (sections 4911 and 4912), chapter 42 (sections 4940 through 4963), chapter 43 (sections 4971 through 4980E), or chapter 44 (sections 4981 and 4982) exceeds the amount shown as the tax by the taxpayer on a return. Section 6212(a), which authorizes the Commissioner to issue a notice of deficiency, likewise is limited to a deficiency in respect of any taxes imposed by subtitle A or B or chapter 41, 42, 43, or 44.

Pursuant to section 6512(b)(1), we also have jurisdiction to determine the amount of an overpayment ⁶ of tax in limited *60 circumstances. Our jurisdiction to determine whether there has been an overpayment is limited to the same taxable year or years for which the Commissioner has issued a notice of deficiency and with regard to which the taxpayer has timely filed a petition for redetermination of the deficiency. Sec. 6512(b)(1). In addition, our overpayment jurisdiction is limited to determining an overpayment of income, gift, estate, or excise taxes (and related interest) *15 imposed by chapter 41, 42, 43, or 44. Sec. 6512(b)(1) and (2). Once we have determined that there is no deficiency but that the taxpayer has made an overpayment of tax, or that there is a deficiency but the taxpayer has made an overpayment of such tax, we have jurisdiction to determine the amount of the overpayment and order a refund of the overpayment, or to credit the overpayment against the deficiency, if the requirements of section 6512(b) are satisfied. Sec. 6512(b)(1) and (2).

Petitioners' equitable recoupment defense pertains to hospital tax imposed by the Federal Insurance Contributions Act, codified as chapter 21 (sections 3101-3128). Section 3101(b) imposes a 1.45-percent hospital tax on the wage income of all employees, which the employer must withhold from the employees' wages and pay to the Secretary. See secs. 3102(a), 3501. In addition, section 3111(b) requires employers to pay to the Secretary a corresponding *16 1.45-percent hospital tax on all wages paid to employees. See sec. 3501.

Our deficiency and overpayment jurisdiction (described above) does not extend to hospital tax imposed under sections 3101 and 3111. Nevertheless, Congress has recently expanded our jurisdiction with respect to employment tax. In 1997, Congress passed the Taxpayer Relief Act of 1997, Pub. L. 105-34, sec. 1454(a), 111 Stat. 1055, adding section 7436, which confers jurisdiction on the Court to review certain determinations made by the Commissioner regarding employment status (worker classification) and the proper *61 amount of employment tax ⁷ under such determinations.⁸Charlotte's Office Boutique, Inc. v. Commissioner, 121 T.C. 89, 102-103 (2003), affd. 425 F.3d 1203 (9th Cir. 2005); Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 267-268 (2001). However, our jurisdiction under section 7436(a) depends upon, and only arises after, a determination of worker classification by the Secretary. Charlotte's Office Boutique, Inc. v. Commissioner, supra at 103. The Secretary has not made such a determination in this case, and therefore we do not have original jurisdiction under section 7436 over petitioners' claims for hospital *17 tax offsets against their income tax deficiencies. ^9*18

Ordinarily, a taxpayer asserting an overpayment of hospital tax must file a claim for refund or credit with the Secretary. See secs. 6402(a), 6413(a); sec. 31.6402(a)-1, Employment Tax Regs. If the Secretary denies the taxpayer's claim for refund or credit, the taxpayer may file suit in Federal District Court or the Court of Federal Claims to recover any tax alleged to have been erroneously or illegally assessed or collected. Sec. 7422(a); 28 U.S.C. sec. 1346(a) (2000). In addition, any claim for a refund or credit must be made within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires later. Sec. 6511(a). No credit or refund shall be allowed or made after the period of limitations for filing such a claim expires. Sec. 6511(b)(1).

The doctrine of equitable recoupment is a judicially created doctrine that, under certain circumstances, allows a litigant to avoid the bar of an expired statutory limitation period. United States v. Dalm, 494 U.S. 596, 605, 110 S. Ct. 1361, 108 L. Ed. 2d 548 (1990); Bull v. United States, 295 U.S. 247, 262, 55 S. Ct. 695, 79 L. Ed. 1421, 81 Ct. Cl. 974, 1935-1 C.B. 310 (1935). *19 The doctrine prevents an inequitable windfall to a taxpayer or to the Government that would otherwise result from the inconsistent tax treatment of a single transaction, item, or event affecting the same taxpayer or a sufficiently related taxpayer. Estate of Mueller v. Commissioner, 101 T.C. 551, 552 (1993) (Mueller II); ^10*20 see also United States v. Dalm, supra at 605-606 n.5; Bull v. United States, supra.Equitable recoupment operates as a defense that may be asserted by a taxpayer to reduce the Commissioner's timely claim of a deficiency, or by the Commissioner to reduce the taxpayer's timely claim for a refund. O'Brien v. United States, 766 F.2d 1038, 1049 (7th Cir. 1985); Estate of Mueller v. Commissioner, supra,at 552; Estate of Orenstein v. Commissioner, T.C. Memo. 2000-150. When applied for the benefit of a taxpayer, the equitable recoupment doctrine allows a taxpayer to recoup the amount of a time-barred tax overpayment by allowing the overpayment to be applied as an offset against a deficiency if certain requirements are met. Bull v. United States, supra at 259-263; Crop Assocs.-1986 v. Commissioner, 113 T.C. 198, 200 (1999).

As a general rule, the party claiming the benefit of an equitable recoupment defense must establish that it applies. See Estate of Mueller v. Commissioner, supra at 556. In order to establish that equitable recoupment applies, a party must prove the following elements: (1) The overpayment or deficiency for which recoupment is sought by way of offset is *63 barred by an expired period of limitation; (2) the time-barred overpayment or deficiency arose out of the same transaction, *21 item, or taxable event as the overpayment or deficiency before the Court; (3) the transaction, item, or taxable event has been inconsistently subjected to two taxes; and (4) if the transaction, item, or taxable event involves two or more taxpayers, there is sufficient identity of interest between the taxpayers subject to the two taxes that the taxpayers should be treated as one. United States v. Dalm, supra at 604-605; Estate of Branson v. Commissioner, 113 T.C. 6, 15 (1999), affd. 264 F.3d 904 (9th Cir. 2001); Estate of Orenstein v. Commissioner, supra.

We addressed the question of our authority to consider a claim of equitable recoupment in Mueller II. In that case, we held that our authority to apply equitable recoupment was inherent in the jurisdiction conferred on us by statute to redetermine a tax deficiency. Estate of Mueller v. Commissioner, supra at 556. We concluded that exercising jurisdiction over the taxpayer's equitable recoupment claim did not require us to exercise jurisdiction that was beyond the scope of the taxpayer's primary claim for redetermination of the deficiency, explaining that "When a taxpayer raises *22 an affirmative defense to a deficiency determination, we need no additional source of jurisdiction to render a decision with respect to the defense. It is part of the entire action over which we have jurisdiction." Id.

In several cases following Mueller II, we reaffirmed our jurisdiction to consider equitable recoupment as an affirmative defense in resolving a deficiency proceeding. Estate of Branson v. Commissioner, supra; Estate of Bartels v. Commissioner, 106 T.C. 430 (1996); Estate of Orenstein v. Commissioner, supra.

The Courts of Appeals that considered whether this Court may entertain an equitable recoupment claim split on the question. In Estate of Mueller v. Commissioner, 153 F.3d 302 (6th Cir. 1998), affg. on other grounds 107 T.C. 189 (1996), the Court of Appeals held that this Court lacked jurisdiction to consider a claim of equitable recoupment. In contrast, in *64 Estate of Branson v. Commissioner, 264 F.3d 904 (9th Cir. 2001), the Court of Appeals reached the opposite conclusion.

For present purposes, any uncertainty regarding the Court's authority to apply the equitable recoupment doctrine was eliminated with the enactment of the Pension Protection Act of 2006 (PPA), Pub. L. 109-280, sec. 858(a), 120 Stat. 1020, *23 which amended section 6214(b) by adding a second sentence to the provision. Section 6214(b) now provides as follows:

SEC. 6214(b). Jurisdiction Over Other Years and Quarters. -- The Tax Court in redetermining a deficiency of income tax for any taxable year or of gift tax for any calendar year or calendar quarter shall consider such facts with relation to the taxes for other years or calendar quarters as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other year or calendar quarter has been overpaid or underpaid. Notwithstanding the preceding sentence, the Tax Court may apply the doctrine of equitable recoupment to the same extent that it is available in civil tax cases before the district courts of the United States and the United States Court of Federal Claims.