                      107 T.C. No. 13



                UNITED STATES TAX COURT



         ESTATE OF BESSIE I. MUELLER, DECEASED,
JOHN S. MUELLER, PERSONAL REPRESENTATIVE, Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 2733-90.                     Filed November 5, 1996.



     R determined a deficiency in P's estate tax
liability. P claims that it is entitled to equitable
recoupment of previously paid income tax, the refund of
which is barred by the statute of limitations. In
Estate of Mueller v. Commissioner, 101 T.C. 551 (1993),
we held that we have jurisdiction to consider claims of
equitable recoupment.

     As a result of our valuation of stock includable
in the estate, see Estate of Mueller v. Commissioner,
T.C. Memo. 1992-284, it is now apparent that there is
no deficiency in estate tax; rather, P is entitled to
recover an overpayment of estate tax, regardless of
equitable recoupment. Under these circumstances, any
application of equitable recoupment would increase the
amount that P is entitled to recover as an overpayment.
                               - 2 -

          Held: Equitable recoupment is restricted to use
     as a defense against an otherwise valid claim. For
     purposes of equitable recoupment, the notice of
     deficiency is considered to be R's claim for additional
     estate tax. See Bull v. United States, 295 U.S. 247
     (1935). Once it is determined that R has no valid
     claim for additional tax, the defense of equitable
     recoupment has no application. Equitable recoupment
     cannot be used to increase the amount of an overpayment
     that P is entitled to recover.


     Stevan Uzelac, Michael A. Indenbaum, and Paul L. Winter,

for petitioner.

     Thomas M. Rath and Trevor T. Wetherington, for respondent.



                              OPINION


     RUWE, Judge:*   Respondent determined a deficiency of

$1,985,624 in petitioner's Federal estate tax.    Respondent's

deficiency determination was primarily based on her assertion

that the date-of-death value of shares of stock in the Mueller

Co. was $2,150 per share, as opposed to $1,505 per share as

reported on the estate tax return.     The amount of the deficiency

determined by respondent was the result of this increase in value

and other adjustments not in issue, including respondent's

allowance of a credit for tax on prior transfers in the amount of

$1,152,649, that had not been claimed by petitioner on its estate




     *
      This case was reassigned to Judge Robert P. Ruwe by order
of the Chief Judge.
                               - 3 -

tax return.   Petitioner petitioned this Court for a

redetermination.1

     Petitioner subsequently filed an amended petition alleging

that "The Commissioner erred in determining said Deficiency by

disallowing recoupment against such [estate] tax amount for the

income tax paid by the Bessie I. Mueller Trust * * * on capital

gains realized from the post-death sale of * * * Mueller Company

common stock includable in the Decedent's gross estate."    The

Bessie I. Mueller Administration Trust (the Trust) is the

residuary legatee of decedent's estate.   After decedent's death,

the Trust sold shares of Mueller Co. stock that were included in

decedent's gross estate.   On its income tax return, the Trust

reported gain on the sale using a basis of $1,500 per share.2




     1
      Decedent Bessie I. Mueller resided and was domiciled in
Port Huron, Michigan, at the time of her death, and her will was
admitted to probate by the Probate Court of St. Clair County,
Michigan. John S. Mueller, the personal representative in this
case of decedent's estate and one of the two trustees of the
Administration Trust, was a resident of Naples, Florida, when he
filed the petition in this case. The estate’s other personal
representative and the other trustee of the Administration Trust
is Milton W. Bush, Sr., an attorney who resides in Port Huron,
Michigan. The Michigan National Bank, which was engaged by the
two trustees as their agent upon the death of decedent, has its
principal corporate office in Michigan. Throughout the time
relevant to this case, the Administration Trust has been
administered in Michigan.
     2
      The record does not explain why the Trust used a basis that
was $5 per share less than the amount petitioner reported as the
fair market value of the shares in the estate tax return.
                               - 4 -

The Trust's basis in the stock is controlled by the value of the

stock at decedent's date of death.     See sec. 1014(a)(1).3

     In Estate of Mueller v. Commissioner, T.C. Memo. 1992-284

(Mueller I), we found that the date-of-death value of the Mueller

Co. stock was $1,700 per share, as opposed to $1,505 per share as

reported on petitioner's estate tax return or $2,150 as

determined by respondent in the notice of deficiency.     As a

result, it is now clear that the Trust understated its basis and

overstated its gain on the sale of Mueller Co. stock and,

therefore, overpaid its income tax.     However, the statute of

limitations bars refund of the Trust's overpayment of income tax.

     Respondent moved to dismiss petitioner's claim for

recoupment on the ground that we lacked jurisdiction to consider

equitable recoupment.   In Estate of Mueller v. Commissioner, 101

T.C. 551 (1993) (Mueller II), we held that this Court is

authorized to entertain the affirmative defense of equitable

recoupment in an action for redetermination of a deficiency and

denied respondent's jurisdictional motion.     Id. at 561.     However,

we made no findings with respect to whether petitioner satisfied

the requirements for applying equitable recoupment in this case.

     It subsequently became clear that our opinion in Mueller I,

which increased decedent's taxable estate by less than the amount

     3
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 5 -

determined in the notice of deficiency, combined with

respondent's allowance in the notice of deficiency of the credit

for tax on prior transfers, will result in a decision that there

is no deficiency in petitioner's estate tax.4   Indeed, petitioner

is entitled to recover an overpayment of its estate tax,

regardless of whether or not equitable recoupment applies in this

case.5

     The threshold issue we must address is whether petitioner

may use equitable recoupment against respondent, where respondent

has no valid claim for additional estate tax against which

petitioner needs to defend.

     Pursuant to the doctrine of equitable recoupment, "a party

litigating a tax claim in a timely proceeding may, in that

proceeding, seek recoupment of a related, and inconsistent, but

now time-barred tax claim relating to the same transaction."

United States v. Dalm, 494 U.S. 596, 608 (1990).     Equitable

recoupment can be used as a defense by both taxpayers and the

Government.   Stone v. White, 301 U.S. 532 (1937).    While

recoupment claims are generally not barred by the statute of

     4
      This credit, which was not claimed on decedent's estate tax
return, was for property received by decedent from the estate of
her stepson Robert E. Mueller. Allowance of this previously
unclaimed credit was appropriate in determining the amount of the
deficiency. See sec. 6211.
     5
      Both parties agree that there is no estate tax deficiency
and that petitioner is entitled to a decision that it has
overpaid its estate tax, regardless of any effect that the
doctrine of equitable recoupment might have.
                                 - 6 -

limitations if the main action is timely, use of recoupment based

on an otherwise time-barred claim is limited to defending against

the claim in the main action.6    Reiter v. Cooper, 507 U.S. 258,

264 (1993); United States v. Dalm, supra at 605; Stone v. White,

supra at 538-539; Bull v. United States, 295 U.S. 247, 262-263

(1935); United States v. Forma, 42 F.3d 759, 765 (2d Cir. 1994);7

In re Greenstreet, Inc., 209 F.2d 660, 663 (7th Cir. 1954).8

     6
      The term "main action" is used to denote the timely claim
as opposed to the time-barred claim upon which the recoupment
defense is based. See Reiter v. Cooper, 507 U.S. 258, 264
(1993); United States v. Dalm, 494 U.S. 596, 605 (1990); Stone v.
White, 301 U.S. 532, 539 (1937); Bull v. United States, 295 U.S.
247, 262 (1935); United States v. Forma, 42 F.3d 759, 765 (2d
Cir. 1994).
     7
      After reviewing cases involving recoupment, the Court of
Appeals for the Second Circuit stated:


     All of these cases conclude that "a party sued by the
     United States may recoup damages * * * so as to reduce
     or defeat the government's claim * * * though no
     affirmative judgment * * * can be rendered against the
     United States." In re Greenstreet, 209 F.2d at 663.
     [United States v. Forma, supra at 765.]
     8
      With respect to the limited defensive nature of recoupment,
the Court of Appeals for the Seventh Circuit stated:


     the government concedes that a party sued by the United
     States may recoup damages arising out of the same
     transaction, or where authorized, set off other claims,
     so as to reduce or defeat the government's claim. That
     this is a correct conception of the law is apparent
     from United States v. United States Fidelity & Guaranty
     Co., 309 U.S. 506, at page 511 * * *; Bull v. United
     States, 295 U.S. 247, at page 262 * * *; United States
     v. Ringgold, 8 Pet. 150, 163-164 * * *, though no
     affirmative judgment over and above the amount of its
                                                   (continued...)
                                - 7 -

     Petitioner acknowledges that equitable recoupment is limited

to defensive use.    However, petitioner argues that it should be

allowed to use equitable recoupment to defend against the

additional tax that would have been due as a result of our

valuation of decedent's stock, assuming that respondent had not

allowed the credit for prior transfers in the notice of

deficiency.    Petitioner would have us apply recoupment against a

hypothetical tax liability on a transaction-by-transaction basis,

regardless of whether there was a valid claim for additional tax

liability against which to defend.      On brief, petitioner

describes this as an issue of first impression.

     Respondent takes the position that equitable recoupment can

be used by a taxpayer only as a defensive measure to reduce or

eliminate a taxpayer's actual liability for additional tax.

Respondent argues that once it is clear that the taxpayer has no

additional tax liability, there is no valid claim against which

to defend.    Respondent contends that to allow equitable

recoupment of time-barred taxes to increase the overpayment that

is already due petitioner is the same as permitting petitioner

affirmatively to collect the time-barred overpayment of tax.

     Respondent's position finds support in Mueller II where we

stated:

     8
      (...continued)
     claim can be rendered against the United States, United
     States v. Shaw, 309 U.S. 495 * * * [In re Greenstreet,
     Inc., 209 F.2d 660, 663 (7th Cir. 1954).]
                              - 8 -


     the party asserting equitable recoupment may not
     affirmatively collect the time-barred underpayment or
     overpayment of tax. Equitable recoupment "operates
     only to reduce a taxpayer's timely claim for a refund
     or to reduce the government's timely claim of
     deficiency". O'Brien v. United States, 766 F.2d 1038,
     1049 (7th Cir. 1985). [Estate of Mueller v.
     Commissioner, 101 T.C. at 552.]


The opinion in O'Brien v. United States, 766 F.2d 1038, 1049 (7th

Cir. 1985), also supports respondent's position that equitable

recoupment may be used only as a defense against the additional

tax that would otherwise be due:


     Recoupment * * * will permit a taxpayer to recoup an
     erroneously paid tax, the refund of which is time-
     barred, against a timely and correctly asserted
     deficiency by the government. The doctrine thus
     operates only to reduce * * * the government's timely
     claim of deficiency; it does not allow the collection
     of the barred tax itself. In summary, the doctrine
     requires some validly asserted deficiency or refund
     against which the asserting party desires to recoup a
     time-barred refund or deficiency.

              *     *     *        *   *    *     *

          Attempts by taxpayers to utilize the doctrine to
     revive an untimely affirmative refund claim, as opposed
     to offset a timely government claim of deficiency with
     a barred claim of the taxpayer, have been uniformly
     rejected. * * * [Id. at 1049; citation omitted.]


Likewise, in Brigham v. United States, 200 Ct. Cl. 68, 80-81, 470

F.2d 571, 577 (1972), the court explained the function of

equitable recoupment as follows:


     When its benefits are sought by the taxpayer, the
     function of the doctrine is to allow the taxpayer to
                               - 9 -

     reduce the amount of a deficiency recoverable by the
     Government by the amount of an otherwise barred
     overpayment of the taxpayer. * * *


     Petitioner correctly points out that none of these cases,

nor any others relied upon by respondent, specifically address

the situation that confronts us; i.e., whether equitable

recoupment applies where, in the main action, the Court finds

that there is an increase in a taxable item, but because of

another adjustment in the main action, which is in the taxpayer's

favor (the allowance of the credit for prior transfers), there is

no additional tax owed to the Government.   Further examination of

the origin and nature of equitable recoupment is, therefore,

appropriate.

     The doctrine of equitable recoupment in tax cases was first

articulated in Bull v. United States, supra.   The Commissioner

had determined a deficiency in estate tax, which the estate paid.

Thereafter, the Commissioner inconsistently determined that there

was a deficiency in the income tax liability of the estate based

on the same item.   The taxpayer paid the income tax deficiency

and brought suit for refund.   It was ultimately determined that

the additional income tax liability, as determined by the

Commissioner, was correct, but that the additional estate tax

liability determined by the Commissioner based on the same item,

was incorrect.   The problem was that the additional estate tax
                                - 10 -

had already been paid, and the statute of limitations barred any

refund of the estate tax.

     While no refund action could be brought for recovery of the

estate tax, the Supreme Court recognized that if the taxpayer had

been defending against a lawsuit by the Government for the

additional income tax, the taxpayer would have been permitted, by

the doctrine of recoupment,9 to raise time-barred claims arising

out of the same transaction as a defense to the Government's

suit.     But the taxpayer had filed the refund suit and was the

plaintiff.     The Government had already collected the disputed

income tax and was seeking no further relief against which the

taxpayer had to defend.     The Supreme Court, nevertheless,

recognized that it was the Government that had initiated the

controversy by making its income tax deficiency determination and

that the taxpayer, although technically the plaintiff, was, in

reality, defending against the Government's determination.10       The

Supreme Court therefore fashioned the doctrine of equitable

recoupment to allow the taxpayer to defend against the




     9
      Recoupment has been described as "the setting off against
asserted liability of a counterclaim arising out of the same
transaction. Recoupment claims are generally not barred by a
statute of limitations so long as the main action is timely."
Reiter v. Cooper, 507 U.S. at 264.
     10
      See United States v. Dalm, 494 U.S. at 605, stating that
in Bull v. United States, supra, "the proceeding between the
executor and the Government was in substance an attempt by the
Government to recover a debt from the estate."
                             - 11 -

Government's claim for additional taxes.   The Supreme Court

explained this as follows:


     If the claim for income tax deficiency had been the
     subject of a suit [by the Government], any counter
     demand for recoupment of the overpayment of estate tax
     could have been asserted by way of defense and credit
     obtained notwithstanding the statute of limitations had
     barred an independent suit against the Government
     therefor. This is because recoupment is in the nature
     of a defense arising out of some feature of the
     transaction upon which the plaintiff's action is
     grounded.   Such a defense is never barred by the
     statute of limitations so long as the main action
     itself is timely.

          The circumstance that both claims, the one for
     estate tax and the other for income tax, were
     prosecuted to judgment and execution in summary form
     does not obscure the fact that in substance the
     proceedings were actions to collect debts alleged to be
     due the United States. It is immaterial that in the
     second case, owing to the summary nature of the remedy,
     the taxpayer was required to pay the tax and afterwards
     seek refundment. 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. [Bull v.
     United States, 295 U.S. at 262-263; fn. ref. omitted.]


     In Bull v. United States, supra, and United States v. Dalm,

494 U.S. at 602-605, the Supreme Court made it clear that the

purpose of "equitable recoupment" was to replicate the role that

"recoupment" would have played had the Government actually

brought suit to collect the additional tax.   It is instructive

then to look at how recoupment would have applied if the

Government had brought suit to collect the additional estate tax

liability that it claimed as a deficiency in the instant case.
                               - 12 -

The Government would have brought suit in the District Court

against the taxpayer for the amount of additional estate tax that

it claimed--$1,985,624.   Assuming that the District Court found a

$1,700 per share value for the stock, as opposed to the $2,150

alleged by the Government, there would be a judgment that the

taxpayer owed no tax debt to the Government.11   As a result, the

Government would totally lose its claim as plaintiff.   Once the

Government's claim for additional tax was shown to be meritless,

the purely defensive use of recoupment would not be available to

allow the taxpayer to recover any portion of the time-barred

overpayment of income tax.   To allow recoupment in this situation

would go beyond its exclusively defensive nature and beyond the

District Court's jurisdiction.12

     In the instant case, as in Bull v. United States, supra, the

Government's claim for additional tax is embodied in its

deficiency determination.    However, as previously explained, when

the stock is valued at $1,700 per share, there is no additional

tax due.   As a result, the Government does not have a valid claim

     11
      The combination of increasing the taxable estate and
allowing the credit for prior transfers would produce the same
result that we arrive at here--petitioner has no additional
estate tax liability; rather, petitioner has overpaid its estate
tax and would be entitled to a refund.
     12
      No suit or counterclaim can be brought against the United
States where the subject of the suit or counterclaim is barred by
the statute of limitations. This bar is jurisdictional in
nature. A narrow exception is the availability of recoupment as
a defense against an action brought by the United States. United
States v. Dalm, supra at 608.
                              - 13 -

for a tax debt, and there is no liability against which equitable

recoupment can be used to defend.13

     In Stone v. White, 301 U.S. 532 (1937), the Supreme Court

allowed the Government to use equitable recoupment to defend

against an income tax refund suit brought by a trustee.    The

Court ultimately held that the trustee had overpaid income tax

and that the income in issue should have been taxed to the

trust's beneficiary.   However, the statute of limitations barred

assessment against the beneficiary.    The tax on the beneficiary

would have exceeded the amount of tax paid by the trust.     The

Government raised the equitable recoupment defense.    The trust

argued that the statute of limitations barred assessment against

the beneficiary and that the beneficiary's tax should not be

considered.   The Supreme Court allowed the equitable recoupment

defense, stating:



     13
      Equitable recoupment has been restricted to defending
against an otherwise valid claim or cause of action. The
Government's claim or cause of action here is its assertion that
petitioner is liable for additional estate tax. "In federal tax
litigation one's total income tax liability for each taxable year
constitutes a single, unified cause of action, regardless of the
variety of contested issues and points that may bear on the final
computation." Finley v. United States, 612 F.2d 166, 170 (5th
Cir. 1980)(citing Commissioner v. Sunnen, 333 U.S. 591, 598
(1948)). The same reasoning applies to the estate tax. There is
no distinction conceptually between the nature of a cause of
action arising from estate taxes on the one hand and one arising
from a single year's income tax on the other. Estate of Hunt v.
United States, 309 F.2d 146, 148 (5th Cir. 1962); see also
Huddleston v. Commissioner, 100 T.C. 17, 25 (1993).
                                - 14 -

     The statutory bar to the right of action for the
     collection of the tax does not prevent reliance upon a
     defense which is not a set-off or a counterclaim, but
     is an equitable reason, growing out of the
     circumstances of the erroneous payment, why petitioners
     ought not to recover.

          Here the defense is not a counter demand on
     petitioners, but a denial of their equitable right to
     undo a payment which, though effected by an erroneous
     procedure, has resulted in no unjust enrichment to the
     government, and in no injury to petitioners or their
     beneficiary. The government, by retaining the tax paid
     by the trustees, is not reviving a stale claim. Its
     defense, which inheres in the cause of action, is
     comparable to an equitable recoupment or diminution of
     petitioners' right to recover. "Such a defense is
     never barred by the statute of limitations so long as
     the main action itself is timely." Bull v. United
     States, 295 U.S. 247, 262 * * * [Id. at 538-539.]


Even though the uncollected tax from the time-barred year

exceeded the tax in the main action before the Court, the

Government did not affirmatively recover the excess.   To have

done so would have allowed equitable recoupment to be used for

more than defensive purposes.

     In Rothensies v. Electric Storage Battery Co., 329 U.S. 296,

301-303 (1946), the Supreme Court indicated that it was unwilling

to expand the doctrine of equitable recoupment beyond its

established parameters, because to have done so would have

infringed upon the statute of limitations.14   Petitioner's

     14
      In Rothensies v. Electric Storage Battery Co., 329 U.S.
296, 301 (1946), the Supreme Court stressed the importance of a
statute of limitations, stating:


                                                    (continued...)
                              - 15 -

position would also infringe upon the statute of limitations by

allowing petitioner affirmatively to recover time-barred

overpayments.   Nevertheless, petitioner asks us to expand the

application of equitable recoupment beyond what any court has

ever done.   In the final analysis, we agree with the following

observation of the Court of Claims:


     If the doctrine of recoupment were a flexible one,
     susceptible of expansion, it might well be applied in
     the instant case. But the teaching of Rothensies is
     that it is not a flexible doctrine, but a doctrine
     strictly limited, and limited for good reason. [Ford
     v. United States, 149 Ct. Cl. 558, 569, 276 F.2d 17, 23
     (1960).]


     14
      (...continued)
          It probably would be all but intolerable, at least
     Congress has regarded it as ill-advised, to have an
     income tax system under which there never would come a
     day of final settlement and which required both the
     taxpayer and the Government to stand ready forever and
     a day to produce vouchers, prove events, establish
     values and recall details of all that goes into an
     income tax contest. Hence, a statute of limitation is
     an almost indispensable element of fairness as well as
     of practical administration of an income tax policy.

          We have had recent occasion to point out the reason and
     the character of such limitation statutes. "Statutes
     of limitation * * * are designed to promote justice by
     preventing surprises through the revival of claims that
     have been allowed to slumber until evidence has been
     lost, memories have faded, and witnesses have
     disappeared. The theory is that even if one has a just
     claim it is unjust not to put the adversary on notice
     to defend within the period of limitation and that the
     right to be free of stale claims in time comes to
     prevail over the right to prosecute them." Order of
     Railroad Telegraphers v. Railway Express Agency, 321
     U.S. 342, 348-9. * * *
                                 - 16 -

     Use of equitable recoupment is limited to defending against

a valid claim.     It allows an otherwise time-barred tax claim

arising out of the same transaction to be used as a defense or

credit against any additional tax ultimately found to exist in

the main action.15     If all or part of the Government's claim for

additional tax is sustained, equitable recoupment can be used to

reduce or eliminate it.     However, once equitable recoupment of

the time-barred tax overpayment completely eliminates the

additional tax liability in the main action, equitable recoupment

has served its restricted defensive purpose.16     Equitable

recoupment cannot be used affirmatively to recover a tax

overpayment, the refund of which is barred by the statute of

limitations.

     Where the Government claims that the taxpayer owes

additional tax and the court finds that there is no additional

tax due to the Government, there is nothing left to defend

against.17    The additional estate tax liability that would have

     15
          See United States v. Dalm, 494 U.S. at 605.
     16
      See United States v. Timber Access Indus. Co., 54 F.R.D.
36 (D. Or. 1971). The defendant was entitled to an affirmative
recovery against the Government on a separate counterclaim;
however, recoupment against the Government was restricted to the
amount that the Government was entitled to recover in the main
cause of action initiated by the Government.
     17
      See Evans Trust v. United States, 199 Ct. Cl. 98, 106, 462
F.2d 521, 526 (1972), stating:


                                                        (continued...)
                               - 17 -

resulted from our valuation of the stock in decedent's estate was

less than the credit that respondent correctly allowed in the

notice of deficiency.   As a result, respondent has no valid claim

for additional tax.   Respondent's claim for additional tax has

been totally defeated, and petitioner is entitled to a decision

that there is no deficiency and that it overpaid its estate tax.

Any use of equitable recoupment at this point would not be

defensive.

     We hold that petitioner is not entitled to use equitable

recoupment affirmatively to increase the amount of an overpayment

it is entitled to recover.    It follows that equitable recoupment

has no application in this case.   As a result of our disposition,

we express no opinion regarding whether any of the other

requirements for equitable recoupment have been satisfied.

                                          An appropriate order will

                                     be issued.



     Reviewed by the Court.


     COHEN, CHABOT, SWIFT, JACOBS, GERBER, WRIGHT, PARR, WHALEN,
CHIECHI, FOLEY, and VASQUEZ, JJ., agree with this majority
opinion.

     17
      (...continued)
     Furthermore, since the Government's asserted deficiency
     was settled by a determination that no deficiency
     existed, plaintiff is attempting to use recoupment not
     in its traditional form as a defense to an asserted
     deficiency, but as an independent ground for reopening
     years now closed by the statute of limitations.
                               - 18 -


     CHABOT, J., concurring:    I join in the majority opinion and

the interpretation that the “claim” in the instant case, against

which equitable recoupment is sought to lie, is respondent’s

claim that there is a deficiency in estate tax.

     The dissenters maintain that the claim against which

equitable recoupment is sought to lie is only respondent’s claim

that, because of the revaluation of the Mueller Co. stock, the

estate tax liability is greater than it otherwise would be.

Judge Beghe’s dissenting opinion, infra pp. 77-81, relies on

Hemmings v. Commissioner, 104 T.C. 221 (1995), for the

proposition “that the credit for previously paid taxes is not

part of the same claim or cause of action as that attributable to

the date of death value of the shares.”    Dissenting op. p. 79

(Beghe, J.).   However, as explained in Hemmings v. Commissioner,

104 T.C. at 233-235, it appears that the only situation where the

issues of the unclaimed credit and the stock value could be

litigated in separate actions would be where the taxpayer first

proceeds in a refund forum on one of the issues and the

Commissioner then raises the other issue in a later notice of

deficiency.    Also, with exceptions not relevant in the instant

case, in deficiency proceedings in the Tax Court, the different

issues are merged into a single cause of action and neither side

is permitted to bring a separate suit “in any court” once a

decision on liability for “estate tax in respect of the taxable
                              - 19 -

estate of the same decedent” has become final.   Sec. 6512(a);

Hemmings v. Commissioner, 104 T.C. at 226, 232-233.    Indeed, even

in the other forums, the taxpayer apparently is barred from

bringing a second suit for the same tax even if that second suit

is based on a different issue.   Hemmings v. Commissioner, 104

T.C. at 233-234.   Thus, Hemmings does not support the dissent’s

contentions as to what is respondent’s claim in the instant case,

against which equitable recoupment is sought to lie.

     Because the majority opinion’s analysis, in combination with

Mueller I, appears to dispose of the instant case, failure to

respond to the other considerations dealt with in Judge Beghe’s

dissent, is not to be taken as acceptance of, or disagreement

with, the views Judge Beghe expresses as to the many hurdles

petitioner must overcome in order to succeed in the highly

technical realm of equitable recoupment.

     COHEN, PARR, and RUWE, JJ., agree with this concurring

opinion.
                                - 20 -

       WELLS, J., dissenting:   I respectfully disagree with the

majority's overly restrictive view of the applicability of the

doctrine of equitable recoupment.    I agree with Judge Beghe that

all of the conditions for application of the doctrine have been

met.    I, however, want to focus my disagreement on what I believe

is the majority's mistaken notion that the application of the

doctrine of equitable recoupment in the instant case is offensive

rather than defensive simply because the amount of an unrelated

overpayment of tax resulting from the estate's failure to claim a

credit for tax on prior transfers exceeds the amount of

additional estate tax due by reason of the increased valuation of

the shares in issue.

       I believe that, once an equitable recoupment claim is

properly raised by a taxpayer in defense of an asserted

deficiency, the mere fact that the Commissioner's partial victory

fails to produce a deficiency should not prevent the Court from

allowing the equitable recoupment claim.    If respondent had been

totally sustained on the deficiency, or even if the increase in

the valuation of the shares of stock in issue had been great

enough to create an overall deficiency in estate tax, I think the

majority would concede (assuming that they would agree that the

other requirements are met) that the recoupment claimed would be

allowed.    The application of the doctrine should be governed

solely by matters relating to the shares, and not upon the

fortuity of unrelated circumstances, i.e. the convergence of (1)
                                - 21 -

respondent's concession in the notice of deficiency of the credit

for tax on prior transfers that petitioner had failed to claim on

the estate tax return with (2) the valuation of the shares at an

amount that resulted in an overpayment rather than a deficiency.

     The relevant circumstances may be briefly summarized.      For

estate tax purposes, the estate valued the shares in issue at

$1,505 each.   Shortly after decedent's death, the Administration

Trust sold those shares for $2,150 each, computing the gain

realized on the sale using a basis of $1,500 per share, which was

approximately the value claimed for estate tax purposes.

Respondent determined that each share was worth $2,150.    In

Estate of Mueller v. Commissioner, T.C. Memo. 1992-284, we found

the value of each share to be $1,700 for estate tax purposes.

Accordingly, the estate underpaid its estate tax by $957,099 as a

result of the undervaluation.    However, because the Trust used

$1,500 as the basis of the shares to compute the gain on the

sale, the Trust paid $265,999 more in income tax on the sale of

the shares than it would have if the proper basis of $1,700 per

share had been used.   The period of limitations for claiming a

refund of that overpayment of income tax had expired.     In the

notice, respondent allowed the estate a $1,152,649 credit for tax

on prior transfers to which it was entitled but had not claimed

on its estate tax return.   The credit was completely unrelated to

the issue of the valuation of the shares.   If we had sustained

respondent's valuation of the shares, a deficiency would have
                               - 22 -

been due from the estate even considering the overpayment

attributable to the allowance of the credit.    As it turned out,

the additional estate tax attributable to the revaluation of the

shares was less than the overpayment resulting from the estate's

failure to claim the credit on its return, and the estate is

therefore due a refund.

     Petitioner argues that it should be allowed to recoup

against the additional estate tax attributable to the revaluation

of the shares ($957,099) the amount of income tax overpaid on

their sale ($265,999).    The majority would allow equitable

recoupment only if there were an overall deficiency in tax after

taking into account all issues in the case (other than the

equitable recoupment claim).    I agree with Judge Beghe that the

recoupment claim should be allowed so long as it did not exceed

the additional tax due as a result of the increased valuation of

the shares; i.e. recoupment should be applied to correct the

error on a transactional basis, not just on the basis of whether

some amount is finally determined to be owed to the party who

received the windfall.

     Recoupment has been characterized as a counterclaim or

defense against asserted liability relating to the same

transaction, item, or event upon which the main action is

grounded.   Reiter v. Cooper, 507 U.S. 258, 264 (1993); United

States v. Dalm, 494 U.S. 596, 605 n.5, 608 (1990); Bull v. United

States, 295 U.S. 247, 262 (1935).    The doctrine is designed to
                                - 23 -

prevent unjust enrichment of either the taxpayer or the

Government.     Stone v. White, 301 U.S. 532, 537-539 (1937); Bull

v. United States, supra at 260-261.      While admittedly no case has

squarely considered the issue presented by the instant case,

recoupment has always been applied on an item-by-item or

transaction-by-transaction basis, and the circumstances

surrounding unrelated items or transactions have not been deemed

relevant to the application of the doctrine.      Rothensies v.

Electric Storage Battery Co., 329 U.S. 296, 299 (1946)

(recoupment "has never been thought to allow one transaction to

be offset against another, but only to permit a transaction which

is made the subject of suit by a plaintiff to be examined in all

its aspects, and judgment to be rendered that does justice in

view of the one transaction as a whole" (emphasis supplied)).

Consequently, I believe the majority's limitation on the

application of the doctrine is inconsistent with its nature and

the policy underlying it.    As there is no issue as to the

entitlement to the credit, the "main action" in the instant case

is not the entire liability of the estate for tax, but rather the

additional estate tax claimed with respect to the shares.

     I believe that the majority overstates its case regarding

the defensive use of equitable recoupment, in that the cases

relied on by the majority do not go as far as the majority would

have them go.    The rejection of equitable recoupment as an

offensive weapon by the Supreme Court in United States v. Dalm,
                              - 24 -

supra, does not require the result reached by the majority.    If

petitioner had paid the full deficiency determined by respondent

and sued for a refund, the reach of Dalm would not have precluded

the right of petitioner to obtain a refund of the income tax

attributable to the sale of the shares even if the refund forum

court had reduced the estate tax valuation of the shares as we

have done in the instant case.   The only limitation imposed by

Dalm would have been to preclude petitioner from increasing the

amount of its claimed refund by any amount attributable to the

claimed overpayment of income tax.     Similarly, Bull v. United

States, supra, does not require the result the majority reaches

because that case did not involve an unrelated claim for refund,

and therefore the majority's hypothetical construction of the

Government's claim were it to sue for the deficiency determined

mistakenly emphasizes the taxpayer's overall liability as the

determinative factor in deciding whether to apply the doctrine.

     Accordingly, I would hold that, to the extent that

petitioner's recoupment claim does not exceed the amount of the

additional tax sought by respondent with respect to the shares of

stock, the use of the doctrine is purely defensive and does not

enable petitioner to affirmatively recover on a time-barred

claim.   I therefore respectfully dissent.

     COLVIN, BEGHE, and GALE, JJ., agree with this dissent.
                               - 25 -

     HALPERN, J. dissenting:   I join in section 7, Overpayment

Status, of Judge Beghe’s separate opinion and dissent for the

reasons stated therein.
                              - 26 -

     BEGHE, J., dissenting:   I respectfully dissent.    I believe

this case satisfies all requirements for equitable recoupment.

In particular, petitioner's overpayment posture, which results

from a completely unrelated, fortuitous issue, should not prevent

recoupment.

     The majority has created a new rule about offensive use of

equitable recoupment that unnecessarily perpetuates unjust

enrichment of the Government, thwarts the fundamental purposes of

equitable recoupment, and seems likely to prevent equitable

recoupment in other cases where justice may even more clearly

require it.

     I have no disagreement with the facts recited by the

majority opinion; the facts on the recoupment issue were almost

completely stipulated by the parties.   However, I provide a

supplemental statement of the procedural and factual background,

both to aid understanding of the overpayment issue and to lay the

foundations for my conclusions on the other issues.     Bearing in

mind equitable recoupment's objective of promoting one-stop

shopping,1 I think petitioner is now entitled to see a reasoned

opinion charting the path to the destination I would reach.

     After summarizing the background, I address all the other

issues before dealing, infra pp. 69-97, with the overpayment

issue; my rejoinder to the majority opinion begins infra p. 72.

     1
      Mueller v. Commissioner, 101 T.C. 551, 563-564 (1993)
(Halpern, J., concurring).
                               - 27 -

                              Contents

Background    . . . . . . . . . . . . . . . . . . . . . . . .     27

Discussion    . . . . . . . . . . . . . . . . . . . . . . . .     37

  1.   Refund Time-Barred . . . . . . . . . . . . . . . . .   .   39
  2.   Single Transaction . . . . . . . . . . . . . . . . .   .   42
  3.   Inconsistent Treatment . . . . . . . . . . . . . . .   .   60
  4.   Identity of Interest . . . . . . . . . . . . . . . .   .   63
  5.   Statutory Mitigation . . . . . . . . . . . . . . . .   .   65
  6.   Other Equitable Considerations . . . . . . . . . . .   .   68
  7.   Overpayment Status . . . . . . . . . . . . . . . . .   .   69
       i.   Code sections are no obstacle
              to recoupment . . . . . . . . . . . . . . ..    .   71
       ii. Recoupment's defensive nature and
              the unrelated overpayment don't
              bar recoupment . . . . . . . . . . . . . . .    .   72
       iii. Barring recoupment would be inconsistent
              with tax precedent . . . . . . . . . . . . .    .   84
       iv. Barring recoupment would be inconsistent
              with other precedent . . . . . . . . . . . .    .   88

Conclusion    . . . . . . . . . . . . . . . . . . . . . . . .     98


                             Background

       In Estate of Mueller v. Commissioner, T.C. Memo. 1992-284

(Mueller I), we redetermined the increased value of shares of the

Mueller Co. included in the gross estate of Bessie I. Mueller

(decedent).    In Estate of Mueller v. Commissioner, 101 T.C. 551

(1993) (Mueller II), we held that this Court is authorized to

apply equitable recoupment and therefore denied respondent’s

motion to dismiss for lack of jurisdiction those paragraphs of

petitioner’s amended petition asserting its right to equitable

recoupment.    Petitioner’s claim for equitable recoupment would

reduce the additional estate tax arising from an increase in the

estate tax value of the shares by the amount of a time-barred
                              - 28 -

overpayment of income tax made by the Bessie I. Mueller

Administration Trust (the Administration Trust).   This income tax

overpayment was attributable to the overstated gain the

Administration Trust reported on the sale of the shares because

it failed to take into account the step-up in basis resulting

from respondent’s estate tax determination, as modified by our

holding in Mueller I, and then failed to file a timely refund

claim.   It thus remained for us to decide whether to apply

equitable recoupment in this case.

     When decedent, Bessie I. Mueller, died on March 24, 1986,

her gross estate included 8,924 shares of common stock of Mueller

Co. (the shares).2   Petitioner’s Federal estate tax return,

timely filed on December 23, 1986, reported the date-of-death

fair market value of the shares as $13,430,620, or $1,505 per

share.   The total value of decedent’s gross estate reported on

the estate tax return was $14,623,510.

     By statutory notice of deficiency issued on November 24,

1989, respondent determined that the date-of-death fair market

value of the shares was $19,186,600, or $2,150 per share.      As a

result of this increase in value and other adjustments not in

issue, including respondent's allowance of a credit for tax on

prior transfers, in the amount of $1,152,649, that had not been


     2
      See majority op. p.3 note 1 for a summary of the places of
residence of decedent and her personal representatives and the
trustees of the Administration Trust.
                              - 29 -

claimed on the Federal estate tax return, respondent determined a

deficiency of $1,985,624 in petitioner’s Federal estate tax.

Petitioner petitioned this Court for a redetermination.

     In Mueller I, we found that the date-of-death value of the

shares was $15,170,800, or $1,700 per share.   Our revaluation,

standing alone, would result in an increase in Federal estate tax

of $957,099, computed at the top marginal estate tax rate of 55

percent in effect during 1986, prior to allowance of additional

credits for State death taxes and for tax on prior transfers and

a small reduction in the unified credit.

     The Administration Trust is a revocable inter vivos trust

established by decedent3 and is the residuary legatee of her

probate estate.4   Under Article IV of the trust instrument, the

Administration Trust is obliged to pay all death taxes, but

Article III of the second codicil to decedent's will directs that

all death taxes be first paid out of decedent's probate estate as


     3
      The beneficiaries of the Trust are three subtrusts: The
first for the benefit of decedent’s niece Mary M. Hanson and
decedent’s friend Jean Ehlinger and the two other subtrusts known
as the Bessie I. Mueller Irrevocable Trusts A and B for the
benefit of decedent’s grandchildren: Justin R. Mueller, Anne E.
Mueller, and Heidi M. Mueller.
     4
      The noncharitable legatees of decedent’s estate are
decedent’s sons John S. Mueller and James F. Mueller; decedent’s
two granddaughters by son John, Anne E. Mueller and Heidi M.
Mueller; Bessie I. Mueller Irrevocable Trusts A (f/b/o grandson
Justin R. Mueller) and B (f/b/o granddaughters Anne E. Mueller
and Heidi M. Mueller); the Bessie I. Mueller Administration
Trust; decedent’s niece Mary M. Hanson; friend Jean M. Ehlinger;
decedent’s nephew William E. Pearson; and friend Harriet Suggs.
                              - 30 -

an expense of administration and that none of such taxes be

apportioned between or among the recipients of her property.

Since the probate assets were only sufficient to pay

approximately 5 percent of the death taxes, the trustees of the

Administration Trust advanced the funds for full payment of death

taxes, including the tax liability shown on petitioner's estate

tax return.   The parties in interest thereafter petitioned the

probate court for an apportionment order; the ground of the

petition was the apparent conflict in the death tax payment

provisions of decedent’s will and the Administration Trust, and

the requirements of the Michigan Uniform Estate Tax Apportionment

Act, Mich. Comp. Laws secs. 720.11-720.21 (1979).      The probate

court's order held the Administration Trust responsible for 71.9

percent of the Federal estate tax liability already paid.5     The

probate court's order concludes that the apportionment will be

subject to adjustment, following review by the tax authorities,

in accordance with the same methodology used to effectuate the

apportionment of the original payment.    The Administration Trust

will be reimbursed for payment of some additional estate tax

     5
      The recipients of property in the decedent’s gross estate
participating in the apportionment of death taxes were:

          Administration Trust                 71.9%
          Decedent’s Estate                     3.4%
          James F. Mueller                     10.6%
          John S. Mueller                      10.6%
          E. B. Mueller Insurance Trust         3.0%
          Decedent’s Condo (sic in
                          stipulation)          0.5%
                              - 31 -

arising from our determination of the increased date-of-death

fair market value of the shares.   However, any such reimbursement

will not disturb or reduce the estate tax paid by the Trust with

respect to the shares owned by it that were included in the gross

estate, and with respect to which it overpaid income tax when it

sold the shares.   Under the apportionment order of the probate

court, any recoupment allowed would relate solely to estate tax

that the Administration Trust has paid on the inclusion in the

gross estate of shares owned by and appointed to it.   Any

adjustment through recoupment would benefit solely the

Administration Trust (and, through it, its three beneficiary

subtrusts and their beneficiaries).

     On decedent’s date of death, the Administration Trust owned

5,150 of the 8,924 shares included in her gross estate.   The

Administration Trust received an additional 1,500 shares from the

Ebert B. Mueller Marital Trust, pursuant to decedent’s exercise

of a testamentary general power of appointment.6   Consequently,

as of the date of death, the Administration Trust owned 6,650

shares of Mueller Co., all of which were included in decedent’s

gross estate.7   On May 30, 1986, 67 days after decedent died, the

     6
      Decedent also exercised the same testamentary power to
appoint 1,000 shares from the same Ebert B. Mueller Marital Trust
to each of her sons, John S. Mueller and James F. Mueller.
     7
      The gross estate also included the 2,000 shares appointed
to the two sons under the testamentary general power of
appointment, as well as 274 shares owned by the Ebert B. Mueller
                                                   (continued...)
                              - 32 -

Administration Trust (along with all other owners of shares in

Mueller Co.) sold all its shares for $2,150 per share.8

     On April 15, 1987, the Administration Trust filed its

fiduciary income tax return (Form 1041) for the taxable year 1986

reporting $4,572,500 of capital gain on the sale of all 6,650

shares owned by it, and paid $912,378 in Federal income tax on

the gain.   The Administration Trust computed its capital gain

using a date-of-death fair market value basis of $1,462 per share

under section 1014(a)(1).

     On November 16, 1987, 11 months after petitioner had filed

its Federal estate tax return reporting the fair market value of

the shares at $1,505 per share, the Administration Trust filed an

amended fiduciary income tax return recomputing the gain, using a

basis of $1,500 per share, rather than $1,462.   The “amended

return”, as it was labeled, stated:    “Taxpayer erroneously used

the wrong basis for the shares of Mueller Company which were sold


     7
      (...continued)
Life Insurance Trust. The apportionment of Federal estate tax to
the sons, as set forth in note 5 supra, is attributable primarily
to their receipt of shares pursuant to decedent's exercise of the
power of appointment in their favor.
     8
      The actual sale of the 1,500 shares acquired by the
Administration Trust upon decedent’s death was in fact carried
out by the Comerica Bank as Trustee of the Ebert B. Mueller
Marital Trust, but it was on behalf of the new owner, the
Administration Trust. The gain realized upon the sale of the
1,500 shares was treated as distributable net income of the
Administration Trust, and the Administration Trust included the
gain realized on the sale of the 1,500 shares in its taxable
income for 1986.
                              - 33 -

during the year.   The amended return reflects the correct tax

basis of $1,500 per share.   There were no other changes.”   Other

than the return itself and the statement attached thereto, no

written or oral communication to the Internal Revenue Service

preceded or accompanied the filing of the amended return.    On

February 15, 1988, respondent responded to the amended return by

refunding $50,001, plus interest, to the Administration Trust.

Respondent has never issued a statutory notice of deficiency to

the Administration Trust or otherwise determined a deficiency in

its Federal income tax for the taxable year 1986.    The

Administration Trust is not a party to this proceeding.

     On or about September 10, 1990, the Administration Trust

filed a second amended fiduciary income tax return claiming an

$862,377 refund of the income tax it had paid on the capital gain

from the sale of the 6,650 shares.     This amended return was filed

3 years and 5 months after the Administration Trust had

originally filed its Federal income tax return and paid the

income tax for the taxable year 1986.    This was less than 3 years

after the Administration Trust had filed its first amended 1986

income tax return, almost 1 year after respondent had issued the

statutory notice to petitioner, and 7 months after petitioner had

filed its petition.   The Administration Trust’s second amended

return bore the designation “Amended Return - Correction” and

claimed that, in computing the gain on the sale of the shares, it

had used a fair market value basis that was $650 lower than the
                              - 34 -

fair market value respondent used in determining the amount

includable in decedent’s gross estate and that the claim was

being filed to protect the Administration Trust’s rights pending

the outcome of this Tax Court proceeding to redetermine the date-

of-death fair market value of the shares.   On April 22, 1991,

respondent disallowed the Administration Trust’s claim for refund

of 1986 income tax on the ground that the claim had not been

timely filed within the 3-year statutory limitation period.

     Not considering any other issues, the income tax that would

have been reported by the Administration Trust from the gain on

the sale of the 6,650 shares, using a sales price of $2,150 and a

cost or other basis of $1,700 per share, would have been

approximately $596,378.   Not considering any other issues, the

difference between the amount of income tax actually paid by the

Administration Trust on the gain from the sale of 6,650 shares

(approximately $862,377) and the amount of such tax that would

have been reported due using a basis of $1,700 per share

(approximately $596,378) would have been approximately $265,999.

Based on our decision that the fair market value of the shares

was $1,700 per share at the time of decedent’s death, her gross

estate is increased by $1,740,180 (8,924 shares X $195 per share)

over the amount shown on the Federal estate tax return, and this

increase results in the increase of $957,099 in Federal estate

tax liability previously described.
                                - 35 -

     Not considering any other adjustments, once one takes into

account both our Mueller I opinion on the date-of-death fair

market value of the shares and respondent's allowance of the

credit for tax on prior transfers not claimed on the Federal

estate tax return,9 the parties agree that there is no deficiency

in petitioner’s estate tax; petitioner is in an estate tax

overpayment posture, whether or not equitable recoupment applies

in this case.   This is because the credit for previously taxed

property that petitioner failed to claim on its estate tax return

and that respondent has allowed (and all agree, properly so)

exceeds the amount of the tentative deficiency resulting from our

valuation of the shares.     And this will be true irrespective of

whether the credit for State death taxes ultimately allowable is

the amount claimed on the estate tax return as filed or the

larger credit that the parties agree would be allowed as a result

of the increase in the tentative deficiency resulting from our

valuation of the shares:10

     Credit for previously taxed property . . . . .     $1,152,649
     Less: Agreed reduction in unified
            credit . . . . . . . . . . . . . . 6,000

            Deficiency attributable to


     9
      This credit was for property received by decedent from the
estate of Robert E. Mueller, her stepson.
     10
      It's not clear from the parties' stipulation on this point
whether they've taken into account the partially offsetting
reduction in the credit for State death taxes that would result
from the reduction in estate tax liability arising from the
application of equitable recoupment. The answer to this question
would have no effect on the outcome.
                              - 36 -

            redetermination of value of shares
            at $1,700 per share . . . . . . 957,099         963,099

     Minimum overpayment prior to recoupment . .   . .     189,550
     Plus: Maximum increase in credit for State
            death taxes . . . . . . . . . . . .    .   .   278,428
     Maximum overpayment prior to recoupment . .   .   .   467,978
     Plus: Claimed recoupment . . . . . . . . .    .   .   265,999
     Maximum overpayment with recoupment . . . .   .   .   733,977


     Petitioner’s amended petition, filed April 22, 1991,

asserted two affirmative partial defenses against respondent’s

estate tax deficiency determination:   First, that although the

Administration Trust’s September 10, 1990, claim for refund was

barred by the statute of limitations, respondent erred by not

applying equitable recoupment to reduce petitioner’s estate tax

deficiency by the Administration Trust’s 1986 income tax

overpayment caused by its use of a basis for the shares that was

too low; and, second, that respondent erred in not applying the

statutory mitigation provisions to allow the Administration Trust

to file a timely claim for refund to recover the amount of the

related overpayment.   Issue was joined on both the equitable

recoupment and statutory mitigation defenses when respondent

denied these allegations in her amended answer.

     After we issued our opinion on the valuation issue, Mueller

I, respondent moved, on the ground that the Tax Court lacked

jurisdiction to grant equitable recoupment relief, to dismiss

those paragraphs of the amended petition asserting the partial

defense of equitable recoupment.   In response, we issued Mueller

II, holding that this Court has authority to apply equitable
                               - 37 -

recoupment, and denied respondent's motion.    We reserved the

issue of petitioner’s entitlement to equitable recoupment relief

for further proceedings, and this case has been tried, submitted,

and briefed for the Court's opinion on the issue of equitable

recoupment.

     Subsequent to the filing of the amended petition, the

parties presented no arguments on the issue of statutory

mitigation.   It only arose, in a preliminary skirmish that led

nowhere, in Respondent’s Request for Admissions and Petitioner’s

Answer to Respondent’s Request for Admissions.

                             Discussion

     The doctrine of sovereign immunity persists as a

jurisdictional limitation on suits against the United States,

FDIC v. Meyer, 510 U.S. 471, ___, 114 S. Ct. 996, 1000 (1994);

United States v. Dalm, 494 U.S. 596, 608 (1990); United States v.

Forma, 42 F.3d 759, 763 (2d Cir. 1994), and jurisdictional

limitations based on sovereign immunity apply equally to

counterclaims against the Government, United States v. Forma,

supra at 764.    Case law, however, has developed a significant

limitation to the general bar of sovereign immunity against

counterclaims:    Despite sovereign immunity, a defendant may,

without statutory authority, recoup on a counterclaim that would

otherwise be barred by the statute of limitations an amount not

in excess of the principal claim.    Id. (citing United States v.

United States Fidelity & Guaranty Co., 309 U.S. 506, 511 (1940)).
                              - 38 -

     In the tax area, where the taxpayer in a refund suit or a

proceeding in this Court is put in the position of the

"plaintiff", the Supreme Court has applied the general doctrine

of recoupment, in the specific form of equitable recoupment, in

Bull v. United States, 295 U.S. 247 (1935).   See also United

States v. Dalm, supra at 605-606 n.5; Rothensies v. Electric

Storage Battery Co., 329 U.S. 296 (1946); Stone v. White, 301

U.S. 532 (1937).   Under the equitable recoupment doctrine,

taxpayers in Federal tax proceedings may raise recoupment as an

affirmative defense, rather than as a counterclaim.   United

States v. Dalm, supra at 607; Commissioner v. Gooch Milling &

Elevator Co., 320 U.S. 418, 420-421 (1943); Mueller II, 101 T.C.

at 560.   The Government is also entitled to raise this defense,

Stone v. White, supra, so that either side may assert it, in

certain limited circumstances, to remove the bar of the expired

statutory limitation period in order to prevent inequitable

windfalls to either taxpayers or the Government.   Those limited

circumstances are that otherwise such a windfall would result

from inconsistent tax treatment of a single transaction, item,

or event affecting the same taxpayer or a sufficiently related

taxpayer.   United States v. Dalm, supra at 605-606 n.5.

     Equitable recoupment thus requires, and I address in turn:

(1) That the refund or deficiency for which recoupment is sought

by way of offset be barred by time; (2) that the time-barred

offset arise out of the same transaction, item, or taxable event
                                 - 39 -

as the overpayment or deficiency before the Court; (3) that such

transaction, item, or taxable event have been inconsistently

subjected to two taxes; and (4) that there be sufficient identity

of interest between the person or persons subject to the two

taxes.11     Although recoupment may further require (5) that the

situation not be one to which the mitigation provisions, sections

1311 through 1314, apply, respondent has waived that argument in

this case.     I then consider (6) any additional equitable factors

and, finally, (7) the effect of the presence of the estate tax

overpayment, the issue on which the majority have chosen to

dispose of this case.

1.   Refund Time-Barred

     Not until September 10, 1990, did the Administration Trust

file the claim for refund of its April 15, 1987, payment of

income tax that is now at issue.     That claim would appear to be

barred by section 6511(a), which requires that such a claim be

made within 3 years from the time the return was filed, and the

return was filed on the same date that the payment was made,

April 15, 1987.12


     11
      United States v. Dalm, 494 U.S. 596, 608 (1990), makes
clear the further requirement, not in issue in this case, that
there be a basis for jurisdiction in the case independent of
equitable recoupment. In this case, the statutory notice and
petition are clearly valid and were timely filed, and
consequently we have independent jurisdiction over the deficiency
originally determined by respondent (and the overpayment that we
must now determine).
     12
          Because the expiration of this 3-year period occurred
                                                       (continued...)
                              - 40 -

     Petitioner has suggested, although not on brief, that the

Administration Trust’s refund claim was a timely amendment of the

timely filed amended return of November 16, 1987.    Petitioner

refused respondent’s request to admit that the second amended

return was not a timely claim for refund.    Respondent has argued

that petitioner’s refusal to stipulate that the second refund

claim is barred constitutes a failure to establish an essential

element of its claim for equitable recoupment and is sufficient

ground for denying petitioner the relief it seeks.    To the

contrary, I would regard it as sufficient that we can satisfy

ourselves that the claim is barred.    I don't believe that

petitioner needs to concede the point for the purposes of this

proceeding.

     The essential question on this point is whether the original

amended return of November 16, 1987, gave respondent sufficient

notice of the tax overpayment now sought through equitable

recoupment and sufficient information to enable respondent to

investigate the claim.   United States v. Andrews, 302 U.S. 517,

524 (1938) ("a claim which demands relief upon one asserted fact

situation, and asks an investigation of the elements appropriate

to the requested relief, cannot be amended to discard that basis

and invoke action requiring examination of other matters not



     12
      (...continued)
later than the expiration of the 2-year period after the payment
of the tax, that alternative date need not be considered. Sec.
6511(a) directs us to use the later date.
                                - 41 -

germane to the first claim"); United States v. Memphis Cotton Oil

Co., 288 U.S. 62, 72 (1933); United States v. Felt & Tarrant

Manufacturing Co., 283 U.S. 269, 272-273 (1931); In re Ryan, 64

F.3d 1516, 1520-1521 (11th Cir. 1995); United States v. Forma, 42

F.3d at 767 n.13; American Radiator & Standard Sanitary Corp. v.

United States, 162 Ct. Cl. 106, 318 F.2d 915, 920-922 (1963);

secs. 301.6402-2, 301.6402-3, Proced. & Admin. Regs.    Under the

variance doctrine, taxpayers are obliged in their refund claims

to identify the assets at issue and to state why they were

treated improperly.    It is not enough to state a related claim.

The policy ground for not allowing time-barred claims that

impermissibly vary from timely claims is that the Commissioner

lacks the time and resources to perform extensive investigations

into the precise reasons and facts supporting every taxpayer’s

claim for refund.     Charter Co. v. United States, 971 F.2d 1576,

1579-1580 (11th Cir. 1992); cf. Angelus Milling Co. v.

Commissioner, 325 U.S. 293, 297-298 (1945).

     Whether the grounds for the Administration Trust’s second

refund claim of September 10, 1990, vary impermissibly from the

grounds for the amended return filed on November 16, 1987, need

not detain us--although I incline to believe they do so vary.

Respondent's acceptance and allowance of the Administration

Trust's 1987 claim provides sufficient basis for the conclusion

that its 1990 refund claim is time-barred.    See, e.g., Union

Pacific R.R. Co. v. United States, 182 Ct. Cl. 103, 389 F.2d 437,
                                - 42 -

447 (1968) (fully paid refund claim can't be revived by belated

amendment after expiration of the period of limitations on the

original claim).   The variance doctrine is based on a requirement

that respondent have sufficient notice of taxpayers' claims, and,

in the facts and circumstances of this case, I would conclude

that respondent did not have such sufficient notice of the 1990

claim within the statutory time limits.   Cf. United States v.

Memphis Cotton Oil Co., 288 U.S. 62, 72 (1933) (suggestion that

if amendments to informal claim had been made after it had been

rejected on merits, they would have been too late); Lefrak v.

United States, 1996 WL 420308 (S.D.N.Y., July 26, 1996)

(imperfect claim that has been rejected cannot be perfected by a

later, time-barred claim lacking the defect).

2.   Single Transaction

      For the doctrine of equitable recoupment to apply, a single

transaction, item, or event must have been taxed twice

inconsistently.    United States v. Dalm, 494 U.S. at 608

(construing Bull v. United States, supra, and Stone v. White,

supra).

      Although the “single transaction” requirement was mentioned

in passing in Bull v. United States, 295 U.S. at 261, it was the

stated ground for decision in Rothensies v. Electric Storage

Battery Co., 329 U.S. at 300.    In that case, the taxpayer in 1935

obtained a refund of excise taxes paid for the years 1922 through

1926 that turned out not to have been due.   Refunds of the type
                              - 43 -

of excise taxes paid could not be obtained for the earlier years

1919 through 1921 because those years were already time-barred.

The Commissioner then determined that the excise tax refund for

the years 1922 through 1926 should be included in the taxpayer's

gross income in 1935, the year of receipt.    The taxpayer paid

under protest and brought a refund suit, arguing that the refund

was not taxable income and, in the alternative, that the income

tax should be reduced by equitable recoupment on account of the

time-barred overpaid excise taxes for the earlier years 1919

through 1921 for which it had been denied a refund.    In District

Court, the taxpayer lost on the income inclusion issue, but won

on the recoupment issue.   Electric Storage Battery Co. v.

Rothensies, 57 F. Supp. 731 (E.D. Pa. 1944).    The Court of

Appeals for the Third Circuit affirmed, holding that the

interpretation of “transaction” should be informed by the

"concepts of fairness" basic to the doctrine of recoupment, so

that all the doctrine required was a "logical connection" between

the main claim and the recoupment claim.     Electric Storage

Battery Co. v. Rothensies, 152 F.2d 521, 524 (3d Cir. 1945).      In

reversing on the equitable recoupment issue, the Supreme Court

rejected the Third Circuit’s reasoning.    The Supreme Court

insisted that the equitable recoupment doctrine required that a

single transaction constitute both the taxable event claimed upon

and the one considered in recoupment and held that the single
                                - 44 -

transaction requirement had not been satisfied.     Rothensies v.

Electric Storage Battery Co., 329 U.S. 296, 299 (1946).

        What must be emphasized is that actually there was no

logical connection--much less a causal relationship--between the

time-barred excise tax refunds for 1919-21 and the inclusion in

taxable income for 1935 of the excise taxes paid for 1922-26.

Considering each year as a separate cause of action, cf.

Commissioner v. Sunnen, 333 U.S. 591, 598 (1948), there was no

transactional nexus whatsoever between the time-barred excise

taxes paid in 1919-21 and the excise taxes paid in 1922-26 that

the taxpayer recovered and was required to include in income in

1935.     All the time-barred and the recovered excise taxes had in

common was the coincidence of the same general subject matter.

     Since Rothensies v. Electric Storage Battery Co., supra,

the Supreme Court has not revisited the single-transaction

requirement of equitable recoupment except in dicta in United

States v. Dalm, supra at 605 n.5, where it did say that in

Rothensies v. Electric Storage Battery Co. it had emphasized that

the condition that must be satisfied is that "the Government has

taxed a single transaction, item, or taxable event”.     The

inclusion of “item” in this phrase is significant for our case.

Although the income and estate taxes in this case were arguably

imposed on different taxable events (the estate tax was imposed

on the transfer of the shares on decedent’s death, whereas the

income tax was imposed upon the gain from the sale of the shares
                                - 45 -

67 days thereafter), they were imposed on the same item (the same

shares of stock), in the sense that the date-of-death value of

the shares was a necessary element in determining the amount of

the liability for both taxes.    Whether they were imposed on the

same “transaction” can be debated, and is addressed below.

     In the absence of any decision by the Supreme Court on the

subject since Rothensies v. Electric Storage Battery Co., supra,

the interpretation and application of the single-transaction

requirement has largely been left to the lower courts, resulting

in two lines of conflicting authority.

     The two cases on which petitioner largely relies are United

States v. Bowcut, 287 F.2d 654 (9th Cir. 1961) and United States

v. Herring, 240 F.2d 225 (4th Cir. 1957).   Both these cases, like

the case at hand, concerned the estate tax and the income tax,

and the two taxes had not been imposed on the same taxable event.

Nevertheless, in both cases the single-transaction requirement of

equitable recoupment was held to be satisfied, and equitable

recoupment was applied in the taxpayers’ favor.   In each case,

after a death, estate tax was paid and thereafter the Government

sought additional income tax from the estate for income not

reported during the decedent's lifetime.    After paying the income

tax, the estate sued for refund of income tax on the ground that

it was entitled to equitable recoupment of the overpayment of

then time-barred estate tax resulting from the estate's failure

to claim the increased income tax liability as a debt in
                                   - 46 -

determining the taxable estate.       In Herring, the Court of Appeals

found that, although the case might differ from Bull, in

practical effect both of the Government’s claims grew out of the

same transaction and were asserted against the same assets in the

hands of the executor.       United States v. Herring, 240 F.2d at

228.    The court in Herring distinguished Rothensies v. Electric

Storage Battery Co., supra, on the ground that the two sets of

transactions there had been so very remote from each other that

the claims for which recoupment was sought were long dead.          Id.

at 227.       In Bowcut, the District Court reached the same result on

the basis of Herring.       Bowcut v. United States, 175 F. Supp. 218,

221-222 (D. Mont. 1959), affd. 207 F.2d 654 (9th Cir. 1961).         The

Court of Appeals did not consider the single-transaction issue,

as the Government appealed primarily on other grounds, lack of

clean hands and laches, which the Court of Appeals rejected as

grounds for denying equitable recoupment, United States v.

Bowcut, 287 F.2d at 656-657 & n.1.          The Commissioner acceded to

these decisions in Rev. Rul. 71-56, 1971-1 C.B. 404,13 which like

them concerns the application of a barred overpayment of Federal

estate tax against outstanding assessments of income tax owed by

a decedent for years preceding death and provides for

administrative allowance of equitable recoupment in that

situation.




       13
            Revoking Rev. Rul. 55-226, 1955-1 C.B. 469.
                                - 47 -

     Despite the statement of administrative position in Rev.

Rul. 71-56, supra, respondent has chosen, in the case at hand, to

hang her hat on contrary decisions of the old Court of Claims.

In Wilmington Trust Co. v. United States, 221 Ct. Cl. 686, 610

F.2d 703 (1979), in two consolidated cases, the Commissioner

assessed income tax deficiencies against the taxpayers after

their deaths, and the executors deducted the income taxes paid as

claims against the decedents’ gross estates.    In the subsequent

refund suits to recover the income tax payments, the Commissioner

sought, through equitable recoupment of the time-barred estate

tax deficiencies, to reduce the refunds.    In both cases, the

trial judges, citing Herring v. United States, supra, Bowcut v.

United States, supra, and Rev. Rul. 71-56, found that the single-

transaction requirement had been satisfied, and recommended

decision for the Government.    Wilmington Trust Co. v. United

States, 43 AFTR 2d 79-801, 79-1 USTC par. 9223 (Ct. Cl. Trial

Div. 1979); McMullan v. United States, 42 AFTR 2d 78-5723, 78-2

USTC par. 9656 (Ct. Cl. Trial Div. 1978).    The Court of Claims

reversed and remanded both cases, stating that it was obliged by

Rothensies v. Electric Storage Battery Co., 329 U.S. 296 (1946),

to give the single-transaction requirement a narrow, inflexible

interpretation.   Wilmington Trust Co. v. United States, 610 F.2d

at 713.   In these consolidated cases, unlike Herring and Bowcut--

and unlike the case at hand--it was the Government that was

seeking equitable recoupment.
                              - 48 -

     In applying the single-transaction test so restrictively,

the Court of Claims relied on its earlier opinion in Ford v.

United States, 149 Ct. Cl. 558, 276 F.2d 17 (1960), whose facts

were closer to our case.   Taxpayers had received shares of stock

in 1939 from their father’s estate, which had reported the shares

at an estate tax value of approximately $11,900.   On audit of the

estate tax return, there had been an upward adjustment to

$23,715, which the estate accepted.    In 1947, taxpayers sold the

shares, reported a date-of-death income tax basis of $165,800,

and claimed refund of an overpayment on this ground.   The Court

of Claims determined the date-of-death value to be $165,000.

Neither taxpayers nor the Government adverted to whether the

Government might be entitled to recoupment of the time-barred

underpaid estate tax against the income tax refund.    The Court of

Claims on its own initiative considered the issue, and, by a 3-2

vote, held that the Government was not entitled to recoupment

because the facts were not identical to those in Bull v. United

States, supra, and Stone v. White, supra.    The Court of Claims

said that Rothensies v. Electric Storage Battery Co., 329 U.S.

296 (1946), held that the doctrine of equitable recoupment was

not flexible, but strictly limited, and limited for the good

reason that if the doctrine were broadened there would never come

a day of final settlement in the income tax system.    Ford v.

United States, 276 F.2d at 23.   The Court of Claims did not cite

United States v. Herring and United States v. Bowcut, and Rev.
                               - 49 -

Rul. 71-56 had not yet been issued.     In Ford, as in Wilmington

Trust, but not as in Herring, Bowcut, or the case at hand, it was

the Government's claim to equitable recoupment that was denied.

     When the Court of Claims later decided Wilmington Trust, it

was already committed to its prematurely expressed and ill-

considered view in the Ford case.     I agree with petitioner that

Herring and Bowcut reflect the preferable view.    To deny that

there is a single transaction for equitable recoupment purposes

in the Herring-Bowcut situation wouldn't serve the purposes of

statutes of limitation.   Requiring only that the connection

between the two taxable events be causally automatic (as in

Herring-Bowcut and in our case) serves to avoid the kind of

staleness that the Supreme Court feared in Rothensies v. Electric

Storage Battery Co., supra.    This requirement of at least

automatic causality also helps to ensure that the Commissioner

and the taxpayer aren't obliged to perform extensive additional

investigation and recordkeeping; the concept of final repose

isn't overwhelmingly important where the claim of one party may

only be inchoate or not even exist until there has been a

determination on the open claim, at which time the former claim

may already be barred.    To rely on the need for final repose as

barring equitable recoupment in this situation would make a

mockery of the concept of repose.14

     14
      Academic commentators have almost invariably supported
Herring-Bowcut against the Court of Claims. See Andrews, Modern-
                                                   (continued...)
                              - 50 -

     The Courts of Appeals have lined up on both sides.    In Boyle

v. United States, 355 F.2d 233 (3d Cir. 1965), revg. and

remanding 232 F. Supp. 543 (D.N.J. 1964), after the decedent died

leaving shares of preferred stock, dividend arrearages were added

to their value, and estate tax was paid accordingly.    The

distributees, on receiving those dividends, listed them as

nontaxable for income tax purposes, and the Commissioner

determined income tax deficiencies.    The distributees paid the

income tax deficiencies and brought a refund suit.    The District

Court denied them equitable recoupment against the then time-

barred estate tax, holding that the single-transaction test of

Rothensies v. Electric Storage Battery Co. was not satisfied.

Boyle v. United States, 232 F. Supp. at 549-550.     The Court of

Appeals reversed, Boyle v. United States, 355 F.2d at 236,

holding that there had been double taxation of a single item, the

same fund, which sufficed to satisfy the requirements of Bull v.

United States, and that treatment of the same fund as both corpus

and income provided the necessary inconsistency of treatment.

Id. at 235.   The Court of Appeals distinguished Rothensies v.

Electric Storage Battery Co. on the ground that the lapse of so

much time there made it more distant from the case before the

     14
      (...continued)
Day Equitable Recoupment and the “Two-Tax Effect”: Avoidance of
the Statutes of Limitation in Federal Tax Controversies, 28 Ariz.
L. Rev. 595, 630-650 (1986); Willis, Some Limits of Equitable
Recoupment, Tax Mitigation, and Res Judicata: Reflections
Prompted by Chertkof v. United States, 38 Tax Law. 625, 642-645
(1985).
                               - 51 -

Court than Bull.    Id. at 236-237.   Respondent attempts to

distinguish Boyle from our case on the ground that what was at

issue in Boyle was whether the second tax should have been paid

at all on the transaction, not whether it was overpaid.    However,

the Court of Appeals doesn't seem to have relied on that fact,

and I don't see the distinction as dispositive.    Thus, Boyle

supports Herring-Bowcut, and petitioner’s view of the single-

transaction issue in this case.

     In O’Brien v. United States, 766 F.2d 1038 (7th Cir. 1985),

revg. 582 F. Supp. 203 (C.D. Ill. 1984), the District Court held

squarely that the single-transaction requirement is satisfied

where the issue is inconsistency in establishing fair market

value of the same property for the purpose of determining the

gross estate and the basis of the property (the situation in the

case at hand), and the Court of Appeals for the Seventh Circuit

appears to have agreed.   Respondent correctly points out that any

statement of the Court of Appeals to that effect was dictum, as

that Court reversed the District Court’s decision to apply

equitable recoupment, on a ground not relevant to our case (later

confirmed by Dalm), that equitable recoupment requires an

independent basis for jurisdiction.     O’Brien v. United States,

766 F.2d at 1049.   But the Court of Appeals did say, even if in

dictum, that the single-transaction test of Rothensies v.

Electric Storage Battery Co., supra, “appears to be satisfied on
                                   - 52 -

these facts if we adopt the reasoning of the Third Circuit in

Boyle.”     Id.    at 1050 n.16.

     After the O’Brien decedent had died, his estate paid estate

tax on stock in his estate at one value.      Then, after the estate

sold the stock, it paid income tax using that same value as its

basis.     The Commissioner then determined a higher value for

estate tax purposes, and a stipulated decision was entered in

this Court resolving the estate tax dispute using a higher value.

One of decedent’s heirs and children then sued for a refund of

overpaid income tax, on which the period of limitations had

expired, arguing that the basis used for the stock should have

been higher and using equitable recoupment as the ground for the

suit.     The District Court agreed, finding that the single-

transaction requirement of Rothensies v. Electric Storage Battery

Co. had been satisfied.15      O’Brien v. United States, 582 F. Supp.

at 205-206.       Like the Court of Appeals in Boyle, the District

Court in O’Brien relied on Bull, finding it closer to its case

than Rothensies v. Electric Storage Battery Co.       The District

Court distinguished Rothensies v. Electric Storage Battery Co. on

the ground that in that case the Government had not taken

inconsistent positions, the dispute having been precipitated by



     15
      The taxpayer also argued for the refund under the
statutory mitigation provisions, secs. 1311-1314, and the
District Court also bought this argument, O’Brien v. United
States, 582 F. Supp. 203, 206-207 (C.D. Ill. 1984), under
Chertkof v. United States, 676 F.2d 984 (4th Cir. 1982). The
Court of Appeals also reversed this conclusion.
                                - 53 -

the plaintiff’s successful, but belated, challenge of the

legality of the excise tax.     O’Brien v. United States, 582 F.

Supp. at 206.    The District Court distinguished Ford v. United

States, supra, finding it not in point for reasons that it does

not make very clear and finding the case before it

indistinguishable from Bull.     Id.   Although the Court of Appeals

was somewhat guarded in its language, it does not seem to have

disagreed.     It reversed solely because of the lack of an

independent basis for jurisdiction, the period of limitations

having expired on the income tax refund claim that was the

subject of the taxpayer's lawsuit.       O’Brien v. United States, 766

F.2d at 1048-1051.    Even if the reversal of the District Court on

this ground caused what the Court of Appeals said about the

single-transaction issue to be dictum, all this supports

petitioner’s view of the issue in our case, which is similar to

the facts in O’Brien.

     Respondent asserts that Minskoff v. United States, 349 F.

Supp. 1146 (S.D.N.Y. 1972), affd. per curiam 490 F.2d 1283 (2d

Cir. 1974), supports her view of the single-transaction

requirement.    In that case, an estate brought a refund action

against the Government for recovery of estate tax on the

decedent’s interest in a corporation; the Government had

collected income tax in 1961 on the proceeds from the decedent’s

sale of his interest in the corporation in 1949, prior to his

death in 1950 (at trial, the Government was successful in proving
                                - 54 -

that the decedent had sold his interest prior to his death).      As

in Herring and Bowcut, the refund suit was ostensibly for

overpaid income tax (which was not yet time-barred) but in fact

was grounded on equitable recoupment of the earlier, time-barred

overpaid estate tax.    Equitable recoupment was denied.

Respondent interprets this case to mean that, to satisfy the

single-transaction requirement, not only must two taxes have been

imposed, but they must have been imposed on a single transaction

on inconsistent legal theories.    However, although both the

District Court and the Court of Appeals cited Rothensies v.

Electric Storage Battery Co., supra, failure to satisfy the

single-transaction test was not clearly the basis of their

refusal to allow equitable recoupment.    Actually, it was quite

proper for the Government to impose both taxes on the amount in

question, and there was therefore no proper basis for

recoupment.16    Indeed, the District Court did say that Bull only

allows recoupment where the imposition of two taxes rests on

inconsistent theories, as opposed to inconsistent factual

determinations, Minskoff v. United States, 349 F. Supp. at 1149,

and the Court of Appeals affirmed on that ground, 490 F.2d at

1285.     If the opinions in Minskoff were right on this point,

petitioner in the case at hand would lose, as the inconsistency

in tax treatment rests on a factual issue, the value of the

     16
      See Tierney, Equitable Recoupment Revisited: The Scope of
the Doctrine in Federal Tax Cases after United States v. Dalm, 80
Ky. L.J. 95, 100 n.15 (1992).
                               - 55 -

stock.    However, the Minskoff courts are unpersuasive in

distinguishing Bull on this fact-law distinction:    The issue of

whether the amounts in Bull were income or part of the gross

estate was a mixed question of fact and law.    Similarly, the

issue in Dalm was the factual one of whether the payments had

been gifts or income for services,17 and everything indicates

that, had it not been for the lack of an independent basis for

jurisdiction, Mrs. Dalm would have won her suit.18    No other

decision decides whether or not to apply equitable recoupment on

the basis of this distinction.     I conclude that the Minskoff case

does not clearly use failure to satisfy the single-transaction

requirement to justify its refusal to apply equitable recoupment,

is wrong in its fact-law distinction, and is in any event clearly

distinguishable from our case.19


     17
      See Commissioner v. Duberstein, 363 U.S. 278, 289-290
(1960).
     18
      In United States v. Dalm, 867 F.2d 305 (6th Cir. 1989),
revd. 494 U.S. 596 (1990), the Sixth Circuit found all the
requirements for equitable recoupment to be met except for the
one, different factual issue of whether the Tax Court settlement
already took account of the overpaid gift tax and remanded to the
District Court to determine that issue. In reversing on the
jurisdictional issue, the majority of the Supreme Court expressed
no misgivings about the factual basis of the inconsistent tax
treatment and indeed suggested that, had it not been for the
jurisdictional issue, Mrs. Dalm could have had her refund: “Our
holding today does not leave taxpayers in Dalm’s position
powerless to invoke the doctrine of equitable recoupment.”
United States v. Dalm, 494 U.S. at 610.
     19
      The District Court in Minskoff v. United States, 349 F.
Supp. 1146 (S.D.N.Y. 1972), affd. per curiam 490 F.2d 1283 (2d
Cir. 1974), advanced alternative grounds for its correct result,
                                                   (continued...)
                              - 56 -

     The Court of Claims view was applied under somewhat

different circumstances in Estate of Mann v. United States, 552

F. Supp. 1132 (N.D. Tex. 1982), affd. 731 F.2d 267 (5th Cir.

1984), a case cited by neither party.   There, after a holding

that a decedent’s estate was entitled to an income tax refund on

the ground that a bad debt had been a business debt, the

Government’s equitable recoupment claim, based on the ground that

the estate should have paid estate tax on the refund claim, was

denied.   As the District Court observed, because refund suits

     19
      (...continued)
and one of these may have been correct. The first and arguably
correct one of these alternative grounds was that the estate had
not proved that there was any factual inconsistency, still less
its actual amount. Id. at 1150. The Court of Appeals, although
it felt no need to decide the case on any but the first ground
(fact as opposed to law), approved the District Court’s reasoning
about the estate’s failure of proof in a footnote, Minskoff v.
United States, 490 F.2d at 1285 n.1, and on this basis
distinguished Boyle v. United States, 355 F.2d 233 (3d Cir.
1965), where the sum at issue could not have been earned both
before and after the death of the decedent. (The District Court
had felt that Boyle was inconsistent with Rothensies v. Electric
Storage Battery Co., 329 U.S. 296 (1946), and had therefore
refused to follow Boyle v. United States, supra. Minskoff v.
United States, 349 F. Supp. at 1150 n.3.) With respect to this
issue of proof, our case resembles Boyle, rather than Minskoff:
Different valuations of a stock at the same time are inconsistent
on their face, and there is no need for petitioner to prove
anything on this score.

     The District Court’s other alternative ground was that
equities weren't on the side of the taxpayer, who had failed to
report as income capital gain that clearly should have been
reported, and that therefore the doctrine of equitable
recoupment, being in the nature of an equitable defense, could
not be invoked by a party lacking clean hands. Id. at 1150. As
we shall see infra pp. 68-69, this is an aberrant view that
courts generally don't follow, which may no longer be
respondent's view, and which is incorrect. The Court of Appeals
was silent on this issue in Minskoff.
                                - 57 -

based on the deduction of worthless business debts are allowed

for 7 years, under section 6511(d)(1), and because the issues

posed by the two claims would require substantially different

proof, to allow recoupment in this situation would seriously

undermine the statute of limitations.    Estate of Mann v. United

States, 552 F. Supp. at 1141.    However, the District Court also

clearly expressed its preference for the reasoning of the Court

of Claims over Herring and Bowcut, Estate of Mann v. United

States, 552 F. Supp. at 1137-1140, and the Court of Appeals for

the Fifth Circuit affirmed, on the basis of Rothensies v.

Electric Storage Battery Co., Estate of Mann v. United States,

731 F.2d at 279.   Estate of Mann clearly lines up with the Court

of Claims on the single-transaction issue, but it can be

distinguished from our case.    On balance, I regard the later

cases as neither strengthening nor weakening my conclusion that

Herring and Bowcut represent the preferable view of the law.20

     Respondent tries to distinguish the case at hand from

Herring, Bowcut, and Rev. Rul. 71-56, on the ground that in



     20
      Our recent decision in Estate of Bartels v. Commissioner,
106 T.C. 430 (1996), furnishes additional implicit support for
United States v. Herring, 240 F.2d 225 (4th Cir. 1957), and
United States v. Bowcut, 287 F.2d 654 (9th Cir. 1961), as opposed
to the contrary cases. In that case, which presented the
Herring-Bowcut situation, respondent, consistently with the view
announced in Rev. Rul. 71-56, 1971-1 C.B. 404, didn't even raise
the single-transaction requirement as an objection to our
allowance of the taxpayer's equitable recoupment claim. Estate
of Bartels v. Commissioner, at 433 n.4. We therefore found the
single-transaction requirement not to be an obstacle to
permitting equitable recoupment.
                              - 58 -

Herring-Bowcut, both the main action and the recoupment claim

are occasioned solely by deficiencies, whereas here that

characterization was available only for the proceeding before us

prior to issuance of our opinion in Mueller I.   However, here

both the proceeding before us and the recoupment claim are

occasioned solely by inconsistent valuations of the same shares

of stock.   There may not be a single taxable event here, but that

is really true in Herring-Bowcut as well.    One can also speak of

our situation as a single transaction, decedent’s death, which

occasions the need to value the shares, both to determine the

gross estate for estate tax purposes and the step-up in basis for

income tax purposes.   There is, moreover, the same fund, which

can be considered the same item.    Cf. Estate of Vitt v. United

States, 706 F.2d 871, 875 (8th Cir. 1983) (taxation of same tract

of property and inclusion of identical part of value of that

property in two instances of imposition of estate tax sufficient

to satisfy single-transaction requirement); United States v. Gulf

Oil Corp., 485 F.2d 331, 333 (3d Cir. 1973) (taxation of same

fund all that is required); Boyle v. United States, 355 F.2d at

236 (taxation of identical “definite fund” all that is required).

     This differences between the situation in Rothensies v.

Electric Storage Battery Co., on the one hand, and the Herring-

Bowcut-Wilmington Trust Co.-Bartels and the Ford-O'Brien-Mueller

situations, on the other, and the similarities of the latter two

sets of situations, are striking.   In Rothensies v. Electric
                              - 59 -

Storage Battery Co. there is no causal connection between the

main claim and the barred claim sought to be recouped (actually

set-off).   In the latter two sets of situations, there is a

causal connection.   In Herring-Bowcut-Bartels, the determination

and payment of an income tax deficiency gave rise to a time-

barred estate tax overpayment, which was allowed to be recouped

against that deficiency; in Wilmington Trust, the Court of

Claims, improperly, I believe, refused to allow the Government to

recoup time-barred estate tax deficiencies against the taxpayer

estates' recoveries of income tax refunds that generated those

deficiencies.   Similarly, in our case, as in Ford and O'Brien,

the increase in the value of the shares for estate tax purposes

generated an estate tax deficiency and a correlative time-barred

income tax overpayment with respect to the same shares.   In our

case the causal connection is clear; in Rothensies v. Electric

Storage Battery Co. there is no such connection.21

     Moreover, in another significant respect, the situation in

the case at hand is further removed from the Rothensies v.

Electric Storage Battery Co. situation than Herring and Bowcut:

Here, all the events happened within the same calendar year,



     21
      The excursus in the text further sharpens the point of my
observation in Fort Howard Corp. v. Commissioner, 103 T.C. 345,
377 n.2 (1994) (Beghe, J., dissenting), that for tax purposes the
connections that are important are not so much the logical
connections arrived at by reference to the laws of thought and
correct syllogistic reasoning as the "logic of events" that has
to do with cause and effect relationships and necessary
connections or outcomes.
                               - 60 -

within 67 days of each other.22   In addition, the dicta of the

Court of Appeals in O’Brien (and the decision of the District

Court in that case) find the single-transaction requirement

satisfied in a situation that is still closer to the case at hand

than the Herring-Bowcut situation.

     Finally, in Mueller II, we decided, having been prompted to

do so by United States v. Dalm, supra, that we are authorized to

apply equitable recoupment.    Dalm wrought a change in the legal

landscape that not only led us to change our own view of our

authority, but did so in a way that undercuts the broad rationale

of the narrow interpretation of the single-transaction

requirement urged in Rothensies v. Electric Storage Battery Co.,

supra.    In deciding that case, the Supreme Court stated

emphatically that an important reason for keeping equitable

recoupment narrowly confined was its fear that otherwise too many

tax cases would be diverted from the Tax Court to the District

Courts.    In Rothensies v. Electric Storage Battery Co., supra,

the Supreme Court also expressed concern that allowing, through

broadly interpreted equitable recoupment, wholesale reexamination

of other years would undermine the whole single-year income tax

system.    In view of the limitations imposed by my view of the

requirements for equitable recoupment, including the single-

transaction requirement, the Supreme Court’s expression of

     22
      Cf. Willis, Some Limits of Equitable Recoupment, Tax
Mitigation, and Res Judicata: Reflections Prompted by Chertkof
v. United States, 38 Tax Law. at 640-641.
                              - 61 -

concern is not reasonably implicated.   My approach is merely

lenient enough to admit the Herring-Bowcut situation and this

case.   In Rothensies v. Electric Storage Battery Co., supra, the

taxpayer was trying to resurrect claims that were 20 years old,

whereas in our case only 67 days within the same calendar year

separate the two taxable events.   Cf. O’Brien v. United States,

766 F.2d at 1051 n.17 (much to be said for liberally construing

single-transaction and identity-of-interest requirements for

equitable recoupment, but not for relaxing rule against reopening

closed tax years); Aetna Cas. & Sur. Co. v. Tax Appeals, 633

N.Y.S.2d 226, 228 (N.Y. App. Div. 1995) (equitable recoupment

allowed so long as taxpayer’s counterclaim covers same tax period

as Government’s claim, so that overpayment can be considered part

of same “transaction”, (citing National Cash Register Co. v.

Joseph, 86 N.E.2d 561, 562 (N.Y. 1949))).

     According to Brown v. Secretary of Army, 78 F.3d 645, 650

(D.C. Cir. 1996), the rationale for narrow interpretation of

waivers of sovereign immunity is the risk of imposing

unanticipated and potentially excessive liabilities on the fisc.

The liability imposed on the fisc by interpreting the single-

transaction requirement in the way I would do here is strictly

limited and can't be regarded as excessive.

     I would therefore hold, in the circumstances of this case,

where not only has the same fund been subjected to inconsistent

double taxation by reason of the decedent's death, but the
                              - 62 -

taxable events occurred within the same calendar year, and within

67 days of each other, that the single-transaction, item, or

event requirement of equitable recoupment has been satisfied.

3.   Inconsistent Treatment

      Respondent, in denying the Administration Trust’s second

refund claim made in 1990, treated the same shares inconsistently

with respondent’s statutory notice to petitioner determining an

estate tax deficiency based on a different valuation of those

shares at the same time, the time of decedent’s death.   It

follows from my conclusion in the preceding section that this

case satisfies the single-transaction requirement that respondent

has subjected the same item to inconsistent tax treatment.    Thus,

the inconsistent-treatment requirement is met.23



      23
      I'm aware that it's not necessarily inconsistent that the
same fund should be subjected to both income and gift tax, as the
Code sections having to do with those two taxes are not construed
in pari materia. Farid-Es-Sultaneh v. Commissioner, 160 F.2d 812
(2d Cir. 1947), revg. 6 T.C. 652 (1946). That does not, however,
gainsay a real inconsistency in our case, because both tax
results depend upon the same matter of fact, the fair market
value of the same shares at decedent’s death. It would be
inconsistent to hold those shares to have had one value for
estate tax purposes and another for income tax purposes. There
is a presumption that the estate tax value of an asset is correct
and applies also to determine income tax basis. Hess v. United
States, 210 Ct. Cl. 483, 537 F.2d 457, 463 (1976); Swift v.
Wheatley, 538 F.2d 1009, 1010 (3d Cir. 1976); Levin v. United
States, 373 F.2d 434, 438 (1st Cir. 1967); Williams v.
Commissioner, 44 F.2d 467, 469 (8th Cir. 1930), affg. 15 B.T.A.
227 (1929); Feldman v. Commissioner, T.C. Memo. 1968-19; sec.
1.1014-3(a), Income Tax Regs.; Rev. Rul. 54-97, 1954-1 C.B. 113.
                              - 63 -

4.   Identity of Interest

      In Stone v. White, 301 U.S. 532 (1937), the Supreme Court

permitted the Government to recoup its time-barred deficiency

claim against the sole beneficiary of a trust to reduce a timely

refund claim brought by the trustees of the same trust.   Thus,

the Government’s claim against one taxpayer could be raised as a

defense to a claim brought by another taxpayer, so long as the

two taxpayers had an “identity in interest”.    Id. at 537.

      Later cases have followed Stone v. White, supra, in finding

identity of interest between legally different parties because

their interests did in fact coincide.    Estate of Vitt v. United

States, 706 F.2d 871 (8th Cir. 1983) (husband’s estate and wife’s

estate); Boyle v. United States, 355 F.2d 233 (3d Cir. 1965)

(estate and all the beneficiaries of the estate); United States

v. Bowcut, 287 F.2d 654 (9th Cir. 1961) (decedent and his

estate); United States v. Herring, 240 F.2d 225 (4th Cir. 1957)

(same); Hufbauer v. United States, 297 F. Supp. 247 (S.D. Cal.

1968) (taxpayer and wholly owned corporation); see also O'Brien

v. United States, 766 F.2d 1038, 1050-1051 (7th Cir. 1985)

(dicta; one of three principal heirs).   But see Kramer v. United

States, 186 Ct. Cl. 684, 406 F.2d 1363 (1969) (life tenant

annuitant and decedent's estate); Lockheed Sanders, Inc. v.

United States, 862 F. Supp. 677, 681-682 (D.N.H. 1994) (parent

corporation and subsidiary not qualified as member of affiliated

group).
                             - 64 -

     Respondent argues that petitioner and the Administration

Trust don't satisfy the identity-of-interest requirement because:

(1) The Administration Trust, far from being the only beneficiary

of decedent’s estate, is not even a beneficiary; (2) petitioner’s

recoupment claim will inure to the benefit of all beneficiaries

of the Administration Trust, and petitioner hasn't met the burden

of showing an identity of interest between the Administration

Trust and the estate; (3) the Administration Trust has been and

will be reimbursed for part of its payment of decedent’s estate

taxes by the other parties in interest to whom some portion of

the Federal estate tax liability will be apportioned; (4) some of

the Administration Trust’s beneficiaries aren't beneficiaries of

the estate; and (5) the case law supports denying rather than

affirming that the requirement is satisfied.

     These arguments don't seem to me to have force.   Although

the Michigan Uniform Estate Tax Apportionment Act provides that,

unless the will otherwise provides, death taxes shall be

apportioned in proportion to the value of the interest that each

person has in the estate, Mich. Comp. Laws sec. 720.12 (1979), it

also contains several provisions for equitable apportionment,

Mich. Comp. Laws secs. 720.13(b), 720.15(d), 720.16 (1979).     The

aim of this statute is to ensure an equitable allocation of the

burden of the tax among those actually affected by that burden.

In re Estate of Roe, 426 N.W.2d 797, 799-800 (Mich. Ct. App.

1988).
                                  - 65 -

      I would find that any adjustment through recoupment will

solely benefit the Administration Trust (and, through it, its

beneficiary subtrusts and their beneficiaries).       Even though,

because of the reimbursements under probate court order, the

Administration Trust has been responsible for only 71.9 percent

of the estate tax that has been paid so far, I believe the

probate court would apportion any reduction in estate tax arising

from allowance of recoupment so that it would inure solely to the

benefit of the Administration Trust.       The Administration Trust

paid all its income tax on the sale of its shares, including the

overpaid portion.      There is thus an absolute identity of

interest.      The situation seems to me to be quite analogous to

that of Stone v. White, so that any distinction based on the

existence of different legal entities would be purely artificial.

      I would conclude that the identity-of-interest requirement

is satisfied.

5.   Statutory Mitigation

      Congress in 1938 enacted the mitigation provisions now

contained in sections 1311 through 1314 as a supplement to

equitable recoupment and other court-created correctives to the

injustices resulting from inconsistent treatment of related items

for Federal tax purposes.      S. Rept. 1567, 75th Cong., 3d Sess. 48

(1938), 1939-1 C.B. (Part 2) 779, 815.24      If the complicated


      24
           "The Federal courts in many somewhat similar tax cases
                                                        (continued...)
                               - 66 -

requirements of these provisions are satisfied, then either a

taxpayer or the Government (depending on which has suffered from

the inconsistency) can obtain redress, regardless of the bar of a

statute of limitations.    If the result of the required adjustment

is a tax deficiency, then it will be assessed and collected in

the same way as any other deficiency.    If the result is a tax

overpayment, then the taxpayer must file a claim for refund,

unless the Government refunds it without the filing of a formal

claim.    If the claim is denied or is not acted on in 6 months,

the taxpayer may then sue for a refund.    Secs. 6532(a)(1),

7422(a).

     The Administration Trust here applied for an income tax

refund, which was denied.    Thereafter, petitioner in this case

raised mitigation as one of the affirmative defenses in its

amended petition, treating respondent's denial of its refund

claim as the final determination that would bring the mitigation

provisions into play.    Respondent did not move to strike this

defense.    Nevertheless, because petitioner failed to argue



     24
      (...continued)
have sought to prevent inequitable results by applying principles
variously designated as estoppel, quasi estoppel, recoupment, and
set-off. For various reasons, mostly technical, these judicial
efforts can not extend to all problems of this type. Legislation
has long been needed to supplement the equitable principles
applied by the courts and to check the growing volume of
litigation by taking the profit out of inconsistency, whether
exhibited by taxpayers or revenue officials and whether
fortuitous or by design.” S. Rept. 1567, 75th Cong., 3d Sess. 48
(1938), 1939-1 C.B. (Part 2) 779, 815; emphasis added.
                               - 67 -

mitigation further at trial or on brief, I would deem petitioner

to have waived this defense, insofar as its ability to assert it

in this proceeding is concerned.

     That might not be the end of the matter.   The mitigation

provisions may have a preemptive effect on petitioner’s right to

equitable recoupment.    Compare, e.g., Brigham v. United States,

200 Ct. Cl. 68, 470 F.2d 571, 577 (1972) with First Natl. Bank of

Omaha v. United States, 565 F.2d 507, 512, 518 (8th Cir. 1977).

However, respondent has not argued that equitable recoupment is

unavailable to petitioner because mitigation preempts it, nor did

petitioner argue that there is no preemption.   Under the

circumstances, I would hold that respondent has waived the

preemption argument.25   Consequently, the mitigation provisions



     25
      In light of the regulation stating that statutory
mitigation is only available for inconsistencies involving solely
the income tax, sec. 1311(a)-2(b), Income Tax Regs., and Chevron,
U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837 (1984), which requires us to defer to that regulation if it
is reasonable, see Reno v. Koray, 515 U.S. ___, ___, 115 S. Ct.
2021, 2023 (1995) (Chevron deference owed to interpretive rules),
it would be unnecessary to decide whether, in the absence of the
regulation and Chevron, Chertkof v. United States, 676 F.2d 984,
987-992 (4th Cir. 1992), was correct in holding that statutory
mitigation is also available to correct inconsistencies in
application of estate tax and income tax. The weight of
authority is to the contrary, see Hall v. United States, 975 F.2d
722 (10th Cir. 1992) (windfall profits tax); Ketteman Trust v.
Commissioner, 86 T.C. 91, 110 (1986) (gift tax); Provident Natl.
Bank v. United States, 507 F. Supp. 1197 (E.D. Pa. 1981) (estate
tax); see also, Willis, Correction of Errors Via Mitigation and
Equitable Recoupment: Some People Still Do Not Understand, 52
Tax Notes 1421 (Sept. 16, 1991); Willis, Some Limits of Equitable
Recoupment, Tax Mitigation, and Res Judicata: Some Reflections
Prompted by Chertkof v. United States, 38 Tax Law. 625 (1985).
                                - 68 -

do not prevent the application of equitable recoupment in this

case.

6.   Other Equitable Considerations

        Respondent raised arguments that application of equitable

recoupment to petitioner was blocked by other considerations:

(1) Lack of clean hands, largely because of considerations having

to do with trial tactics that are essentially irrelevant; and (2)

lack of diligence or laches, because the Administration Trust had

more than 4 months following issuance of the estate tax statutory

notice in which it could have filed a timely protective claim for

an income tax refund.     On brief, however, respondent has

essentially conceded these issues and admitted that, where the

proper circumstances for the application of equitable recoupment

are present, such equitable considerations won't prevent its

application.     All that remains in respondent’s briefs of the

original arguments about other equitable factors are trace

references to their factual bases and what appears to be an

argument in the alternative:     “if the Court believes that other

factors should be taken into account,” then respondent suggests

we take into account the Administration Trust’s lack of diligence

and failure to provide some necessary information during

discovery and at and after trial.

        Petitioner argues in detail against respondent’s specific

charges, but only after initially arguing that respondent’s

concession that such equitable considerations shouldn't be taken
                              - 69 -

into account in determining the availability of recoupment moots

the specifics of respondent’s charges.   Because I would agree

with petitioner that respondent’s concession settles the issue,

it's unnecessary to address respondent’s charges.26   I would

therefore decide that neither of these considerations prevents

the application of equitable recoupment in petitioner's favor.

7.   Overpayment Status

      Petitioner's overpayment status is attributable to two

functionally unrelated factors:   respondent's uncontested

allowance of credit for tax on prior transfers under section

2013, and our redetermination of the value of the shares in an

amount which, although greater than the value reported on the

estate tax return, is substantially less than the value

determined in respondent's statutory notice.

      If petitioner had filed the estate tax return claiming the

previously taxed property credit to which it is clearly entitled,



      26
      There is substantial authority that equitable factors
can't block equitable recoupment, Bull v. United States, 295 U.S.
247 (1935); Fisher v. United States, 80 F.3d 1576, 1581 (Fed.
Cir. 1996); Lovett v. United States, 81 F.3d 143, 145 (Fed. Cir.
1996); United States v. Bowcut, 287 F.2d at 656-657; Dysart v.
United States, 169 Ct. Cl. 276, 340 F.2d 624, 628-630 (1965);
Holzer v. United States, 250 F. Supp. 875, 878 (E.D. Wis. 1966),
affd. per curiam 367 F.2d 822 (7th Cir. 1966); see also
McConnell, The Doctrine of Recoupment in Federal Taxation, 28 Va.
L. Rev. 577, 579 (1942) (recoupment not entirely equitable in
origin or nature). But see Fairley v. United States, 901 F.2d
691, 694 n.4 (8th Cir. 1990); Wilmington Trust Co. v. United
States, 610 F.2d at 714-715; Davis v. United States, 40 AFTR 2d
77-6189, at 77-6192, 77-1 USTC par. 13,195, at 87,274 (N.D. Tex.
1977); Minskoff v. United States, 349 F. Supp. at 1150.
                              - 70 -

we wouldn't even be discussing this issue.   Petitioner would have

paid estate tax in an amount that was $1,152,649 less than the

amount that accompanied the return as prepared and filed, and

respondent would have determined an estate tax deficiency in

excess of $3 million rather than the one slightly less than $2

million in the statutory notice that was actually sent.27     As a

result of our valuation redetermination of the value of the

shares at $1,700 per share in Mueller I, there would be an estate

tax deficiency of $957,099, against which there would be

recoupment of $265,999, resulting in a reduced deficiency on the

order of $691,100.

      Petitioner hasn't attempted to explain why it failed to

claim the previously taxed property credit on the estate tax

return, but whether petitioner has a valid excuse should have no

bearing on the outcome.   As indicated supra p. 68, laches and

lack of diligence don't adversely affect a taxpayer's right to

recoupment.   For purposes of recoupment, petitioner shouldn't be

disadvantaged by its initial oversight in failing to claim a

credit that respondent acknowledges petitioner's clearly entitled

to.   To allow respondent to take advantage of petitioner's

oversight would perpetuate in another guise the unjust enrichment

that equitable recoupment is designed to prevent.



      27
      For the purpose of this discussion, changes in other
credits can be and are ignored. See background statement, supra
pp. 35-36.
                              - 71 -

     i.   Code sections are no obstacle to recoupment

     Section 6214(a) grants this Court “jurisdiction to

redetermine the correct amount of a deficiency”.     Deficiency, as

defined in section 6211, depends generally on the relationship

between the amount of the tax imposed on the taxpayer and the

amount the taxpayer showed as the tax on the tax return.     In

Mueller II, when the parties argued the case on the assumption

that petitioner would have a deficiency, respondent argued that

these sections did not authorize us to use equitable recoupment

to adjust petitioner's deficiency.     We decided in Mueller II

that, even if petitioner should have a deficiency, we have

authority to apply equitable recoupment.     We recently reaffirmed

that conclusion in Estate of Bartels v. Commissioner, 106 T.C.

430 (1996).

     There is less restriction on our overpayment jurisdiction

under section 6512(b).   Although section 6512(b)(1) does require

that the overpayment have been made by “the taxpayer”, and the

Administration Trust is not the same as petitioner, the identity

of interest that I would find, and the fact that the

Administration Trust has paid and is responsible for the estate

tax on transfers of the shares held by and appointed to it,

satisfy this requirement, given the nature and purposes of

equitable recoupment.

     Moreover, the requirements of section 6512(b)(3), which sets

time limits on any credit or refund, and whose restrictions
                              - 72 -

section 6512(b)(1) incorporates, have been satisfied so as to

allow the refund of the overpayment in this case.   Because the

statutory notice in this case was mailed within 3 years of the

Administration Trust's overpayments of both income tax and estate

tax, section 6512(b)(3)(B) has been satisfied.

     ii.   Recoupment's defensive nature and the unrelated
           overpayment don't bar recoupment

     Respondent argues and the majority conclude that

petitioner’s overpayment status prevents us from applying

equitable recoupment.   They've been beguiled by the notion that

allowing equitable recoupment when there's already a net

overpayment would increase the overpayment, and that this would

be the same as allowing an affirmative recovery of time-barred

taxes that recoupment can't provide.   As we've said, Mueller II,

101 T.C. at 552, and as United States v. Dalm, 494 U.S. 596

(1990), clearly establishes, a taxpayer asserting equitable

recoupment may not affirmatively collect the time-barred

overpayment of tax, but may only use equitable recoupment to

reduce the Government’s timely determination of a deficiency.

     Respondent and the majority (majority op. p. 8) cite for

their conclusion Brigham v. United States, 200 Ct. Cl. 68, 470

F.2d 571 (1972).   There, the taxpayers were seeking refunds of

ordinary income tax paid in barred years that, it turned out

under a later Supreme Court case, had been erroneously paid,

because the underlying transaction should have been treated as an
                              - 73 -

installment sale resulting in capital gains.   The Commissioner

acquiesced and allowed the taxpayers a refund for 1962 but not

for earlier, barred years.   The taxpayers then sued for refunds

of their overpayments for those earlier years, under the

alternative theories of mitigation and equitable recoupment.    The

Court of Claims denied mitigation on the ground that the

Commissioner had not actively maintained inconsistent positions.

The Court of Claims then denied equitable recoupment, primarily

because it believed that mitigation, within its area of

applicability, preempts equitable recoupment, but also on the

alternative ground that equitable recoupment can only be used to

reduce the amount of deficiencies recoverable by the Government

in later years, and there were no such deficiencies, just time-

barred earlier years.   Brigham v. United States, 470 F.2d at

577.28

     Brigham’s language might, in isolation, like some language

in Mueller II, 101 T.C. at 552, be extended to support

respondent’s view, but petitioner persuasively argues that such

an extension would make no sense.   Under respondent’s view, this



     28
      "When its benefits are sought by the taxpayer, the
function of the doctrine [of equitable recoupment] is to allow
the taxpayer to reduce the amount of a deficiency recoverable by
the Government by the amount of an otherwise barred overpayment
of the taxpayer. * * * Here no such situation exists. * * *
Rather, the plaintiffs are attempting an extension of the
doctrine of equitable recoupment to the case of a refund of taxes
for an otherwise barred year." Brigham v. United States, 200 Ct.
Cl. 68, 470 F.2d 571, 577 (1972).
                              - 74 -

Court’s jurisdiction to apply equitable recoupment would

evaporate if and when it turned out that the petitioner was in an

overpayment status, which might well not be known until we were

about to enter a decision after a Rule 155 computation in a

multi-issue case.   To tie the requirement that the assertion of

equitable recoupment be defensive to a taxpayer’s total position,

rather than to the single transaction to which equitable

recoupment would attach, would be a radical departure from the

history of recoupment.   Recoupment arose as an equitable rule of

joinder that permitted adjudication in one suit of two claims,

both arising out of the same transaction, that otherwise had to

be brought separately under the common law forms of action.    In

re Davidovich, 901 F.2d 1533, 1537 (10th Cir. 1990).    Hence, when

recoupment was imported into the tax law by the Supreme Court in

Bull v. United States, 295 U.S. 247 (1935), the Court did require

that both claims arise out of the same transaction and that the

recoupment claim be defensive, but it did not require that the

taxpayer have a deficiency.   Bull v. United States, 295 U.S. at

262.   Indeed, the Court could not have done so; in Bull v. United

States, supra, as in all later refund cases where taxpayers

obtained equitable recoupment, the taxpayers had overpaid.    The

fact that the amount that they claimed in recoupment did not

exceed the amount claimed by the Government from the same

transaction sufficed to render their claim defensive.   The

language in Brigham v. United States, supra, on which respondent
                             - 75 -

relies means no more than that equitable recoupment is only

available against a deficiency determined by respondent, whether

or not it turns out to exceed any recoupment sought.29

     The foundations, such as they are, of the majority opinion

lie in its footnotes 13 and 14.   Footnote 13 provides the

majority's rationale for refusing to decide whether petitioner is

in a deficiency posture and thus to refuse to apply recoupment

before taking into account the credit for tax on prior transfers.

Footnote 14 asserts a policy reason for this refusal.

     The cases cited in footnote 1330 can be made to stand for

the proposition that, for purposes of res judicata with respect

to whether a taxpayer in a new action can raise new tax issues



     29
      In any event, the language of Brigham v. United States,
supra, on which respondent rely is dictum. The taxpayers in the
cases consolidated in Brigham were seeking to use equitable
recoupment (as well as mitigation) to recover time-barred income
tax overpaid. The Court of Claims, having denied mitigation,
went on to deny equitable recoupment, first on the ground that
mitigation preempted equitable recoupment within its area of
applicability. It then went on to observe that the taxpayers
were not seeking to reduce deficiencies in later years, which it
was conceded did not exist, but rather to extend equitable
recoupment to a refund of taxes in an otherwise barred year.
There was no independent basis for jurisdiction. The language is
best taken as a somewhat less clear expression of the doctrine
expressed much more clearly in United States v. Dalm, supra. The
same is true of similar language in Evans Trust v. United States,
199, Ct. Cl. 98, 462 F.2d 521, 526 (1972), quoted by the majority
(majority op. p. 16), which is to be properly interpreted in the
same way as the language of Brigham.
     30
      Commissioner v. Sunnen, 333 U.S. 591, 598 (1948); Finley
v. United States, 612 F.2d 166, 170 (5th Cir. 1980); Estate of
Hunt v. United States, 309 F.2d 146, 148 (5th Cir. 1962);
Huddleston v. Commissioner, 100 T.C. 17, 25 (1993).
                               - 76 -

with respect to a tax year or estate concerning which there has

already been a final court decision, all issues having to do with

the same tax, the same taxpayer, and the same tax year (or same

estate) are part of one undivided claim.   However, the fact that

two issues are part of the same claim or cause of action for one

purpose doesn't mean they must be deemed to be such for any and

all other purposes.    Olympia Hotels Corp. v. Johnson Wax Dev.

Corp., 908 F.2d 1363 (7th Cir. 1990).

     The language in Commissioner v. Sunnen, 333 U.S. 591, 598

(1948),31 appears to imply more than the other cases cited in

footnote 13.    However, this language is pure dictum: the Supreme

Court in Sunnen was denying that res judicata blocked Government

litigation of the same tax issue that had been previously decided

for earlier tax years, not asserting a res judicata effect with

respect to the same year.   The holding of Sunnen was

significantly limited in Montana v. United States, 440 U.S. 147,

161 (1979).32   Sunnen now only stands for the proposition that


     31
      "Income taxes are levied on an annual basis. Each year is
the origin of a new liability and of a separate cause of action.
Thus, if a claim of liability or non-liability relating to a
particular tax year is litigated, a judgment on the merits is res
judicata as to any subsequent proceeding involving the same claim
and the same tax year." [Commissioner v. Sunnen, 333 U.S. 591,
598 (1948).]
     32
      The issue in Montana v. United States, 440 U.S. 147, 161
(1979), was whether a Government contractor, which had filed
suit at the direction of the United States in Montana courts
against the constitutionality of a Montana tax, had lost his case
in the Montana Supreme Court, and then abandoned its appeal to
                                                   (continued...)
                              - 77 -

res judicata doesn't prevent the Government from litigating the

same tax issue for different years if the law has changed since

the prior lawsuit.   Cf. Greene v. United States, 79 F.3d 1348,

1352 (2d Cir. 1996); Kamilche Co. v. United States, 53 F.3d 1059,

1061 n.2 (9th Cir. 1995); ITT Corp. v. United States, 963 F.2d

561, 564 (2d Cir. 1992); Blair v. Taxation Div. Director, 9 N.J.

Tax 345, 352-353 & n.7 (N.J. Tax Ct. 1987), affd. 543 A.2d 99

(N.J. Super. Ct. 1988).   Since the Supreme Court spoke its dictum

about the annual nature of the income tax in aid of its

conclusion that res judicata didn't prevent new litigation of the

same issue for later years, query how much of that dictum the

Supreme Court would repeat today, in view of its change of view

on that conclusion (different year no longer implies different

claim or cause of action).

     This Court decided, in Hemmings v. Commissioner, 104 T.C.

221 (1995), that a final judgment in District Court in a refund

suit didn't prevent respondent from issuing a statutory notice

for the same year on a different issue and this Court from



     32
      (...continued)
the United States Supreme Court, was prevented by res judicata
from filing a new suit, again at the direction of the United
States and now in United States District Court, against the
constitutionality of the same tax, with respect to different
payments under it. As Commissioner v. Sunnen, supra, had
previously been interpreted, res judicata would not have
prevented suit. However, in Montana v. United States, the United
States Supreme Court emphasized other language in Commissioner v.
Sunnen, supra, about how the law had changed since the previous
decision in deciding that res judicata prevented this new suit.
                               - 78 -

refusing to grant partial summary judgment to the taxpayers on

the basis of res judicata.    Although it's settled law that the

requirements for claim preclusion are:    (1) identical parties

(met); (2) court of competent jurisdiction (presumably met); (3)

final judgment on merits (met); and (4) identical cause of

action, United States v. Shanbaum, 10 F.3d 305 (5th Cir. 1994),

we decided in Hemmings that the Government was only prevented

from litigating in a new suit after a concluded refund suit all

its compulsory counterclaims and such permissive counterclaims as

are actually litigated.    Hemmings v. Commissioner, 104 T.C. at

234.    What this means is that this Court has held that it's not

always and for all purposes that all tax issues having to do with

the same taxpayer and the same tax year are parts of one

indivisible claim or cause of action.

       In Hemmings v. Commissioner, 104 T.C. at 234-235, we cited a

number of cases holding or stating that unrelated tax claims by

the Government having to do with the same tax year or same estate

are not compulsory counterclaims in a refund suit by the taxpayer

in District Court.   See, e.g., Gustin v. IRS, 876 F.2d 485, 490

n.1 (5th Cir. 1989) (wrong to dismiss for lack of jurisdiction

Government's counterclaim in refund suit, because that

counterclaim is not compulsory); Caleshu v. United States, 570

F.2d 711, 713-714 (8th Cir. 1978) (pending refund suit in

District Court does not prevent collection action to reduce

unpaid assessments to judgment in different District Court);
                              - 79 -

Pfeiffer Co. v. United States, 518 F.2d 124, 128-130 (8th Cir.

1975) (pending refund suit in District Court does not render

statutory notice and resulting deficiency assessment invalid);

Bar L Ranch v. Phinney, 400 F.2d 90, 92 (5th Cir. 1968) (pending

refund suit in District Court does not render statutory notice

and resulting deficiency assessment invalid); Florida v. United

States, 285 F.2d 596, 602-604 (8th Cir. 1960) (pending refund

suits in District Court do not prevent Government action in

different District Court   to enforce payment of taxes).   Most of

these cases cite dictum to the same effect in Flora v. United

States, 362 U.S. 145, 166 (1960).33    If these counterclaims are

not compulsory and thus can be the basis of a separate action,

tax cases can be split, at least for some purposes.


     33
      "Moreover, if [the taxpayer] decides to remain in the
District Court, the Government may--but seemingly is not required
to--bring a counterclaim; and if it does, the taxpayer has the
burden of proof." [Flora v. United States, 362 U.S. 145, 166
(1960); fn. ref. omitted.]

     With respect to Flora v. United States, supra, it's
interesting to observe that that case's central holding, that
refund suits can only be brought when taxes have been paid in
full, was, like Rothensies v. Electric Storage Battery Co., 329
U.S. 296 (1946), largely motivated by the desire not to divert
large numbers of tax cases from this Court to the district
courts. Flora v. United States, 362 U.S. at 175-176. After
United States v. Dalm, supra, and Mueller II, we won't divert tax
cases to the district courts if we refrain from holding that the
credit for prior taxes is part of the same claim or cause of
action for the purpose of permitting equitable recoupment any
more than we'll divert them by refusing to allow a narrow reading
of the single-transaction issue (the issue in Rothensies v.
Electric Storage Battery Co., supra) to block equitable
recoupment. See infra pp. 42-60 discussing the single-
transaction issue.
                              - 80 -

     Our issue here, whether the credit for prior taxes is part

of the same claim for the issue of blocking equitable recoupment,

is clearly less closely related to the issue of Finley v. United

States, 612 F.2d 166 (5th Cir. 1980), and Estate of Hunt v.

United States, 309 F.2d 146 (5th Cir. 1962) (whether the new

issue is part of the same claim for the purpose of preventing the

plaintiff taxpayer from separately litigating the new issue) than

the issue of Hemmings v. Commissioner, supra (whether the new

issue is part of the same claim for the purpose of preventing the

defendant Government from separately raising the new issue

through a statutory notice and then continuing to litigate it in

the Tax Court).   Hemmings v. Commissioner, supra, being closer to

our case, furnishes ground for confining recoupment to the same

transaction and not impeding it with the overpayment arising from

allowance of the credit for taxes on prior transfers, a

completely unrelated issue.

     The language of Bull v. United States, supra, quoted by the

majority suggests that for our equitable recoupment issue we

should look to Hemmings v. Commissioner, supra, not to Finley and

Hunt:   Defenses that the taxpayer could have asserted if the

Government had brought suit for the tax are to be allowed

taxpayers in suits that they bring.    Bull v. United States, 295

U.S. at 263.   If the United States had sued petitioner in this

case for the estate tax deficiency, the estate wouldn't have had

to raise the credit for prior taxes as a defense or counterclaim.
                                - 81 -

Since it doesn't spring from the same transaction as the estate

tax claim, it wouldn't have had to be raised as a compulsory

counterclaim.     Fed. R. Civ. P. 13.    Thus, petitioner could have

raised recoupment as a defense in such a suit and, in the absence

of any claims about the credit, would have been entitled to

recoupment.   Thereafter, the estate could have brought a separate

suit for the credit for prior taxes.      It's highly significant

that this is the test that was applied in Hemmings:       The

Government's claim was allowed in the second action because in

the first action the claim would have been a permissive, not a

compulsory, counterclaim.     Hemmings v. Commissioner, 104 T.C. at

232, 234-235.34

     I conclude, for the purposes of applying equitable

recoupment, that the cases cited in the majority's footnote 13

are inapposite and that the credit for previously paid taxes is

not part of the same claim or cause of action as that

attributable to the date of death value of the shares.

     The majority's footnote 14 quotes at length a passage in

Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 301


     34
      The majority posits a different hypothetical case
(majority op. pp. 11-12) in which the credit for prior death
taxes is known and figures as an issue. But it assumes that a
court would take that credit into account when deciding whether
equitable recoupment is being used defensively and should
therefore be allowed. In so assuming, the majority begs the
question. There's no case law on point, and we can't be certain
what such a court would decide. We're therefore free to decide
which is the preferable rule, both for this hypothetical and for
the case at hand (the issue is the same for both).
                               - 82 -

(1946), that emphasizes the importance and desirability of

maintaining a statute of limitations in the income tax area.    As

I've already observed, supra pp. 49, 58-59, the purposes

underlying statutes of limitations--preventing stale litigation

and protecting repose--don't apply when the timely claim that

initiates a lawsuit is subjected to an otherwise time-barred

defensive claim that arose out of the same transaction, item, or

event.    Indeed, those purposes are repugnant to disallowance of

such a defense, since such a limitation would encourage delay in

the bringing of some claims until a defense is time-barred.

United States v. Western Pac. R.R., 352 U.S. 59, 72 (1956).

     In any event, Rothensies v. Electric Storage Battery Co.

(like Ford v. United States, 149 Ct. Cl. 558, 276 F.2d 17 (1960),

which the majority also cites and quotes in this connection,

majority op. p. 15), stands not just for limiting equitable

recoupment, but for limiting it through a narrow interpretation

of the single-transaction requirement.35   To limit equitable

recoupment in the way that those two cases do is more defensible

than to limit it in the way that the majority does here.   There's

a connection between the defensive purpose of equitable

recoupment and the single-transaction requirement.

     Recoupment is allowed to circumvent such bars as statutes of

limitations, sovereign immunity, and bankruptcy because it would


     35
      The two cases are discussed at length, supra pp. 42-44,
47-52, in the section on the single-transaction requirement.
                               - 83 -

be unjust to allow one party to benefit from some aspects of a

transaction when another party can't derive the benefits of other

aspects of that same transaction merely because of the presence

of some procedural bar.    Reiter v. Cooper, 507 U.S. 258, 265 n.2

(1993); Rothensies v. Electric Storage Battery Co., 329 U.S. at

299; In re Peterson Distrib., Inc., 82 F.3d 956, 961 (10th Cir.

1996); In re B & L Oil Co., 782 F.2d 155, 159 (10th Cir. 1986)

(cited approvingly for extent to which recoupment is available in

bankruptcy in Reiter v. Cooper, 507 U.S. at 265 n.2 ); In re

Centergas, Inc., 172 Bankr. 844, 849 (Bankr. N.D. Tex. 1994).     To

the extent that the object of inconsistent taxation was not a

part of the same transaction, to that extent justice requires

less insistently that it be treated consistently, and this is

what explains the single-transaction requirement.   There is no

such connection between the rationale of equitable recoupment and

the majority's expansive interpretation of the requirement that

recoupment be defensive.   Rather, the majority's reasoning

prevents justice from being rendered in view of the one

transaction as a whole and thereby thwarts the purpose of

equitable recoupment, not only in this case but probably in

future cases where such a result would be even more clearly

unjust.
                               - 84 -

     iii.    Barring recoupment would be inconsistent with tax
             precedent

     Respondent and the majority would now have us believe that

in tax cases Bull v. United States, supra, only eliminates to a

very limited extent the requirement that equitable recoupment be

defensive.    Of course, under Bull v. United States, supra, and

later recoupment tax cases, a taxpayer can't gain any greater

credit from the Government under equitable recoupment than the

Government seeks from him (just as the Government can't gain any

greater credit than the taxpayer seeks from the Government).      But

the majority and I part company on their conclusion that

equitable recoupment in favor of the taxpayer is further limited

in that it can't, in combination with any other unrelated claims

of the taxpayer, lead to any affirmative recovery by the

taxpayer.    Bull v. United States, supra, by allowing recoupment

where the recouping party was technically the plaintiff,

liberalized the requirement that recoupment could only be used

defensively.    It did so to prevent unjust enrichment of the

Government.    For the Government to retain both the estate tax and

the income tax on the same fund was held to amount in law to a

fraud on the taxpayer's rights and to be against morality and

conscience.    In limiting Bull v. United States, supra, as the

majority have done, they are thereby perpetuating unjust

enrichment in the case at hand.
                               - 85 -

       The question is really one of the order of application:    If

we consider the adjustment that would result from recoupment as

occurring before the allowance of credit for tax on prior

transfers, then that adjustment doesn't cause affirmative

recovery, which would only result later; rather, it merely

cancels, in part, the Government's claim arising from the same

transaction, item, or event.    Only if we consider the adjustment

from recoupment as occurring after the allowance of the credit

for tax on prior transfers would it cause affirmative recovery.

We aren't obliged to take that view of it, and the policy

considerations argue strongly against so taking it.

       So long as petitioner is entitled to some unrelated credit,

however small, there would, under respondent's reasoning, be some

redetermined increased valuation of the shares at which

petitioner would cease to be entitled to any more than partial

recoupment, and another, lower but still increased, valuation at

which petitioner would cease to be entitled to any recoupment at

all.    The same would be true of any refund actions that might

have occurred if the estate had paid the deficiency determined by

respondent and then sued for a refund.    Under respondent's and

the majority's approach, any limitation on recoupment might only

become clear upon final disposition of a multi-issue case.       And

this limitation on equitable recoupment would result from the
                              - 86 -

altogether fortuitous existence of some unrelated credit or other

adjustments, in this case the credit for tax on prior transfers.

     Let me take another cut at what it means to say that the

defense of equitable recoupment can't be used offensively, like a

counterclaim, to generate an overpayment.   Suppose we didn't have

the previously taxed property credit problem.   Suppose also that

the estate had reported the value of the shares at $1,500 per

share and there was no estate tax audit and the period of

limitations expired on the assessment of an estate tax deficiency

and the filing of an estate tax claim for refund.   The

Administration Trust, which reported its gain on the sale of the

shares using the date-of-death value basis of $1,500 per share,

then files an income tax claim for refund just before the period

of limitations expires, contending that it should have used a

basis of $1,700 per share, and sues for the refund.   The

Government answers with a denial, but also asserts equitable

recoupment.   The District Court upholds the $1,700 date-of-death

value, which means that the estate is entitled to an income tax

refund of approximately $266,000.   The Government says that means

there is a time-barred deficiency in estate tax of approximately

$957,000.   Allowing recoupment means that the $266,000 refund

claim is wiped out, but the statute of limitations bars the

Government from collecting the balance of the estate tax

deficiency of $691,000.
                              - 87 -

     If we were to allow an increase in the overpayment in our

case, we would not breach the bar of the statute of limitations

in the way the District Court would be doing if it allowed the

Government to recover the balance of the deficiency in my

hypothetical.   The Government is already indebted to the taxpayer

in our case for the amount of the unclaimed previously taxed

property credit of more than $1 million ($1,152,649), and,

because the Government has conceded that amount in the statutory

notice, there's no statutory bar on the taxpayer's recovering it

as an overpayment in this case.

     If this Court had upheld in full the estate's reporting

position on the value of the shares at $1,505 per share, we would

have jurisdiction to determine an overpayment in the full amount

of $1,152,649, and to enter a decision in favor of the taxpayer

in that amount.   There is and would be no statute of limitations

bar to our determining an overpayment in that full amount.     All

I'm proposing that we do now is reduce the smaller deficiency

that arises from valuing the shares at $1,700 per share by the

amount of the recoupment in order to compute the amount of the

reduction of the overpayment that the taxpayer is already

otherwise entitled to, and that's already in the picture as part

of this case.   To do so would not impair the sovereign immunity

bar of the statute of limitations.
                                 - 88 -

     Nothing in Bull v. United States, supra, indicates that we

need consider anything other than the single transaction at issue

when we set out to determine whether recoupment is being used

defensively, and there is plenty of other authority to the effect

that we should only consider that single transaction.     As the

Supreme Court said in Rothensies v. Electric Storage Battery Co.,

329 U.S. 296, 299 (1946):

     Equitable recoupment has never been thought to allow
     one transaction to be offset against another, but only
     to permit a transaction which is made the subject of
     suit by a plaintiff to be examined in all its aspects,
     and judgment to be rendered that does justice in view
     of the one transaction as a whole.

That sentence was cited at a critical point in United States v.

Dalm, 494 U.S. at 611, to support the Supreme Court's central

holding that equitable recoupment requires an independent basis

for jurisdiction.     By limiting recoupment as respondent wants,

the majority, to that extent, are failing to do justice in view

of the one transaction as a whole.

     iv.     Barring recoupment would be inconsistent with other
             precedent

     In Reiter v. Cooper, 507 U.S. 258, 265 (1993), a bankruptcy

case and the Supreme Court's latest pronouncement on recoupment,

the Supreme Court reaffirmed Bull v. United States, 295 U.S. 247

(1935),36 and cited it for the proposition that recoupment claims


     36
          Equitable recoupment entered bankruptcy law under the
                                                       (continued...)
                                 - 89 -

are not barred by statutes of limitations so long as the main

action is timely, and said that a bankruptcy defendant can meet a

plaintiff-debtor's claim with a counterclaim arising out of the

same transaction, "at least to the extent that the defendant

merely seeks recoupment."     Reiter v. Cooper, 507 U.S. 258, 113

S. Ct. at 1218 & n.2.     The Supreme Court went on to say that this

did not result in preferential treatment of the creditor

asserting recoupment, inasmuch as recoupment merely permits a

determination of the just and proper liability on the main issue.

Id. at 1218-1219 n.2.     To take account of anything other than the

same transaction in determining the amount of recoupment would be

inconsistent with this argument, and indeed the Supreme Court

made absolutely no mention of a further, unrelated amount owing

to the plaintiff-debtor.37


     36
      (...continued)
authority of Bull v. United States, 295 U.S. 247 (1935). In re
Monongahela Rye Liquors, Inc., 141 F.2d 864, 869 (3d Cir. 1944).
As in the tax area, recoupment is used in bankruptcy cases to
prevent unjust enrichment. A debtor should not benefit from
post-petition sales to a creditor under a contract without the
burden of repaying the creditor's pre-petition overpayments under
the same contract. In re Peterson Distrib., Inc., 82 F.3d 956,
961 (10th Cir. 1996); In re B & L Oil Co., 782 F.2d 155, 159
(10th Cir. 1986) (cited with approval for extent to which
recoupment is available in bankruptcy in Reiter v. Cooper, 507
U.S. 258, 265 n.2 (1993)). The prevention of unjust enrichment
thought of in these terms is the real reason for the single-
transaction requirement, both in bankruptcy, where it is also
enforced, and in the tax area.
     37
          This additional amount is disclosed in the opinion of the
                                                       (continued...)
                                - 90 -

     In Reiter v. Cooper, supra, the unrelated claim was properly

ignored by the Supreme Court, because it couldn't have affected

the outcome.   In In re Greenstreet, Inc., 209 F.2d 660 (7th Cir.

1954), a claim that the Court of Appeals for the Seventh Circuit

chose to regard as unrelated was very much before the Court,

which refused to allow that claim to have any effect on the

amount of recoupment allowed.    Instead, the claim belonging to

the same transaction to which the recoupment counterclaim also

belonged alone determined the extent to which recoupment was

allowed.   That is to say, only the single transaction was

considered.

     In In re Greenstreet, Inc., supra, the Government filed

claim, in the bankruptcy proceedings of a manufacturer of Army

clothing, for $302,500, the purchase price of property that it

had furnished to the debtor for the manufacture of such clothing,

and for an additional $68,279.72 damages for the bankrupt's

failure to complete the contract.    The bankruptcy trustee in turn

filed counterclaims amounting to $155,593.49, asserting certain

liens and unsecured money demands against the property and the

Government's general claim.   The District Court held that it had



     37
      (...continued)
Bankruptcy Court in this case. In re Carolina Motor Express, 84
Bankr. 979, 981, 991 (Bankr. W.D.N.C. 1988). The Supreme Court
only mentioned the debts owing under the main issue. Reiter v.
Cooper, 507 U.S. 258, 113 S. Ct. at 1217.
                              - 91 -

jurisdiction over all the counterclaims, and the Government

appealed this holding.   The parties agreed that the counterclaims

could cancel the Government's general claim for damages of

$68,279.72.   The issue in dispute was whether the counterclaims

could also be asserted against the Government's claim for the

reclamation of its property, so that the whole of the

counterclaims could have effect.   The Court of Appeals found that

they could not be asserted to that extent, since the Government

had not waived its sovereign immunity to that extent.   In

holding, in effect, that the property claim did not involve the

same transaction, the Court of Appeals gave a particularly narrow

reading of the single-transaction requirement, especially for a

bankruptcy case.   That issue would almost certainly be decided

differently today,38 so that there would be no question of


     38
      Cf. In re Pullman Constr. Indus., Inc., 142 Bankr. 280
(Bankr. N.D. Ill. 1992) (questioning In re Greenstreet, Inc., 209
F.2d 660 (7th Cir. 1954), on the basis of later Seventh Circuit
decisions about the single-transaction issue, making the test for
deciding whether sovereign immunity is waived with respect to a
counterclaim whether the counterclaim is a compulsory
counterclaim to the claim in question, and holding on that basis
that sovereign immunity had been waived with respect to the
counterclaim), affd. sub nom. United States v. Pullman Constr.
Indus., Inc., 153 Bankr. 539 (N.D. Ill. 1993), appeal dismissed
sub nom. Pullman Constr. Indus., Inc. v. United States, 23 F.3d
1166 (7th Cir. 1994). Query whether if there has been such a
liberalization of the single-transaction requirement for
equitable recoupment in bankruptcy, there should not be a similar
liberalization in the tax area, and whether the post-Rothensies
v. Electric Storage Battery Co. cases cited in the discussion of
the single-transaction requirement do not demonstrate precisely
                                                   (continued...)
                              - 92 -

limiting the recoupment.   However, it is not Greenstreet's

treatment of the single-transaction issue that makes it

significant for the case at hand.   Rather, In re Greenstreet,

Inc. is a striking example of a refusal by a court to look beyond

the single transaction in deciding what effect to give to

recoupment as a defense.   It is with this in mind that we should

look at the language in In re Greenstreet, Inc. quoted by the

majority (majority op. p. 6 n.8) against my view of the

overpayment issue.   There would have been no affirmative recovery

by the debtor if all its counterclaims had been allowed, provided

that one looks beyond the single transaction.   After all, the

Government's claims in total substantially outweighed the

counterclaims.   In saying that there could be no affirmative

recovery through recoupment, the Court of Appeals for the Seventh

Circuit was clearly thinking of affirmative recovery with respect

to the single transaction.

     It should further be noted that the Supreme Court in Reiter

v. Cooper, supra, said that it basically made no difference

whether recoupment was a defense or a counterclaim (according to

the Supreme Court, it was in fact a counterclaim in the context

of that case, but the defendants' characterization of it as a

defense was inconsequential, and the plaintiff's argument that,


     38
      (...continued)
such a development.
                              - 93 -

since it was a counterclaim, it could not be raised as a defense

was denied).   Reiter v. Cooper, 507 U.S. at 263; cf. FDIC v.

Hulsey, 22 F.3d 1472, 1487 (10th Cir. 1994) (claims in recoupment

are compulsory counterclaims under Fed. R. Civ. P. 13(a)).   This

suggests that it is a mistake to insist too much on recoupment's

defensive nature in the case at hand.39

     Faced with the issue of whether recoupment is subject to the

limitations on setoff in the Bankruptcy Code, a later bankruptcy

court decided, on the basis of Reiter v. Cooper, that recoupment

was not so limited.   It said further, by way of distinguishing

the two: "recoupment speaks not simply to the net amount due from

one party to the other computed by subtracting one claim from the

other, but rather to the amount of the plaintiff's claim alone on

a particular contract, transaction or event."   In re Izaguirre,


     39
      In deciding in Reiter v. Cooper, supra, that it made no
difference whether the recoupment was considered a counterclaim
or defense, the Supreme Court cited 5 Wright & Miller, Federal
Practice & Procedure, sec. 1275 (2d ed. 1990), according to which
it is not clear whether setoffs and recoupments should be viewed
as defenses or counterclaims. Reiter v. Cooper, 507 U.S. at 263.

     In In re Izaguirre, 166 Bankr. 484, 493 (Bankr. N.D. Ga.
1994), a bankruptcy court cited the reference in Reiter v. Cooper
to Wright & Miller to conclude: "Although recoupment may be
viewed as an offset to the extent it is viewed as a counterclaim,
recoupment has a chameleon-like quality that also permits it to
be viewed simply as a defense."

     In agreement that Reiter v. Cooper minimizes the importance
of the distinction between defenses and counterclaims with
respect to recoupment is Consolidated Rail Corp. v. Primary
Indus. Corp., 868 F. Supp. 566 (S.D.N.Y. 1994).
                               - 94 -

166 Bankr. 484, 493 (Bankr. N.D. Ga. 1994).   To the same effect,

outside bankruptcy, see such cases as United States v. Tsosie, 92

F.3d 1037,     , (10th Cir. 1996) (Indian land case); FDIC v.

Hulsey, 22 F.3d 1472, 1487-1488 (10th Cir. 1994) (secured loan

agreement); Frederick v. United States, 386 F.2d 481, 488 (5th

Cir. 1967) (suit on a note); Shipping Corp. of India, Ltd. v.

Pan-Am. Seafood, Inc., 583 F. Supp. 1555, 1557 (S.D.N.Y. 1984)

(admiralty); United States v. Timber Access Indus. Co., 54 F.R.D.

36 (D. Or. 1971) (logging contract).

     United States v. Timber Access Indus. Co., supra, is close

to the point but not on all fours with our overpayment issue.

The United States, as trustee for an Indian tribe, sued the

defendant logger, asserting breaches of a logging contract, for

$47,561.06.   The defendant counterclaimed under the same

contract, alleging that the Government owed it $109,870.85, and

argued that, although it could not have full recovery on the

counterclaim, it was entitled to a credit of $47,561.06 as

recoupment and, beyond that, affirmative recovery of $10,000

under the Tucker Act, 28 U.S.C. sec. 1346(a)(2) (1994)($10,000

being the jurisdictional limit on Tucker Act claims in the

District Court40).   The Government argued that sovereign immunity


     40
      There is no such monetary limitation on contractual claims
against the United States in the Court of Federal Claims, 28
U.S.C. sec. 1491 (1994), and the District Court in United States
                                                   (continued...)
                                - 95 -

barred any affirmative recovery by the defendant.       The District

Court agreed with the defendant and allowed an affirmative

recovery to the extent of $10,000.       However, it denied other,

permissive counterclaims sought to be brought by the logger's

surety, but only on the ground that these counterclaims were

brought against the United States not in its capacity as trustee

for the Indian tribes, but in its own capacity, so that they were

unauthorized under Fed. R. Civ. P. 13, because sovereign immunity

operated with respect to these other counterclaims.

     The fact that no statute-of-limitations problem figures in

United States v. Timber Access Indus. Co., supra, does not

distinguish it from our case:    There, the doctrine of recoupment

was needed to support the defendant's main counterclaim against

the Government's claim of sovereign immunity, whereas in our case

recoupment is needed to support petitioner's defense against the

bar of the statute of limitations.       The fact that the defendant

in United States v. Timber Access Indus. Co., supra, could still,

after the decision in the case, bring suit in the Court of Claims

for the balance of its counterclaim means that to limit



     40
      (...continued)
v. Timber Access Indus. Co., 54 F.R.D. 36 (D. Or. 1971), left
open the possibility that the defendant logger could recover the
balance of its counterclaim in the Court of Claims (as it was
then called), 54 F.R.D. at 38-39. The District Court held that
allowing the $10,000 recovery in the District Court would not be
the prohibited splitting of the cause of action.
                              - 96 -

recoupment there didn't eliminate all opportunity for the

defendant to obtain complete justice with respect to the

transaction in issue, whereas barring recoupment in our case

would amount to denying complete justice.   To allow an

affirmative recovery arising from the same transaction to bar or

limit recoupment (as the District Court in United States v.

Timber Access Indus. Co., supra, refused to do) does less

violence to the idea of doing complete justice with respect to

the one transaction than would allowing an unrelated affirmative

recovery (like that in our case with respect to the previously

taxed property credit) to have such a limiting effect.    Thus,

there was more reason in United States v. Timber Access Indus.

Co., supra, than there is in our case to limit recoupment by the

amount of the affirmative recovery, and nevertheless the District

Court didn't do so.   United States v. Timber Access Indus. Co.,

supra, which is cited and discussed at some length in 6 Wright et

al., Federal Practice & Procedure, sec. 1427, at 197-198 n.8 (2d

ed. 1990), illustrates the point that another affirmative

recovery with its own independent jurisdictional basis, even when

it arises from the same transaction from which a recoupment

defense or counterclaim arises, does not bar or limit recoupment.

     It is appropriate to use these non-tax cases, and most

especially Reiter v. Cooper, in the tax area.   Reiter v. Cooper

not only cited Bull v. United States at a crucial point in its
                               - 97 -

argument, 507 U.S. at 265.    It also used several recoupment cases

outside both bankruptcy and tax to support the proposition that

there is a "general principle of recoupment", which has force in

the absence of explicit Congressional prohibition, id.; cf.

United States v. Dewey Freight Sys., Inc., 31 F.3d 620, 623 (8th

Cir. 1994).    Standard jurisdictional principles typically operate

in the same fashion in tax as in all other areas of the law.

United States v. Forma, 42 F.3d at 766 (citing United States v.

Dalm, 494 U.S. at 608-611).

       So long as the recoupment claim is only allowed to offset

the Government’s claim from the transaction in issue, and not to

exceed any amount determined to be owing to the Government that

also arises from that transaction, all sensible requirements are

met.    The statement of the Court of Appeals for the Second

Circuit in a tax case that, despite sovereign immunity, a

defendant may, without statutory authority, recoup on a

counterclaim an amount equal to the principal claim, United

States v. Forma, 42 F.3d at 764 (citing United States v. United

States Fidelity & Guaranty Co., 309 U.S. 506, 511 (1940)),

supports my view.41


       41
      United States v. Forma, 42 F.3d 759, 767-768 & n. 11 (2d
Cir. 1994), did not involve equitable recoupment, although that
doctrine is discussed briefly. Rather, it involved an unrelated
time-barred counterclaim by taxpayers in a suit where the United
States originally sought to reduce tax assessments relating to
                                                   (continued...)
                              - 98 -

                            Conclusion

     In sum, in the circumstances of this case, equitable

recoupment properly would only be allowed as an offset against

(and only up to the amount of) the deficiency as we would have

redetermined it in the absence of the previously taxed property

credit.   The previously unclaimed credit that respondent allowed

has no bearing on the issue arising out of the date-of-death

valuation of the shares, and should also be paid to petitioner.

Thus, petitioner should be paid in the end the amount

                          a = c - (d - r)

                             (d $ r),

where a is the amount of the overpayment to be paid, c is the

credit for the tax on prior transfers that respondent allowed in

the statutory notice, d is the deficiency as we would have

redetermined it if the credit had been claimed on the estate tax

return or paid administratively, and r is the offset to that




     41
      (...continued)
the same years to judgment and then voluntarily agreed to the
dismissal of its claims. The Court of Appeals held that there
was no basis for jurisdiction over the counterclaim and therefore
remanded the case to the District Court with a direction to
dismiss the counterclaim. In the discussion of equitable
recoupment, which the parties agreed was not available to the
taxpayers in the case, there is mention that the single-
transaction requirement was not satisfied. There is, however, no
mention of any no-affirmative-recovery requirement, in the
discussion of either equitable recoupment or the counterclaims.
                               - 99 -

deficiency resulting from our application of equitable

recoupment, which can't exceed the amount of that deficiency.

     I would find that respondent's overpayment argument doesn't

prevent the application of equitable recoupment.   This would

allow us to consider all the other issues, on which I would also

find in favor of petitioner.   Consequently, I would apply

equitable recoupment in favor of petitioner.
