                       113 T.C. No. 2



                UNITED STATES TAX COURT



        ESTATE OF FRANK A. BRANSON, DECEASED,
        MARY M. MARCH, EXECUTOR, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 10028-95.                    Filed July 13, 1999.



     P reported the date-of-death fair market values of
the stock of S and W as $181.50 and $485, respectively,
per share. P sold some of the S stock for $335 per
share and all the W stock for $850 per share. The gain
realized on the sales by P was distributed to the
residuary legatee, M, who reported the gain on her
Federal income tax return and paid the income tax due.
R determined a deficiency in P's estate tax liability.
R's determination was based on his assertion that at
the date of death the fair market values of the S and W
shares were $300 and $850, respectively, per share. In
Estate of Branson v. Commissioner, T.C. Memo. 1999-231,
we found that the date-of-death fair market values of
the S and W shares were $276 and $626, respectively. P
asserts that it is entitled to equitable recoupment of
the income tax overpaid by M, the refund of which is
barred by the statute of limitations.
     Held, under the doctrine of equitable recoupment, P is
entitled to a credit for the income tax overpaid by M on the
                                - 2 -


     gain recognized on the sales of the shares due to the lower
     values reported on the estate tax return. Estate of Bartels
     v. Commissioner, 106 T.C. 430 (1996); Estate of Mueller v.
     Commissioner, 101 T.C. 551 (1993), followed.



     Robert A. Mills, Marco L. Quazzo, and Mary Catherine Wirth,

for petitioner.

     Rebecca T. Hill, Bryce A. Kranzthor, and Elizabeth

Groenewegen, for respondent.


                               OPINION


    PARR, Judge:    In Estate of Branson v. Commissioner, T.C.

Memo. 1999-231 (Branson I), we redetermined the increased value

of the shares of Savings Bank of Mendocino County (Savings) and

Bank of Willits (Willits) included in decedent's gross estate.

We now consider whether this Court has authority to apply

equitable recoupment in light of the opinion of the Court of

Appeals for the Sixth Circuit in Estate of Mueller v.

Commissioner, 153 F.3d 302 (6th Cir. 1998), affg. on other

grounds 107 T.C. 189 (1996), and if so, whether petitioner is

entitled under that doctrine to credit for the taxes paid by the

residuary legatee on the excessive gain recognized from the sales

of the shares due to the lower values provided by the estate tax

return.   Following our opinions in Estate of Bartels v.

Commissioner, 106 T.C. 430 (1996), and Estate of Mueller v.

Commissioner, 101 T.C. 551 (1993), we hold that this Court has
                               - 3 -


authority to apply equitable recoupment.   We further hold that

petitioner is entitled to recoup the residuary legatee's

excessive payment of income tax against the estate tax

deficiency.

     The relevant facts are taken from our findings in Branson I,

the parties' submissions, and the existing record.   Petitioner is

the estate of Frank A. Branson (decedent), who died testate on

November 9, 1991, in Mendocino, California.   Mary March (March),

decedent's daughter, is the executrix and residuary legatee of

the estate.   March's legal address was Potter Valley, California,

at the time the petition in this case was filed.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect as of the date of decedent's

death, and all Rule references are to the Tax Court Rules of

Practice and Procedure.   All dollar amounts are rounded to the

nearest dollar, unless otherwise indicated.

Background

     At the time of his death, decedent owned 12,889 shares of

Savings stock and 500 shares of Willits stock.   Petitioner

reported the value of the Savings and Willits shares as $181.50

and $485, respectively, per share, on its Form 706, United States

Estate (and Generation-Skipping Transfer) Tax Return.

     Decedent's will provided that all estate taxes were to be

paid from the residue of the estate.   Pursuant to a court order,
                                - 4 -


March, as executrix, was granted authority to sell 2,800 shares

of Savings stock at $335 per share and 500 shares of Willits

stock at $850 per share.    March sold the shares in 1992 and paid

Federal and State of California estate taxes of $1,008,698 and

$200,632, respectively.    March, as executrix and residuary

legatee, assumed individual liability for any estate taxes later

found due from petitioner.

     Petitioner reported the capital gain from the sales of the

Savings and Willits shares on Schedule D of its 1992 Form 1041,

U.S. Fiduciary Income Tax Return, which it filed on or about

April 15, 1993.   Petitioner calculated the gain by subtracting

the value of the shares reported on the estate tax return from

the amount received from their sale.    Petitioner reported

$429,800 of gain from the sale of the Savings shares and $182,500

from the sale of the Willits shares.1   Petitioner, however, did

not pay any income tax on these gains; instead, it reported a net

long-term capital gain distribution of $610,274 to March on

Schedule K-1, Beneficiary's Share of Income, Deductions, Credits,

Etc., which it attached to the Form 1041.

     March and her husband, Charles March, filed their 1992 Form

1040, U.S. Individual Income Tax Return, using the status of



     1
      Petitioner also reported $6,955 of long-term capital gain
from the sale of 2,000 shares of PG&E stock and a $738 net long-
term capital loss carryover from 1991. The value of the PG&E
shares and the loss carryover are not at issue in this case.
                                 - 5 -


"Married filing joint return", on or about April 15, 1993, and

paid the tax due.   March reported the $610,274 gain on line 13 of

Schedule D, which was attached to the Form 1040, as "Net long-

term gain or (loss) from partnerships, S corporations, and

fiduciaries".

     Respondent determined a deficiency in petitioner's estate

tax liability on the grounds that the fair market values of the

Savings and Willits shares on the date of death were $300 and

$850, respectively, per share.    In Branson I, we found that the

date-of-death fair market values of the Savings and Willits

shares were $276 and $626, respectively.   Petitioner asserts that

it is entitled to equitable recoupment of the income tax overpaid

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

limitations, in determining the amount of its Federal estate tax

liability.

Discussion

     Relying upon Estate of Mueller v. Commissioner, 153 F.3d 302

(6th Cir. 1998), respondent asserts that this Court lacks

jurisdiction to consider petitioner's claim for equitable

recoupment.   In Estate of Mueller v. Commissioner, 101 T.C. 551

(1993) (Mueller II), we opined that we have jurisdiction to

consider claims of equitable recoupment.   In Estate of Mueller v.

Commissioner, 107 T.C. 189 (1996) (Mueller III), we held that

equitable recoupment is restricted to use as a defense against an
                                - 6 -


otherwise valid claim.    As a result of our valuation of the stock

includable in Mueller's estate, see Estate of Mueller v.

Commissioner, T.C. Memo. 1992-284, and the taxpayer's failure to

claim a large previously taxed property credit on its Federal

estate tax return, it became apparent that there was no

deficiency in estate tax; rather, the taxpayer was entitled to

recover an overpayment of estate tax, regardless of equitable

recoupment.    Inasmuch as application of equitable recoupment

under these circumstances would have increased the amount the

taxpayer was entitled to recover as an overpayment, rather than

reduce a deficiency, we held that equitable recoupment was not

available.    The taxpayer appealed.    The Court of Appeals for the

Sixth Circuit affirmed Mueller III, on the ground that this Court

lacked jurisdiction to consider the affirmative defense of

equitable recoupment.    See Estate of Mueller v. Commissioner,

supra.

     The Court of Appeals for the Sixth Circuit interpreted

sections 6214(b) and 6512(b) together to

     explicitly confer on the Tax Court jurisdiction to do
     no more than determine the amount of the deficiency
     before it. The Tax Court's jurisdiction cannot extend
     beyond its statutory confines to encompass an equitable
     remedy such as recoupment because the Tax Court "is a
     court of limited jurisdiction and lacks general
     equitable powers," and because "[t]he Tax Court and its
     divisions shall have such jurisdiction as is conferred
     on on them by [Title 26]." * * * [Estate of Mueller v.
     Commissioner, 153 F.3d at 305; citations omitted.]
                                - 7 -


       The Court of Appeals further relied upon Commissioner v.

Gooch Milling & Elevator Co., 320 U.S. 418 (1943), and several

cases decided in Federal courts which have cited Gooch Milling,2

for the proposition that this Court does not have jurisdiction to

consider the affirmative defense of equitable recoupment.

       The jurisdictional status of equitable recoupment in this

Court has had a long history, which we reviewed with painstaking

care in Estate of Bartels v. Commissioner, 106 T.C. 430 (1996)

and in Mueller II.    We do not here reiterate that history, except

to distinguish our position from that of the Court of Appeals for

the Sixth Circuit.

       In Mueller II, we interpreted Commissioner v. Gooch Milling

& Elevator Co., supra, as presenting the question whether the

Board of Tax Appeals had authority to apply the doctrine of

equitable recoupment in income tax cases.    We concluded that

Gooch Milling does not prevent this Court from "considering the

affirmative defense of equitable recoupment when it is properly

raised in a timely suit for redetermination of a tax deficiency

over which we have jurisdiction."    See Mueller II, 101 T.C. at

560.



       2
      See Rothensies v. Electric Storage Battery Co., 329 U.S.
296, 303 (1946); Elbert v. Johnson, 164 F.2d 421, 424 (2d Cir.
1947); Mohawk Petroleum Co. v. Commissioner, 148 F.2d 957, 959
(9th Cir. 1945), affg. 47 B.T.A. 952 (1942); Estate of Van Winkle
v. Commissioner, 51 T.C. 994, 999 (1969); Wiener Mach. Co. v.
Commissioner, 16 T.C. 48, 54 (1951).
                                 - 8 -


     In its opinion, the Court of Appeals for the Sixth Circuit

did not consider the difference between the Board of Tax Appeals

and the Tax Court.   At the time the Board of Tax Appeals decided

the issue of whether it could consider equitable recoupment in

Gooch Milling & Elevator Co., the Board was an independent agency

in the Executive Branch of the Government.     See sec. 900(k) of

the Revenue Act of 1924, ch. 234, 43 Stat. 253, 338.     As a result

of the Tax Reform Act of 1969, Pub. L. 91-172, sec. 951, 83 Stat.

487, 730, the Tax Court became a legislative court under Article

I of the Constitution.     See sec. 7441; Freytag v. Commissioner,

501 U.S. 868, 887 (1991) (Congress enacted legislation in 1969

with the express purpose of making the Tax Court an Article I

court rather than an executive agency).     Thus, the Tax Court

exercises judicial, rather than executive, legislative, or

administrative, power.   See Freytag v. Commissioner, supra at

890-891.

     The difference between an agency of the Executive Branch and

an Article I court is material to this issue.     "The Tax Court's

function and role in the federal judicial scheme closely resemble

those of the federal district courts, * * * [and it] exercises

its judicial power in much the same way as the federal district

courts exercise theirs."     Freytag v. Commissioner, supra at 891.3


     3
      See also Flight Attendants Against UAL Offset v.
Commissioner, 165 F.3d 572, 578 (7th Cir. 1999) ("the present Tax
                                                   (continued...)
                               - 9 -


Moreover, in deciding cases over which we have jurisdiction "we

have applied the equity-based principles of waiver, duty of

consistency, estoppel, substantial compliance, abuse of

discretion, laches, and the tax benefit rule."   See Woods v.

Commissioner, 92 T.C. 776, 784 (1989); fn. refs. omitted.     Thus,

this Court should be properly viewed as exercising full judicial

power within its limited subject matter jurisdiction.4

     Furthermore, in United States v. Dalm, 494 U.S. 596, 611 n.8

(1990), the Supreme Court noted:   "We have no occasion to pass

upon the question whether Dalm could have raised a recoupment

claim in the Tax Court."   See also id. at 615 n.3 (Stevens, J.,

dissenting) (commending the majority's reservation of the

question whether the Tax Court has authority to consider

recoupment).   Thus, although the Supreme Court agreed that the

Board of Tax Appeals could not consider equitable recoupment, we

believe that the Supreme Court has left this issue open with

respect to the Tax Court as presently constituted.   Commissioner

v. Gooch Milling & Elevator Co., and its progeny, therefore, do

not control the outcome of this case.




     3
      (...continued)
Court operates pretty indistinguishably from a federal district
court.").
     4
      See Saltzman, IRS Practice and Procedure, par. 5.06[1], at
S5-20 (2d ed. 1991); Willis, "Equitable Recoupment: More
Pitfalls for the Unwary", Tax Notes 361 (Oct. 19, 1998).
                                  - 10 -


       We have found support for our holding that we have authority

to apply equitable recoupment in section 6214(b).5      The

concluding language of section 6214(b), which speaks in terms of

this Court's not having "jurisdiction to determine whether or not

the tax for any other year or calendar quarter has been overpaid

or underpaid" (emphasis added), means that, at most, we are

precluded from determining the income tax or gift tax for any

prior period.       See Estate of Bartels v. Commissioner, 106 T.C. at

434.       In redetermining the amount of the estate tax deficiency in

this case, we are not determining the amount of income tax or

gift tax deficiency or overpayment from any prior period.      See

id.    We are considering such facts with relation to the share

value included in both corpus and income so that this item6 may

be examined in all its aspects, as is necessary to correctly




       5
        Sec. 6214(b) provides:

       The Tax Court in redetermining a deficiency of income
       tax for any taxable year or of gift tax for any
       calendar year or calendar quarter shall consider such
       facts with relation to the taxes for other years or
       calendar quarters as may be necessary correctly to
       redetermine the amount of such deficiency, but in so
       doing shall have no jurisdiction to determine whether
       or not the tax for any other year or calendar quarter
       has been overpaid or underpaid.
       6
        See infra pp.17-18.
                                  - 11 -


redetermine the amount of the estate tax deficiency now before

us.7

           In Estate of Bartels v. Commissioner, supra at 435-436, we

stated:

       what is involved herein is a question of our authority
       and not a question of our jurisdiction since we already
       have jurisdiction by virtue of the income tax
       deficiency notice and the timely petition filed in
       response thereto. Thus, the cases articulating a
       principle that the jurisdiction of this Court is
       limited to that conferred upon it by Congress
       represented by Commissioner v. Gooch Milling & Elevator
       Co., supra, and its progeny, have no application. * * *
       [Citation omitted.]

       Therefore, "'While we cannot expand our jurisdiction through

equitable principles, we can apply equitable principles in the

disposition of cases that come within our jurisdiction.'"      See

Woods v. Commissioner, supra at 784-785 (quoting Berkery v.

Commissioner, 90 T.C. 259, 270 (1988) (Hamblen, J., concurring)).

       In this case, respondent accepted petitioner's and March's

income tax returns, which reported gain calculated by using the

fair market values of the shares reported on the estate tax

return.       Respondent asserted a higher date-of-death fair market

value for those same shares for estate tax purposes, determined a

deficiency in petitioner's estate tax, and issued a statutory

notice of deficiency.       In response, petitioner filed its timely



       7
      Furthermore, sec. 6214(b) specifically applies only to
income and gift taxes, and makes no mention of estate tax. See
Estate of Mueller v. Commissioner, 101 T.C. 551, 560 (1993).
                               - 12 -


petition with this Court.    There is no doubt that we have

jurisdiction of this case.    We may therefore exercise full

judicial power in its disposition.

Court of Appeals for the Ninth Circuit

     Any appeal in this case lies to the Court of Appeals for the

Ninth Circuit, and we are bound by any decision of that court

squarely in point.   See Golsen v. Commissioner, 54 T.C. 742, 756-

757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).    Respondent

asserts that this issue was settled in the Ninth Circuit by

Mohawk Petroleum Co. v. Commissioner, 148 F.2d 957, 959 (9th Cir.

1945), affg. 47 B.T.A. 952 (1942).

     In Mohawk Petroleum Co. v. Commissioner, supra, the Court of

Appeals relied on Gooch Milling & Elevator Co. for its decision

that the Board of Tax Appeals lacked jurisdiction to consider

equitable recoupment of income taxes.    See id. at 959.   Because

we have found that Gooch Milling & Elevator Co. is not on point,

it follows that Mohawk Petroleum Co. is not dispositive.

Accordingly, we disagree with respondent's assertion.

     In Mueller II, we found additional support for our decision

in sections 7422(e), 6512(a), and 7481.    See Mueller II, 101 T.C.

at 557.   Considered together, these sections indicate that

"Congress intended the Tax Court to have full judicial authority

to resolve issues over which it has jurisdiction".    Woods v.
                                - 13 -


Commissioner, 92 T.C. at 788.    Judge Halpern further observed

that

       the Code is structured to channel tax litigation to the
       Tax Court. We are the tax forum of choice, because
       only here can the tax liability be litigated prior to
       payment. Understandably, we preside over the vast
       majority of tax litigation. * * * [Mueller II, 101
       T.C. at 564 (Halpern, J., concurring); citations
       omitted.]

       If this Court lacked authority to consider equitable

recoupment, a taxpayer without the practical ability to prepay

the contested deficiency and sue for refund in a different forum

would be precluded from raising a defense available to a more

affluent taxpayer who has the means to do so.      We do not believe

that Congress intended this result.      Accordingly, we shall

continue to follow our opinions in Estate of Bartels v.

Commissioner, 106 T.C. 430 (1996), and Mueller II, supra.

Defensive Use

       We held in Mueller III that equitable recoupment is

restricted to use as a defense against an otherwise valid claim

for a deficiency, and not to increase an overpayment of tax.       See

also United States v. Dalm, 494 U.S. at 608 (tax refund courts

are without jurisdiction to consider time-barred refund claims

based solely upon equitable recoupment).      We have found that

petitioner underreported the values of the Savings and Willits

shares on its estate tax return.    Accordingly, petitioner has a

deficiency in estate tax, and is, therefore, properly positioned
                               - 14 -


to invoke the doctrine of equitable recoupment to reduce that

deficiency by the amount of the income tax overpaid because of

its use of the same underreported value as the basis of the

shares.

Legatee Not Diligent

     Respondent argues that equitable recoupment should not be

permitted in this case because March was not diligent in seeking

a refund of the income tax paid on the gain passed through to her

as residual legatee.    The estate tax notice of deficiency was

issued on March 16, 1995, and the limitations period did not

expire on March's income tax refund until April 15, 1996.    March

thus had more than a year within which to file a protective claim

for refund.

     In addressing this issue in United States v. Bowcut, 287

F.2d 654, 657 (9th Cir. 1961), the Court of Appeals for the Ninth

Circuit, citing Bull v. United States, 295 U.S. 247 (1935),

stated:

     It is apparently not the diligence of the taxpayer as
     to his legal rights which controls, but rather the
     inequity of holding that, while the government's rights
     under a transaction continue unimpaired, its
     adversary's rights thereunder are barred by
     limitations.

     Accordingly, we do not consider March's lack of diligence to

be a factor in deciding whether petitioner is entitled to claim

equitable recoupment.
                             - 15 -


Requirements of Equitable Recoupment

     In a recent case, the Supreme Court reaffirmed that 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.     See

United States v. Dalm, supra at 608 (interpreting Bull v. United

States, 295 U.S. 247 (1935), and Stone v. White, 301 U.S. 532

(1937)).

     A claim of equitable recoupment requires:   (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 as the

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

transaction, item, or taxable event have been inconsistently

subjected to two taxes; and (4) that if the subject transaction,

item, or taxable event involves two or more taxpayers, there be

sufficient identity of interest between the taxpayers subject to

the two taxes so that the taxpayers should be treated as one.

See United States v. Dalm, supra at 604-605 & n.5; Coohey v.

United States, 172 F.3d 1060 (8th Cir. 1999); Parker v. United

States, 110 F.3d 678, 682-683 (9th Cir. 1997).

     Each of these requirements is met in the instant case.
                              - 16 -


1.   Refund Time-Barred

      March filed her 1992 Federal income tax return on or about

April 15, 1993, and payment was made on the same date that the

return was filed.   March has never filed a claim for refund;

therefore, a claim for refund is barred by section 6511(a).

2.   Single Transaction, Item, or Taxable Event

      Since Bull v. United States, supra, the Supreme Court has

emphasized that a claim of equitable recoupment will lie only

where the Government has taxed a single transaction, item, or

taxable event under two inconsistent theories.    See United States

v. Dalm, 494 U.S. at 608 n.5 (construing Rothensies v. Electric

Storage Battery Co., 329 U.S. 296, 299-300 (1946), Bull v. United

States, supra, and Stone v. White, supra).   The terms "single

transaction", "item", or "event" are not synonymous, and the

inclusion of "item" in this phrase is significant in our case.

      In Bull v. United States, supra, Archibald Bull (Bull) died

owning a partnership interest, including the right to receive

future profits.   The partnership interest was transferred to his

estate, and, later his estate received the sum of approximately

$212,000, constituting its share of partnership profits earned

subsequent to Bull's death.   In 1921, the executor, at the

Commissioner's insistence, erroneously included this sum in the

gross estate under the theory that it was estate corpus, and

thus, it was subjected to estate taxes.   In 1925, the Government
                               - 17 -


determined a deficiency in the estate's income tax on the correct

theory that the same sum was income to the estate.   The executor

paid the income tax in 1928.   Later, in that same year, the

executor filed a claim for refund for the income tax paid and

sued for refund after the claim was denied.

     In considering the issue before it, the Supreme Court

stated:

     A serious and difficult issue is raised by the claim
     that the same receipt has been made on the basis of
     both income and estate tax, although the item cannot in
     the circumstances be both income and corpus; and that
     the alternative prayer of the petition required the
     court to render a judgment which would redress the
     illegality and injustice resulting from the erroneous
     inclusion of the sum in the gross estate for estate
     tax. * * * [Bull v. United States, 295 U.S. at 255;
     emphasis added.]

     The Supreme Court found that the estate's receipt of the sum

was properly taxable as income to the estate and that under the

facts of the case, "the item could not be both corpus and income

of the estate."   See Bull v. United States, supra at 258.

     Thus, the Supreme Court viewed the sum of money owed to

Bull's estate as an item.   See id. at 255.   We have no reason to

believe that the same sum may be defined as an item for income

tax purposes but be defined as something other than an item when

included in corpus for purposes of calculating the estate tax.

See id. at 256.   In the case at hand, the same item (in terms of
                              - 18 -


share value)8 was included in both petitioner's corpus in

determining the value of the gross estate and in income.9

Therefore, the estate tax and the income tax were imposed on the

same item.

     Furthermore, under the facts of the case before us, this

item cannot properly be both corpus and income to the estate.

The income tax paid by the residuary legatee on that identical

item is money which the Government is not justly entitled to

retain.   See id. at 261 ("While here the money was taken through

mistake without any element of fraud, the unjust retention is

immoral and amounts in law to a fraud on the taxpayer's

rights.").

    In holding that equitable recoupment was available for the

taxpayer to credit the estate tax paid on the same item subjected




     8
      Petitioner reported the date-of-death fair market value of
the Savings shares at $181.50 per share and used that amount as
the basis in calculating the gain on the shares later sold. We
have determined that the date-of-death fair market value of each
Savings share is $276. Thus, $94.50 ($276 minus $181.50) of
share value for each share of Savings stock was included in both
corpus and income. Similarly, $141 ($626 minus $485) of share
value for each share of Willits stock was included in both corpus
and income.
     9
      Petitioner sold the shares and calculated the amount of
income (capital gain) realized from the sale. The income passed
through the estate to March, who reported it on her return and
paid the income tax due. Thus, although March recognized the
income, it was realized by petitioner.
                               - 19 -


to the income tax, the Supreme Court stated:

     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. [Id. at
     262.]

     Although the "single transaction" requirement was mentioned

in Bull v. United States, supra, it was the stated ground for

decision in Rothensies v. Electric Storage Battery Co., supra.

In that case, the taxpayer erroneously paid excise taxes on the

sale of electric storage batteries from April 1919 to April 1926.

In July 1926, the taxpayer filed a claim for refund for the

periods of mid-1922 to 1926, the years not barred by the statute

of limitations, and received a refund in 1935.   Although the

taxpayer had been deducting the payment of these taxes, it did

not include the refund in income.   The Government determined a

deficiency in the taxpayer's 1935 income tax, and the taxpayer

paid the deficiency and sued for refund when its claim was

denied.

     In both the trial court and the Court of Appeals for the

Third Circuit, the taxpayer asserted successfully that the income

tax for 1935 should be reduced by equitable recoupment for the

time-barred excise tax overpayments for the 1919 through mid-1922

years.    In affirming the District Court, the Court of Appeals for

the Third Circuit stated that the same transaction element should
                             - 20 -


be interpreted to mean that there be "a logical connection

between main claim and the recoupment claim."   Electric Storage

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

revd. 329 U.S. 296 (1946).

     In reversing on this issue, the Supreme Court stated that

equitable recoupment

     has never been thought to allow one transaction to be
     offset against another, but only to permit a
     transaction which is made 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. [Rothensies v.
     Electric Storage Battery Co., 329 U.S. at 299.]

     In Rothensies v. Electric Storage Battery Co., supra, it is

clear that the case involved separate transactions, separate

items, and separate taxable events; the time-barred overpayments

arose from the erroneous treatment of many separate sales of

batteries as subject to excise taxes,10 and the income tax

deficiency arose from the failure to include the refunded open-

year excise taxes in gross income under the tax benefit rule.11

The time-barred refunds of the 1919 through mid-1922 excise taxes

and the inclusion of the refunded taxes that were paid in 1922


     10
      Therefore, the excise taxes paid in the time-barred years
were not paid on the same item or in the same transaction, but on
the same type of item or transaction.
     11
      See Andrews, "Modern-Day Equitable Recoupment and the 'Two
Tax Effect': Avoidance of the Statute of Limitation in Federal
Tax Controversies", 28 Ariz. L. Rev. 595, 610 (1986).
                              - 21 -


through 1926 in the taxpayer's 1935 income had no logical

connection.   The erroneous failure to include the excise tax

refund in income for 1935 is not the same transaction as

erroneously paying excise taxes in 1919 through mid-1922.

Furthermore, there was no transactional nexus between the time-

barred excise taxes paid in 1919 through mid-1922 and the

refunded excise taxes paid in 1922 through 1926, which the

taxpayer was required to include in income in 1935.

     The Supreme Court has not decided a case based on the

single-transaction requirement since Rothensies v. Electric

Storage Battery Co., supra.   In a recent case, United States v.

Dalm, 494 U.S. 596 (1990), the Court held that equitable

recoupment could only be used defensively, and the Court stated

that since Bull v. United States, 295 U.S. 247 (1935), it has

emphasized "that a claim of equitable recoupment will lie only

where the Government has taxed a single transaction, item, or

taxable event under two inconsistent theories."   United States v.

Dalm, supra at 605 n.5.

     Consequently, the interpretation and application of the

single-transaction requirement has been left to the lower courts,

which has resulted in conflicting authority.

     The cases on which petitioner mainly relies are Boyle v.

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

per curiam 232 F. Supp. 543 (D.N.J. 1964); O'Brien v. United
                                - 22 -


States, 766 F.2d 1038 (7th Cir. 1985), revg. 582 F. Supp. 203

(C.D. Ill. 1984); Estate of Vitt v. United States, 706 F.2d 871

(8th Cir. 1983); United States v. Herring, 240 F.2d 225 (4th Cir.

1957); and United States v. Bowcut, 287 F.2d 654 (9th Cir. 1961).

     In Boyle v. United States, supra, the decedent died in 1953

owning preferred stock with more than 20 years of accumulated

undeclared dividends (the arrearages).    The decedent's assets

were transferred to his estate, including the value of the

arrearages, and the estate tax was paid accordingly.    In 1954,

the executors distributed the preferred stock among the four

beneficiaries under the will.

     Later, the beneficiaries, on receiving those arrearages,

declared their receipt and listed them as nontaxable income on

their tax returns.    In 1958, after the period of limitations had

expired to claim a refund of the estate taxes, the Government

determined deficiencies in the beneficiaries' income tax because

of their reporting position with respect to the dividends.    The

beneficiaries paid the income tax deficiencies and brought a suit

for refund.   The District Court denied them equitable recoupment

against the time-barred estate tax, holding that the single-

transaction test of Rothensies v. Electric Storage Battery Co.,

supra, was not satisfied.    See Boyle v. United States, 232 F.

Supp. at 549-550.    The Court of Appeals for the Third Circuit

reversed, finding that there was "double taxation of the single
                               - 23 -


item" as both corpus and income, which sufficed to satisfy the

requirements of Bull v. United States.    See Boyle v. United

States, 355 F.2d at 236.

     The Court of Appeals distinguished Rothensies v. Electric

Storage Battery Co., on the grounds that in Rothensies v.

Electric Storage Battery Co., the taxpayer "waited over twenty

years to seek a refund",12 and the facts in Boyle were much

closer to the facts in Bull than were the circumstances of the

taxpayer in Rothensies v. Electric Storage Battery Co.    See Boyle

v. United States, 355 F.2d at 236-237.

     In O'Brien v. United States, supra, decedent's estate paid

estate tax on the stock of a closely held corporation, which it

valued at $215.7796 per share.    In the year following the

decedent's death, the Government determined a deficiency in the

estate tax, asserting a higher value of the stock, and the

taxpayer (one of decedent's heirs) filed a petition to the Tax

Court.    While the valuation issue was pending, the corporation

was liquidated, and, for the purpose of calculating the resulting

capital gain reportable on his income tax return, the taxpayer

used the value of the shares reported on the estate tax return.

The Government did not dispute this valuation and accepted the

payment of income tax on the gain arising from the liquidation.


     12
      Thus, the Court of Appeals for the Third Circuit indicated
that in any equitable claim, an equitable defense, such as
laches, may bar the claim.
                               - 24 -


In 1980, the Tax Court entered a stipulated decision in the

estate tax case, setting the value of the stock at $280.10 per

share.    The taxpayer did not assert the equitable recoupment

claim in the Tax Court case.

     On April 8, 1981, the taxpayer filed a claim for refund for

the income taxes that he overpaid in 1975 because of his use of

the lower value as the stock's basis.    The claim for refund was

denied on the grounds that the period of limitations had run for

the 1975 taxable year.    The taxpayer then filed suit for refund

in District Court, arguing that the basis for the stock should

have been higher and using equitable recoupment as the ground for

the suit.13

     The District Court agreed, finding the single-transaction

requirement satisfied.    Like the Court of Appeals for the Third

Circuit in Boyle, the District Court in O'Brien relied upon Bull,

and found that the facts of O'Brien were closer to Bull than to

Rothensies v. Electric Storage Battery Co.    The Court of Appeals

for the Seventh Circuit reversed, on the ground that equitable

recoupment cannot be used offensively as an independent ground




     13
      The taxpayer also argued for the refund under secs. 1311-
1314, the statutory mitigation provisions. The District Court
accepted this argument, but the Court of Appeals for the Seventh
Circuit reversed this conclusion. See O'Brien v. United States,
582 F. Supp. 203, 206-207 (C.D. Ill. 1984), revd. 766 F.2d 1038
(7th Cir. 1985).
                              - 25 -


for reopening years closed by the statute of limitations.      See

O'Brien v. United States, 766 F.2d at 1049.

     The Court of Appeals for the Seventh Circuit noted, however,

that the single-transaction test had been met.   The court stated:

          The "single transaction test," requiring that a
     "single transaction or taxable event ha[s] been
     subjected to two taxes on inconsistent theories,"
     Rothensies, 329 U.S. at 300, 67 S.Ct. at 272, also
     appears to be satisfied on these facts if we adopt the
     reasoning of the Third Circuit in Boyle. The Boyle
     court ruled that the "single transaction test" was
     satisfied where undeclared dividends were erroneously
     treated as assets, included as part of the corpus of
     decedent's estate and subjected to estate tax, but
     later were ruled taxable income upon distribution to
     the beneficiaries. The net effect, the court noted,
     was inconsistent treatment of the same fund directly
     resulting in an overpayment of tax by the estate.
     Essentially the same situation exists here where
     inconsistent tax treatment of the same stock (in terms
     of valuation) has directly resulted in the overpayment
     of tax by the beneficiaries. [O'Brien v. United
     States, supra at 1050-1051 n.16]


     Petitioner also relies upon Estate of Vitt v. United States,

706 F.2d 871 (8th Cir. 1983), to support its position that double

taxation of the same fund under inconsistent theories satisfies

the single-transaction requirement.14   In Estate of Vitt v.


     14
      The Court of Appeals for the Eighth Circuit cited Estate
of Vitt v. United States, 706 F.2d 871 (8th Cir. 1983), in a
recently decided case, Coohey v. United States, 172 F.3d 1060,
(8th Cir. 1999). In Coohey v. United States, supra, the court
found that, under the facts of that case, an AMT refund, based
upon repeal of a statute, for one year and the allowance of an
AMT credit for the following year "are clearly a single
transaction", because without the assessment and payment of the
AMT for the earlier year, there would never have been an AMT
                                                   (continued...)
                               - 26 -


United States, supra, Edward Vitt owned property with his wife,

Verlena, which they held as tenants in the entirety even though

Edward had provided all the consideration for its purchase.    The

Vitts conveyed the property by three separate deeds to their

daughters and grandchildren, retaining a life estate for their

joint lives.   When Edward died in 1964, his estate included one-

half of the value of the property for estate tax purposes.    In

reliance upon a revenue ruling that construed section 2036, the

Government determined that the entire value of the property, less

the actuarial value of Verlena's life estate, was includable in

Edward's gross estate.   This resulted in the inclusion of more

than one-half of the value of the property in Edward's estate.

The estate paid the tax and interest due, and later, the revenue

ruling was revoked.

     In 1975, Verlena died, and her estate tax return was filed

reporting her interest in the property but assigning it no value

for estate tax purposes.   The estate did not report any value for

Verlena's interest in the property because it was previously

included in Edward's estate.   The Government properly asserted

that one-half of the value of the property was includable in

Verlena's estate and determined a deficiency in the estate tax.




     14
      (...continued)
credit given to the taxpayer for the succeeding year.
                              - 27 -


The estate paid the deficiency and then filed suit for refund in

District Court.

     The District Court found that no more than one-half of the

value of property was includable in Edward's estate and that the

value in excess of that amount was included in error.   See Estate

of Vitt v. United States, 536 F. Supp. 403, 407 (E.D. Mo. 1982),

affd. 706 F.2d 871 (8th Cir. 1983).    Further, the District Court

found that although the taxes were imposed at different times,

the subject matter of the tax never changed.   Therefore, "To hold

on these facts that there is no common taxable event or fund

would be to blindly follow a narrow, overly simplified definition

of what constitutes a single transaction or taxable event".    See

id. at 408.   Accordingly, the District Court found that Verlena's

estate was entitled under the doctrine of equitable recoupment to

a credit for the excess tax paid by Edward's estate.

     In affirming, the Court of Appeals for the Eighth Circuit

considered the Government's argument that the single-transaction

requirement was not satisfied and found that, in addition to the

double taxation of the same property, the inclusion of the

property in both estates under section 2036 in essence resulted

from the same transaction--the Vitt's transfer of the real

property with retention of a life estate for their joint lives
                              - 28 -


and for the life of the survivor.   See Estate of Vitt v. United

States, 706 F.2d at 875.15

     Finally, petitioner relies on United States v. Herring, 240

F.2d 225 (4th Cir. 1957), and United States v. Bowcut, 287 F.2d

654 (9th Cir. 1961).   These cases, like the case now before us,

concerned the estate tax and the income tax, and in both cases

the taxes were not imposed on a single taxable event.   In both

cases, however, the single-transaction requirement was found to

be satisfied, and equitable recoupment was applied in the

taxpayer's favor.

     In United States v. Herring, supra, the decedent died in

1948, and his surviving spouse, as administratrix, filed the

estate tax return in 1949, paying the tax due.   In 1951, the

Government issued a preliminary notice proposing a deficiency in



     15
      Although arguably there were two taxable events in Estate
of Vitt v. United States, supra,-- the death of Edward Vitt and
the death of Verlena Vitt, see Parker v. United States, 110 F.3d
678, 684 (9th Cir. 1997) (finding that death is a taxable event),
see infra p. 46--the Court of Appeals for the Eighth Circuit
considered the single transaction requirement met by the
precipitating transaction, the lifetime transfer of the property
to the Vitts’ descendants. Similarly, in the instant case,
arguably there were two transactions or taxable events--the
transfer of the stock to petitioner upon decedent's death and the
subsequent sale by petitioner of that stock--the precipitating
transaction, however, was the valuation of the same item in the
transfer from decedent to petitioner. We note that the Supreme
Court in Bull v. United States, 295 U.S. 247 (1935), also did not
consider the death of Bull and the transfer of the overvalued
partnership interest to the estate; instead it viewed the
precipitating transaction--the distribution of the partnership
income--as the single transaction.
                              - 29 -


income taxes, civil penalties for fraud, delinquency penalties,

and interest against the surviving spouse individually and the

estate for the years 1932 to 1948.     The assessment for tax was

made in 1952, after the time for filing a claim for refund of the

estate taxes had expired.   The administratrix filed suit for

refund of the estate taxes that would not have been due if the

income tax deficiency had been deducted from the value of the

estate, but the District Court dismissed this suit as untimely.

The administratrix then paid the income tax deficiency, which

greatly reduced the size of the estate, and sued for refund of

the income taxes paid on the theory that the estate was entitled

to equitable recoupment of the overpayment of the time-barred

estate tax.   The District Court approved this theory and gave

judgment for the estate in the amount claimed, and the Government

appealed.

     In affirming, the Court of Appeals for the Fourth Circuit

distinguished Rothensies v. Electric Storage Battery Co., 329

U.S. 396 (1946), on the ground that there the transactions "were

too remote from one another to justify recoupment and that claims

so long dead could not be resurrected under the doctrine."

United States v. Herring, supra at 227.     The Court of Appeals for

the Fourth Circuit found that, although the case might differ in
                              - 30 -


some respects from Bull v. United States, supra, in both cases

     the Government has received monies which in equity and
     good conscience belong to the taxpayer, and in both the
     allowance of recoupment should be made to avoid the bar
     of the statutes of limitations. It is true that in the
     Bull case both claims of the Government grew out of the
     same transaction and were asserted against the same
     money in the hands of the executor; but that, in
     practical effect, is the situation that prevails here.
     The Government has asserted two claims against the
     monies of the estate that came into the hands of the
     administratrix--one on account of past due income taxes
     and the other on account of the estate tax due on the
     net estate, and it is impossible to determine the
     amount of the latter without making due allowance for
     the deduction caused by the former. * * * [United
     States v. Herring, 240 F.2d at 228.]

     Four years after the Court of Appeals for the Fourth Circuit

decided the Herring case, the Court of Appeals for the Ninth

Circuit affirmed a case with similar facts, United States v.

Bowcut, 287 F.2d 654 (9th Cir. 1961), affg. 175 F. Supp. 218 (D.

Mont. 1959).   In this case, the decedent died in 1952, and the

executrix (decedent's former wife) filed the estate tax return in

1953, paying the tax due.   In 1954, the Government proposed

adjustments to decedent's income tax for 1947 through 1950 for

additional income tax, civil fraud penalties, and interest.    The

executrix paid the taxes, penalties, and interest in

installments, and filed suit in District Court for refund of

income tax in the amount of the overpaid estate taxes on the

grounds of equitable recoupment.

     In the District Court, the Government argued, inter alia,

that equitable recoupment was not appropriate under Bull v.
                               - 31 -


United States, supra, because the single-transaction requirement

was not satisfied.   The District Court, relying upon United

States v. Herring, supra, dismissed that argument because the

same money was involved in both the claim for the income tax

deficiency and the claim for estate tax.   See Bowcut v. United

States, 175 F. Supp. at 222.

     On affirming the District Court, the Court of Appeals for

the Ninth Circuit did not consider the single-transaction issue,

as the Government appealed primarily on other grounds, which the

court rejected, for denying equitable recoupment.    See United

States v. Bowcut, 287 F.2d at 656-657 & n.1 (9th Cir. 1961).

Although the Court of Appeals did not consider whether the

single-transaction requirement was satisfied, it did note that

"In this case the taxpayer emphasizes that she is seeking to

recover the overassessment of estate tax by recoupment from the

very fund which, taken from the estate, had brought about the

fact of overassessment."   Id. at 656.

     Years after United States v. Herring, supra, and United

States v. Bowcut, supra, were decided, the Commissioner accepted

the logic of these decisions and agreed in Rev. Rul. 71-56, 1971-

1 C.B. 404, to apply equitable recoupment in these

circumstances.16   Despite the statement of administrative


     16
      Rev. Rul. 71-56, 1971-1 C.B. 404, 470, revoked Rev. Rul.
55-226, 1955-1 C.B. 469, which ruled, citing Rothensies v.
                                                   (continued...)
                                    - 32 -


position in Rev. Rul. 71-56, supra, respondent now argues that

the single-transaction requirement is not met in the case at

hand.        In support of his position, respondent cites two Court of

Claims cases, Wilmington Trust Co. v. United States, 221 Ct. Cl.

686, 610 F.2d 703 (1979), and Ford v. United States, 149 Ct. Cl.

558, 276 F.2d 17 (1960).

     In Wilmington Trust Co. v. United States, supra, the

Government argued equitable recoupment in a factual context

similar to United States v. Herring, supra, and United States v.

Bowcut, supra.17       In this consolidated case, individual

taxpayers, Carpenter and McMullan, had been engaged in forest and

land management.        Carpenter and McMullan incurred certain

expenses in these activities which they properly deducted as

ordinary and necessary business expenses.        After Carpenter and

McMullan had died, the Government determined deficiencies in

their predeath income taxes, on the theory that the expenses were

reductions in the amount of capital gain that Carpenter and

McMullan each had realized on sales of timber.        The executor of

each decedent's estate paid the income tax deficiencies and

deducted the income taxes paid as claims against the decedent's



     16
      (...continued)
Electric Storage Battery Co., 329 U.S. 296 (1946), that equitable
recoupment was not available in these circumstances because the
single-transaction requirement was not satisfied.
        17
             See Andrews, supra at 641.
                              - 33 -


gross estate.   Each estate was allowed these deductions for

estate tax purposes.

     Each estate also timely filed an administrative claim for

refund of the predeath income taxes it had paid; the claims were

denied, and each of the executors filed suit for refund of income

tax in the Court of Claims.   If allowed, the refunds of the

improperly paid income taxes would have resulted in estate tax

deficiencies, as the earlier deductions allowed for the income

tax claims against the estates would have been overstated.     After

the period of limitations had expired for the Government to

assert contingent claims against the estates, the Government

amended its answer in the refund suits seeking under the doctrine

of equitable recoupment to offset any resulting estate tax

deficiencies against any income tax refunds the court determined

to be due.

     In both cases, the trial court judges, citing Herring v.

United States, supra, Bowcut v. United States, supra, and Rev.

Rul. 71-56, supra, found the single-transaction requirement had

been satisfied, and recommended decision for the Government.    See

Wilmington Trust Co. v. United States, 43 AFTR 2d 79-801, 79-1

USTC par. 9223 (Ct. Cl. Trial Div. 1979), revd. and remanded 221

Ct. Cl. 686, 610 F.2d 703 (1979); McMullan v. United States, 42

AFTR 2d 78-5723, 78-2 USTC par. 9656 (Ct. Cl. Trial Div. 1978).
                              - 34 -


     The Court of Claims reversed the trial court and held for

the taxpayers, 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.   See Wilmington Trust Co. v. United States, 221

Ct. Cl. 686, 610 F.2d 703, 713 (1979).   In finding that the

single-transaction requirement was not satisfied, the court

stated:

          The income tax refund is based upon the
     deductibility from ordinary income of the timber
     operations expense. The estate tax deficiency,
     however, exists because the estate deducted the
     additional income taxes reflecting those expenses that
     it paid and now is recovering. The recoupment claim
     thus arises from a different transaction (the reduced
     deduction from the estate tax) than the refund claims
     (the increased deductions from ordinary income). The
     government is not seeking to offset against each other
     two taxes levied on the same transaction, but to offset
     the tax on one transaction against the tax on another.
     * * * [Id. at 714.]

     Thus, although the precipitating transaction was the

deduction of the business expenses, the Court of Claims did not

find this sufficient.18

     In 1939, the taxpayers (children) in Ford v. United States,

149 Ct. Cl. 558, 276 F.2d 17 (1960), received stock in a closely



     18
      Academic commentators have almost invariably supported the
Herring-Bowcut analysis over the conclusion of the Court of
Claims. See Andrews, supra at 630-650; 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).
                              - 35 -


held Brazilian coffee company from their deceased father's

estate.   For estate tax purposes, the executors reported the

date-of-death fair market value of the stock at $11,857, which

was adjusted upward to $23,715 in an audit of the estate tax

return.   Eight years later, in 1947, the children sold the stock

for $258,948, and reported gain based upon the adjusted date-of-

death value of the stock.   The children then filed a timely claim

for refund, asserting that the basis reported on the income tax

returns was erroneous, and that the correct date-of-death value,

and, therefore correct basis, was $331,418.   See id. at 20.

     The Government denied the refunds, on the basis of the date-

of-death value reported in the estate tax return.   The children

filed suit in the Court of Claims, and at trial the court found

that the actual fair market value of the stock at the date of the

father's death was greater than the amount the children received

in the 1947 sale.   The Government did not advert that it might be

entitled under the doctrine of equitable recoupment to offset the

overpaid income tax against the earlier underpaid estate tax.

However, on its own initiative the Court of Claims considered

this issue, and on 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, 295 U.S. 247 (1935), and Stone v.

White, 301 U.S. 532 (1937).   The court found that although "The

instant case comes fairly close to satisfying the recoupment
                              - 36 -


standards of the Supreme Court, * * * the teaching of Rothensies

is that [the doctrine of equitable recoupment] is not a flexible

doctrine, but a doctrine strictly limited, and limited for good

reason."   Ford v. United States, 276 F.2d at 23.   The Court of

Claims did not cite United States v. Herring, supra, and United

States v. Bowcut, 287 F.2d 654 (9th Cir. 1961), and Rev. Rul. 71-

56, supra, had not yet been issued.

     The "good reason" referred to in Ford v. United States,

supra, is the avoidance of the kind of staleness that the Supreme

Court feared in Rothensies v. Electric Storage Battery Co.,

supra.

     That concern does not apply in the case at hand.   An

automatic feature arising from the statutory relationship between

the estate tax and the income tax is that once the value of the

item included in the gross estate is finally determined, there is

little or no factual issue with respect to the time-barred claim;

hence there is no genuine issue of staleness.   Furthermore, as

the value improperly excluded from (or included in) the gross

estate automatically is the same amount erroneously included in

(or excluded from) gross income, neither the Commissioner nor the

taxpayer is required to perform extensive additional

recordkeeping or investigation with respect to the time-barred

claim.   Finally, unlike the overpaid excise taxes in Rothensies

v. Electric Storage Battery Co., supra, which had been collected
                               - 37 -


for more than 2 decades and time barred for more than 15 years,

in this case the open claim and the time-barred claim arose at

approximately the same time.

     In two recent decisions, Estate of Harrah v. United States,

77 F.3d 1122 (9th Cir. 1995), and Parker v. United States, 110

F.3d 678 (9th Cir. 1997), the Court of Appeals for the Ninth

Circuit, the circuit to which any appeal in this case would lie,

held that equitable recoupment was not available because, inter

alia, on the facts in those cases no tax had been imposed twice

on a single transaction.    These cases are distinguishable from

the case at hand.

     In Estate of Harrah v. United States, supra, William F.

Harrah died in 1978.    His estate included 5,930,301 shares of

common stock of Harrah's Inc. (Harrah's), which were valued at

$13.325 per share in the estate tax return filed in 1980.    In

1980, Harrah's was merged with Holiday Inns, Inc. (Holiday Inns).

In this merger, the estate received $60,262,886 of cash, a $45

million promissory note executed by Holiday Inns, and convertible

subordinated debentures of Holiday Inns with a face value of

$105,262,800.

     The amount of the taxable gain reported by the estate from

the merger transaction depended upon the value of the promissory

note and the convertible subordinated debentures and the basis of

the Harrah's stock.    On its 1980 income tax return, the estate
                              - 38 -


valued the promissory note at its face value, $45 million, and

the convertible subordinated debentures at $84,210,240, on the

basis of a 20-percent discount from their face value.

Accordingly, the estate reported $110,451,865 of taxable gain on

its return.

     In 1982, the estate converted the debentures into Holiday

Inns stock, which resulted in a basis of $16 per share.   In this

year, the Government determined a deficiency in estate tax,

contending that the value of the Harrah's stock was $34.05 rather

than $13.325 as reported on the return.

     In 1983, the estate sold 679,400 shares of Holiday Inns

stock for $25,159,789, and distributed 1,101,447 shares to a

marital trust that was established by William F. Harrah's will,

which also provided that the marital trust was to be funded from

the estate.   In 1984, the estate sold 58,200 shares of Holiday

Inns stock for $2,620,487, and the marital trust sold all its

shares for $58,177,080.   In each of these sales, the $16 basis

was used to compute the gain realized.

     The estate filed a petition with this Court, contesting the

Commissioner's determination of the value of the Harrah's stock

that it reported on the estate tax return.   In 1986, during the

pendency of this litigation, the estate filed a timely income tax

refund claim for 1980, on the ground that if it had undervalued

the Harrah's stock, it had then overstated the gain it realized
                               - 39 -


in the 1980 merger with Holiday Inns.   At this time, the

Commissioner and the estate stipulated that for estate tax

purposes the Harrah's stock had a value of $19.41 per share.

Because of this stipulation, the value of the Harrah's stock was

not an issue on appeal.   See Estate of Harrah v. United States,

supra at 1125 n.4.

     After the stipulation of the value of the Harrah's stock,

the estate filed a revised claim for refund of its 1980 income

taxes.   In 1988, the Government stated that it would oppose the

1980 refund claim on the grounds that the convertible

subordinated debentures were undervalued.   In 1989, the estate

filed suit in District Court for refund of $10,542,641 of income

tax paid for the 1980 taxable year.

     At this time, the estate filed a claim for refund of income

taxes for the 1983 and 1984 taxable years, and the marital trust

filed a claim with respect to its 1984 taxable year.    The claims

filed for 1983 and 1984 were denied on the grounds that they were

untimely.   As a result of the denial of these claims, the estate

amended its refund suit in District Court to include its claims

for the 1983 and 1984 years.   The marital trust joined in this

action, and sought a refund for its 1984 taxable year.

     The District Court applied the doctrine of equitable

recoupment and found the three refund claims were not barred by

the statute of limitations and also found that the proper
                              - 40 -


discount was 16.8 percent from the face value of the convertible

subordinated debentures, rather than 20 percent as reported on

the estate's 1980 income tax return.   The District Court's

determination of the amount of the discount was accepted by the

Government and was not an issue on appeal.   See Estate of Harrah

v. United States, supra at 1125.

     The only issue before the Court of Appeals for the Ninth

Circuit was whether equitable recoupment would provide

jurisdiction for the court to consider the estate's and trust's

1983 and 1984 time-barred claims for refund of the income tax

paid on their sales of the Holiday Inns stock.   See Estate of

Harrah v. United States, supra.

     In deciding this issue, the Court of Appeals stated:

     The "single transaction" requirement is but a
     reflection of the requirement that recoupment by the
     taxpayer on a time-barred claim is available only when
     it is asserted defensively against a timely claim by
     the government with respect to the same transaction. A
     time-barred claim alone cannot provide jurisdiction to
     remove that bar. [Id. at 1126.]

     The Court of Appeals found that both the estate and marital

trust were seeking to employ equitable recoupment offensively as

the basis of jurisdiction, in a manner not countenanced by Bull

v. United States, supra, and United States v. Dalm, supra.    See

id. at 1126.   Further, the Court of Appeals found that the

estate's and trust's attempts to supply the required jurisdiction

by characterizing their efforts to reduce their 1983 and 1984
                              - 41 -


taxes as an assertion of equitable recoupment in respect to the

open 1980 tax year must fail because consideration of the 1983

and 1984 years was barred by the statute of limitations, and the

1983 and 1984 sales of the Holiday Inns stock transactions were

distinct from the Harrah/Holiday Inns merger transactions

occurring in 1980.   Although the Court of Appeals found "a common

thread of factual similarity" linking the 1983 and 1984

transactions with the 1980 transactions, it was not enough to

provide jurisdiction.   See id. at 1126.

     In Estate of Harrah v. United States, 77 F.3d 1122 (9th Cir.

1997), the Court of Appeals for the Ninth Circuit did not decide

the issue now before us; the value of the stock in Harrah had

been stipulated, and when the District Court determined the value

of the convertible debentures, it consequently determined the

amount of gain from the sale of that stock.   Unlike the stock at

issue in this case, the convertible subordinated debentures were

not items included in the estate for estate tax purposes.

Furthermore, as the taxpayer's 1980 claim for refund of the

overpayment of income tax realized in that sale was not time

barred, the court did not have to consider the issue of whether

the estate could recoup the excess income tax paid as a credit

against the underpaid estate tax.   In short, the issue now before

us is the issue that was not before the Court of Appeals.
                                - 42 -


     In addition to these differences, the instant case is

otherwise distinguishable from Estate of Harrah v. United States,

supra.   In our case, petitioner is not seeking to gain

jurisdiction with a time-barred claim; we have jurisdiction

because respondent determined a deficiency in petitioner's estate

tax, issued a notice of deficiency, and petitioner filed timely a

petition in response thereto.    Moreover, petitioner is not

attempting to reduce the income tax paid in the time-barred year;

it is asserting that equitable recoupment is available to reduce

the estate tax deficiency in the open year with the income tax on

the same item that earlier was erroneously overpaid.

     Most importantly, the 1983 and 1984 sales of the Holiday

Inns shares by the estate and trust were many transactional

generations removed from the transfer of the Harrah's stock to

the estate and its sale of that stock in the merger.      Neither the

convertible subordinated debentures nor the Holiday Inns shares

were items included in the estate.       Furthermore, unlike the item

in Bull v. United States, supra, and the item in the instant

case, the Holiday Inns shares were not taxed once under the

estate tax as corpus and again under the income tax as capital

gain.

     Finally, unlike the case at hand, where the only act of

petitioner that contributed to the circumstance of double

taxation was the erroneous valuation of those assets, see United
                              - 43 -


States v. Bowcut, 287 F.2d at 656 (the "only act of this taxpayer

[the executrix] which contributed to the circumstance of a double

tax upon the estate was her erroneous return of estate tax

liability"), the taxpayer in Estate of Harrah v. United States,

supra, engaged in several sales transactions with multiple

valuation errors.

     In Parker v. United States, 110 F.3d 678 (9th Cir. 1997),

the appellants (sisters) were the two daughters of Eleanor Parker

(mother), who died in 1971.   In 1972, the sisters sued Edward

Allison (stepfather), alleging that he had abused his role as a

fiduciary by embezzling funds from the mother's separate assets

and from a testamentary trust created by the mother in 1958 for

the sisters.   The suit was settled in 1975 with the stepfather

agreeing in part to create a $325,000 settlement trust.   The

income of the settlement trust was to be paid to the stepfather,

and the remainder was to be paid to the sisters upon his death.

     The stepfather died in 1985.   At the request of the executor

of the stepfather's estate, and over the objections of the

sisters, the trustee paid $90,000 in estate taxes owed by the

stepfather's estate from the corpus of the settlement trust.     The

sisters filed a timely claim for refund following the estate tax

payment, which was rejected by the Government.   The sisters then

filed suit for refund in the District Court.
                             - 44 -


     In the District Court, the Government moved for summary

judgment arguing that the sisters were not entitled to a refund

because the value of the settlement trust, if not part of the

stepfather's estate, was part of the mother's estate.19   The

Government claimed--by way of asserted equitable recoupment--that

taxes due from the mother's estate greatly exceeded the $90,000

that the sisters were trying to recover.   The District Court

granted the Government's motion.

     The sisters filed a timely motion for reconsideration in

1995, arguing for the first time that equitable recoupment did

not apply because the case did not involve a single transaction

or an identity of interest as required under the doctrine.      The

District Court denied the sisters' motion for reconsideration,

finding that equitable recoupment applied.   The District Court

reasoned that the case involved a single transaction, the

taxation of the settlement trust, and that the requisite identity

of interest was present because the parties seeking the refund

were the same parties who received the benefit of a larger

inheritance when the mother's estate was not taxed.




     19
      The District Court found that at the time of her death,
the mother had a cause of action against the stepfather for his
fraudulent conveyances. By converting the mother's asset (her
cause of action) into a sum certain by settling the claim, that
sum was therefore includable in the mother's gross estate. See
Parker v. United States, 110 F.3d 678, 681 (9th Cir. 1997).
                             - 45 -


     On appeal, the Court of Appeals for the Ninth Circuit

accepted the Government's concession that the settlement trust

had been improperly included in the stepfather's estate.

However, the Court of Appeals concluded that even if the mother's

claim against the stepfather had been includable in her estate,

the Government's claim against her was time barred and that bar

could not be circumvented by application of the doctrine of

equitable recoupment because this case involved two or more

taxpayers, two or more transactions, no inconsistent treatment

between them, and no equitable reason to deny the sisters their

refund.

     In concluding that the District Court erroneously combined

two or more separate transactions and analyzed them under the

guise of taxation of the trust, the Court of Appeals for the

Ninth Circuit observed that when the Supreme Court declared in

Rothensies v. Electric Storage Battery Co., 329 U.S. at 299, that

equitable recoupment

     "permit[s] 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." * * * This
     pronouncement, however, does not mean that courts
     should lump together related, but nonetheless separate
     transactions so that the facts of a case can be viewed
     as "one transaction as a whole." * * * [Parker v.
     United States, supra at 684; citation omitted.]

     A number of factors contributed to the Court of Appeals'

decision in Parker to treat the sisters' matter as involving more
                               - 46 -


than a single transaction.   First, neither the mother nor her

estate was a party to the settlement trust created 4 years after

the mother's death.   Second, it was not the creation of the trust

that gave rise to the tax liability that the Government claimed

existed with respect to the mother's estate.   The mother's estate

tax liability existed because she possessed a valuable right when

she died, the claim against the stepfather for conversion,

embezzlement, and breach of fiduciary duty.    The Court of Appeals

for the Ninth Circuit reasoned that these "transactions" (the

mother's death or the stepfather's tortious conduct giving rise

to the mother's chose in action) were undeniably separate from

the event giving rise to the sisters' refund claim--the

stepfather's death and the concededly erroneous taxation of his

estate.   See Parker v. United States, supra at 684.   While the

Court of Appeals conceded that the creation and taxation of the

settlement trust were in some ways related to these various

transactions, it found that any factual and arithmetic link

between them was insufficient to enable the Government to succeed

in its claim for recoupment.   See id.

     In contrast to Parker, in which the mother was not even a

party to the creation of the settlement trust, in the case at

hand, petitioner both undervalued and sold the shares of stock

that gave rise to the estate tax deficiency, and the same

undervaluation and sale automatically resulted in petitioner's
                               - 47 -


realization of excess income, and the payment of excess income

tax.    Therefore, unlike the taxpayer in Rothensies v. Electric

Storage Battery Co., supra, and the Government in Parker v.

United States, supra, petitioner is not attempting to lump

distinct transactions separated by many years into a single

taxable event.20

       Any appeal in this case would lie to the Court of Appeals

for the Ninth Circuit, and we are bound by any decision of that

court squarely in point.    See Golsen v. Commissioner, 54 T.C. at

756-757.    However, the Court of Appeals did not consider the

precise issue now before us, and both Estate of Harrah v. United

States, 77 F.3d 1122 (9th Cir. 1995), and Parker v. United

States, 110 F.3d 678 (9th Cir. 1997), are otherwise

distinguishable on their facts; Golsen does not apply.    See id.

       Here, there is more than a mere logical relationship or

factual and arithmetical link between the tax paid on the gain

realized on the shares sold by petitioner and the valuation of

those same shares for the estate tax.    Because of the statutory


       20
      When the taxpayer in Rothensies v. Electric Storage
Battery Co., 329 U.S. 296 (1946), brought suit in 1943, the claim
pleaded as recoupment was for taxes collected over 20 years
before and barred by statute for over 16 years. See id. at 302-
303. Similarly, in Parker v. United States, 110 F.3d 678 (9th
Cir. 1997), the settlement trust was created in 1975, 4 years
after the mother's death, and it was a decade later before the
Government "roused to action" when the sisters sought the refund
to which they were entitled. See id. at 685. In the instant
case, the stock was sold by petitioner in the year immediately
following decedent's death.
                              - 48 -


relationship between sections 2031 and 1014, there is automatic

causality between the fair market value of shares reported by the

estate and the gain recognized on the sale of the same property.

The purpose of section 1014 is, in general, to provide a basis

for property acquired from a decedent that is equal to the value

placed upon such property for purposes of the Federal estate tax.

See sec. 1.1014-1(a), Income Tax Regs.   Once the proper date-of-

death fair market value is established by judicial process and

made subject to the estate tax, it is automatic, under the facts

of this case, that gain has been improperly subjected to the

income tax.   Accordingly, we find that the single transaction,

item, or taxable event requirement is met.

3.   Inconsistent Treatment

      Both the estate and the income tax depend upon the same

matter of fact--the fair market value of the shares at the date

of decedent's death.   Accordingly, the value existing at

decedent's death is taxed only once.   See secs. 1014, 2031.

      With respect to this issue in Parker v. United States,

supra, the Court of Appeals for the Ninth Circuit compared the

facts of that case, in which there was an erroneous inclusion in

the stepfather's estate and an erroneous failure to assess the

full value of the mother's gross estate, with Bull v. United

States, 295 U.S. 247 (1935), in which the same amount of

partnership profits was taxed as both corpus and income.    See
                               - 49 -


Parker v. United States, supra at 685.   In Parker, the court

reasoned that while the Government's failure to determine a

deficiency in the mother's estate on the basis of the value of

the remainder interest, and the inclusion of the corpus in the

stepfather's estate were both wrong, the erroneous tax treatment

of the separate estates was not the result of inconsistent

theories of taxation as required under the doctrine.   See id.

      The instant case is clearly distinguishable from Parker v.

United States, supra.   In this case, the same item has been

subjected to taxation under inconsistent theories, as corpus

under the estate tax and as capital gain under the income tax.

We conclude that this requirement is satisfied.   See Bull v.

United States, supra at 261; see also Boyle v. United States, 355

F.2d at 236 (treatment of the same fund as both corpus and income

provided the necessary inconsistency of treatment).




4.   Identity of Interest

      The courts that have found equitable recoupment available in

the cases before them have not required absolute identity of

interest between the payor of the erroneous overpayment (or

underpayment where the Government asserts recoupment) and the

recipient of the recoupment.   However, if the subject transaction

involves two or more taxpayers, equitable recoupment will not be
                               - 50 -


available unless a sufficient identity of interest exists so that

the taxpayers should be treated as one.   See Parker v. United

States, supra at 683.

     In the instant case, we find that there is sufficient

identity of interest between petitioner and the payor of the tax

that petitioner seeks to recoup.   Decedent's will provides that

the estate taxes are to be paid from the residue of the estate,

and petitioner sold stock included in that residue to pay its

estate tax liability.   The gain realized on the sales passed

through to the residuary legatee, March, who reported the gain

and paid the income tax due.   Any adjustment through recoupment

will benefit only the residuary legatee, and any distinction of

legal entities would be purely artificial.   See Stone v. White,

301 U.S. 532 (1937) (identity of interest between the trust which

paid the tax and the beneficiary who had received the income);

Estate of Vitt v. United States, 706 F.2d 871, 875 n.3 (8th Cir.

1983) (sufficient identity of interest between the separate

estates of deceased spouses, because the same parties

detrimentally affected by the overpayment of estate tax would

receive the proceeds from recoupment); Boyle v. United States,

supra at 236 (sufficient identity of interest between estate that

paid estate tax on accumulated dividend arrearages included in

corpus and all the beneficiaries of the estate who later were

paid the dividends and liable for the income tax thereon); United
                              - 51 -


States v. Herring, 240 F.2d 225, 228 (4th Cir. 1957) (sufficient

identity between decedent and estate); Bowcut v. United States,

175 F. Supp. 218, 221-222 (D. Mont. 1959) (same).

     To reflect the foregoing,

                                           Decision will be entered

                                       under Rule 155.



     Reviewed by the Court.

     GERBER, WELLS, COLVIN, HALPERN, BEGHE, CHIECHI, LARO, FOLEY,
VASQUEZ, GALE, THORNTON, and MARVEL, JJ., agree with this
majority opinion.
                              - 52 -


     BEGHE, J., concurring:   Having joined the majority opinion,

I write separately to respond to Judge Chabot's argument that the

structure of our deficiency jurisdiction prohibits us from

applying equitable recoupment to redetermine petitioner's estate

tax deficiency.

     In Judge Chabot's view, the sole issue for decision in the

case at hand, as he argued in Estate of Mueller v. Commissioner,

101 T.C. 551, 565-566 (1993) (Mueller II), is the valuation of

the Savings and Willits shares included in decedent's gross

estate.   Inasmuch as we have performed that task in Branson I,

the dissent contends that nothing remains for us to do to

redetermine petitioner's estate tax deficiency.   I disagree:   Our

valuations also, as a practical matter, have redetermined a

corresponding increase in the section 1014(a) basis of the

shares, resulting in the residuary legatee's time-barred

overpayment of tax on the sale of the shares.

     Working with the definition of "deficiency" in section

6211(a), there is a way in which the residuary legatee's

overpayment is taken into account in computing petitioner's

estate tax deficiency.   While the approach I suggest requires an

element of fictive or "as if" thinking in applying the statute, I

believe the grounds for applying equitable recoupment to the

facts of this case support an interpretation of section 6211(a)
                                 - 53 -


that allows the residuary legatee's overpayment to be taken into

account in determining petitioner's estate tax deficiency.

     As Judge Chabot points out, the Tax Court's task in this

case is to redetermine petitioner's estate tax deficiency, and

"deficiency" is a term of art in Federal taxation that has

special significance for our jurisdiction.   See Murphree v.

Commissioner, 87 T.C. 1309, 1311 (1986); Martz v. Commissioner,

77 T.C. 749, 754 (1981); Hannan v. Commissioner, 52 T.C. 787, 791

(1969).   Section 6211(a) defines "deficiency" as follows:

     SEC. 6211 DEFINITION OF A DEFICIENCY.

          (a) In General.-- For purposes of this title in
     the case of income, estate, and gift taxes imposed by
     subtitles A and B and excise taxes imposed by chapters
     41, 42, 43, and 44 the term "deficiency" means the
     amount by which the tax imposed by subtitle A or B, or
     chapter 41, 42, 43, or 44 exceeds the excess of--

                (1) the sum of

                     (A) the amount shown as the tax by the
                taxpayer upon his return, if a return was
                made by the taxpayer and an amount was shown
                as the tax by the taxpayer thereon, plus

                     (B) the amounts previously assessed (or
                collected without assessment) as a
                deficiency, over--

                (2) the amount of rebates, as defined in
           subsection (b)(2), made.

In other words, the deficiency (d) equals the correct tax imposed

(t) less the total tax shown on the return (s) plus prior
                               - 54 -


assessments (a) less rebates (r).1      Under this definition, a

deficiency in estate tax will generally result if a taxpayer is

found to have undervalued property included in the gross estate

because an increase in the value of included property will

increase the amount of tax imposed by subtitle B.      Just as the

amount of the deficiency is affected by the amount of tax imposed

under subtitle B, it can also be affected by "amounts previously

assessed (or collected without assessment) as a deficiency", sec.

6211(a)(1)(B), see sec. 1.6211-1(e), Income Tax Regs., and

rebates made, see sec. 6211(a)(2).

     In applying equitable recoupment within the statutory scheme

of section 6211(a), we are in effect holding, after concluding

that the residuary legatee paid too much income tax on

petitioner's gain on the 1992 sales of Willits and Savings

shares, that petitioner has been assessed an additional amount of

estate tax within the meaning of section 6211(a)(1)(B).      In so

doing, we treat the income tax overpayment as if it were a

partial assessment of the estate tax deficiency.      The residuary

legatee's income tax overpayment thereby has the effect of

reducing the amount of the estate tax deficiency, not as a below-


     1
         Expressed as a mathematical formula:

                        d = t - (s + a - r).

The formula can also be expressed as follows:

                        d = (t - s) - (a - r).
                             - 55 -


the-line subtraction from the deficiency, but as an above-the-

line (negative) element of the deficiency itself.   See sec.

6211(a)(1)(B).

     There is a long and honorable tradition of using legal

fictions to overcome the rigidity of the law in order to make the

legal system function fairly.2   A legal fiction is a falsehood

that is deemed to be true for limited purposes designed to bridge

the gap between concept and reality.3   "A doctrine which is

plainly fictitious must seek its justification in considerations

of social and economic policy; a doctrine which is nonfictitious



     2
       See ACLU of Mississippi, Inc. v. Finch, 638 F.2d 1336,
1340 n.7 (5th Cir. 1981), and texts cited. This case and these
texts conclude that legal fictions can be useful and justified
if employed with the understanding of producer and consumer of
their character as such. See also United States v. Dalm, 494
U.S. 596, 612-623 (1990) (Stevens, J., dissenting), discussed
infra pp. 7-8.
     3
          In effect, when we engage in a fiction, we
     redefine reality to comport with existing law as
     a method of changing the law to meet new realities
     * * *. This method of adapting the law to changing
     circumstances and perceptions is saved from absurdity
     by its underlying rationality. * * * when used
     properly the legal fiction is a rule of law embodying
     an unconcealed falsehood at one level and a deeper
     truth at another more important level. The falsehood
     is often made necessary because of the pre-existing
     structure of the law, and is justified (if it is
     justified) by the deeper underlying truth contained
     within the falsehood.

Miller, "Liars Should Have Good Memories: Legal Fictions and the
Tax Code", 64 U. Colo. L. Rev. 1, 26 n.109 (1993).
                               - 56 -


often has spurious self-evidence about it."   L. Fuller, Legal

Fictions 71 (1967).4

     The concepts of tax "deficiency" and "underpayment" are

themselves legal constructs that amount to fictions, inasmuch as

neither of them purports to be the amount of a petitioner's

remaining obligation to pay tax; they stand in somewhat the same

relationship to such obligation as shadows do to the three-

dimensional object.    However, once a deficiency determined by the

Commissioner (or redetermined by the Tax Court) is assessed, the

deficiency becomes a legal obligation that the Commissioner can

collect, and reality painfully intrudes.

     By allowing the residuary legatee's overpayment to be taken

into account in determining petitioner's estate tax deficiency,

we do no more than give effect to the accepted notions that "the

rule of equitable recoupment permits recovery of an otherwise

barred claim by resort to the fiction that the overpayment is a

credit or defense against a later asserted tax liability for a

year open to suit" and that "The doctrine of equitable recoupment

utilizes the fiction of a tax credit or defense to liability for

a year open to suit to avoid violation of the statutory scheme

providing for finality of tax determinations."    Holzer v. United




     4
       Originally published in slightly different form in three
parts in 25 Ill. L. Rev. 363, 513, 865 (1930-31).
                              - 57 -


States, 250 F. Supp. 875, 877-878 (E.D. Wis. 1966), affd. per

curiam 367 F.2d 822 (7th Cir. 1966).

     "[T]he Supreme Court has explicitly and repeatedly stated

that it is sometimes appropriate to interpret statutes in a

manner inconsistent with their literal language."   Zelenak,

"Thinking About Nonliteral Interpretations of the Internal

Revenue Code", 64 N.C. L. Rev. 623, 631 (1986).   Zelenak notes,

id. at 624, that in the preceding 4 years the Supreme Court had

decided at least four tax cases by adopting on confirming a

nonliteral interpretation of the Code.5

     Similarly, the "two wrongs make a right" character of

equitable recoupment, see Willis, "Some Limits of Equitable

Recoupment, Tax Mitigation, and Res Judicata:   Reflections

Prompted by Chertkof v. United States," 38 Tax Law. 625 (1985),

emphasizes that "Recoupment, rather than extending the statute of

limitations to correct a perceived injustice, permits a wronged

party to recoup the loss against a sum still open to litigation."

Id. at 633.   In so doing, recoupment uses the legal fiction that

the recoupment claim is an element in the computation of the tax

subject to the timely claim, rather than the time-barred tax.

The "two wrongs make a right" notion signifies that where an



     5
       Citing and discussing Paulsen v. Commissioner, 469 U.S.
131 (1985); Bob Jones Univ. v. United States, 461 U.S. 574
(1983); Commissioner v. Tufts, 461 U.S. 300 (1983); Hillsboro
Natl. Bank v. Commissioner, 460 U.S. 370 (1983).
                                 - 58 -


earlier matter has received erroneous tax treatment,

"[recoupment] does not correct the wrong, as does the mitigation

statute, but instead causes a later matter to be equally wrong in

the opposite direction."   Id.

     As Justice Stevens observed in his dissent in United States

v. Dalm, 494 U.S. 596, 612-623 (1990), the Supreme Court in Bull

v. United States, 295 U.S. 247 (1935), could have taken the

strict view that the statute of limitations barred the taxpayer's

claim, but instead "avoided that unjust result" by construing the

plaintiff's rights in a Federal tax refund suit by reference to

those of a defendant, thereby proceeding "under * * * the

presumption that for every right there should be a remedy."

United States v. Dalm, supra at 616-617.       Acknowledging that

treating a plaintiff like a defendant "so as to permit, in

effect, the equitable tolling of the limitations period" was

perhaps "an unusually flexible treatment of legal categories,"

Justice Stevens observed that such treatment was "nothing more

than the necessary expression of an exception to a generally

appropriate definition", an exception that had received the

status of a legal rule under Bull.        Id. at 618.   See Tierney,

"Equitable Recoupment Revisited: The Scope of the Doctrine

Revisited in Federal Tax Cases after United States v. Dalm," 80

Ky. L.J. 95, 131-165 (1992).
                              - 59 -


     In Mueller II, we opined that we have authority to apply

equitable recoupment in a case over which we have jurisdiction;

in Estate of Mueller v. Commissioner, 107 T.C. 203 (1996)

(Mueller III), we held, consistent with the view of the majority

in United States v. Dalm, supra, that equitable recoupment is

properly confined to its traditional role as an affirmative

defense.6   Having held in the case at hand that the requirements

of equitable recoupment have been satisfied, our application of

the doctrine does no more violence to the structure of section

6211(a) than the availability of equitable recoupment in the

refund forums does to the Internal Revenue Code as a whole.




     6
       This observation serves to distinguish equitable
recoupment and the case at hand from Commissioner v. Lundy, 516
U.S. 235 (1996).
                               - 60 -


     LARO, J., concurring:    The United States Tax Court is a

court of law that, like the United States District Courts, has

the authority to apply equitable principles such as equitable

recoupment.   The majority holds as much, and I agree.    I write

separately to emphasize the fact that this Court, although

different from District Courts in a few regards, the most obvious

of which is that District Courts were created under Article III

of the U.S. Constitution whereas this Court was created under

Article I of the U.S. Constitution, is a court of law that has

the authority to apply all of the judicial powers of a District

Court.

     This Court's predecessors, namely, the Board of Tax Appeals

and the Tax Court of the United States, were not courts of law,

and they did not possess the judicial powers of a District Court.

This Court's predecessors were independent agencies in the

executive branch of the Federal Government, and, as such, their

powers were limited to those powers conferred upon them by the

executive branch.   See Commissioner v. Gooch Milling & Elevator

Co., 320 U.S. 418 (1943); Old Colony Trust Co. v. Commissioner,

279 U.S. 716, 725 (1929).    The fact that this Court's

predecessors were executive agencies and not courts of law made

them fundamentally different from the District Courts.     The fact

that this Court’s predecessors were executive agencies and not

courts of law made them fundamentally different from this Court.
                              - 61 -


     Following the passage of the Tax Reform Act of 1969 (1969

Act), Pub. L. 91-172, sec. 951, 83 Stat. 730, the United States

Tax Court is the functional equivalent of a District Court.      See

sec. 951 of the 1969 Act, 83 Stat. 730.    See also Freytag v.

Commissioner, 501 U.S. 868, 890-891 (1991).    Through the 1969

Act, Congress changed the status of this Court from an

"independent agency in the Executive Branch of the Government" to

a "court of record" "established * * * under Article I of the

Constitution of the United States".    See sec. 7441 before and

after amendment by the 1969 Act; see also Freytag v.

Commissioner, supra at 890-891.   Congress established the United

States Tax Court through a constitutionally permissible exercise

of its Article I powers.   See Freytag v. Commissioner, supra.

The United States Tax Court, as established by Congress under the

1969 Act, sits as a District Courtlike tribunal that "exercises a

portion of the judicial power of the United States * * *. * * *

to the exclusion of any other function".    Id. at 891.   This

Court's judicial power allows the Court to decide cases without

undue influence from either the executive or legislative branch.

See id. at 890-891; Roberts v. Commissioner, 175 F.3d 889 (11th

Cir. 1999); see also Burns, Stix Friedman & Co. v. Commissioner,

57 T.C. 392, 395 (1971), wherein the Court stated:

     It is clear from the statutory language and the Senate
     committee report (S. Rept. No. 91-552, 91st Cong., 1st
     Sess., p. 302, 1969-3 C.B. 614) that Congress removed
                               - 62 -


     the Tax Court from the Executive Branch and established
     it as an article I court primarily for the purpose of
     recognizing its status as a judicial body and disposing
     of any problems that its status as an executive agency
     sitting in judgment on another executive agency might pose.

This Court's District Courtlike status means that the Court's

decisions are subject to review only by a Federal appellate

court.   See sec. 7482(a) ("The United States Courts of Appeals

* * * shall have exclusive jurisdiction to review the decisions

of the Tax Court * * * in the same manner and to the same extent

as decisions of the district courts in civil actions tried

without a jury").

     Appellate courts have repeatedly applied the law that

preceded the 1969 Act to hold that the predecessors of the United

States Tax Court were not courts of law and, more importantly,

that these predecessors lacked judicial powers.   In Lasky v.

Commissioner, 235 F.2d 97 (9th Cir. 1956), affd. per curiam

352 U.S. 1027 (1957), for example, the Court of Appeals for the

Ninth Circuit held that the Tax Court of the United States,

unlike a District Court, was without authority to vacate a final

decision.   The Ninth Circuit reasoned that the Tax Court of the

United States was "not a court at all but merely an

administrative agency".    Id. at 98; accord Swall v. Commissioner,

122 F.2d 324 (1st Cir. 1941); Sweet v. Commissioner, 120 F.2d 77

(1st Cir. 1941).    Other appellate courts had ruled similarly,

applying the same reasoning.    See, e.g., White's Will v.
                              - 63 -


Commissioner, 142 F.2d 746 (3d Cir. 1944), affg. 40 B.T.A. 664

(1939); Monjar v. Commissioner, 140 F.2d 263 (2d Cir. 1944),

affg. an unreported Order of the Board of Tax Appeals; Denholm &

McKay Co. v. Commissioner, 132 F.2d 243 (1st Cir. 1942), vacating

41 B.T.A. 986 (1940) and reinstating 39 B.T.A. 767 (1939); see

also Helvering v. Northern Coal Co., 293 U.S. 191 (1934).

     These prior cases do not address the current status of this

Court as a court of law that performs exclusively judicial

functions.   None of these cases, therefore, has any bearing on

the types of powers that this Court is authorized to exercise in

performing our judicial functions.     The Supreme Court

acknowledged so much in Freytag when the Court held that Congress

constitutionally established the United States Tax Court as a

court of law that "[exercises] judicial power and perform[s]

exclusively judicial functions" and, in so holding, rejected the

Commissioner's argument that the 1969 Act "simply changed the

status of the Tax Court within * * * [the executive] branch."

Freytag v. Commissioner, supra at 885, 892.     It naturally follows

from Congress' elevation of this Court to an "exclusively

judicial" court that this Court possesses all of the inherent

powers of the judiciary and that this Court's legal and equitable

powers are diametrically different from this Court's executive

agency predecessors which wielded executive powers only.
                              - 64 -


     The Supreme Court has recently stated in dictum that the

United States Tax Court lacks "general equitable powers".    See

Commissioner v. McCoy, 484 U.S. 3, 7 (1987) (per curiam).     When

taken in context, this statement is not remarkable.   Nor is it

inconsistent with the view of this Court as to our ability to

exercise District Courtlike equitable powers.    The context of the

Supreme Court's statement in McCoy indicates clearly that the

Court was merely applying the well-settled rule that no court of

law may ignore the express intent of Congress as to the

imposition of interest and penalties.    See id.; see also Flight

Attendants Against UAL Offset v. Commissioner, 165 F.3d 572, 578

(7th Cir. 1999) ("In context, the Supreme Court's dictum in

Commissioner v. McCoy, 484 U.S. 3, 7, 98 L. Ed. 2d 2, 108 S. Ct.

217 (1987) (per curiam), that the Tax Court lacks 'general

equitable powers' means only that the Tax Court is not empowered

to override statutory limits on its power by forgiving interest

and penalties that Congress has imposed for nonpayment of

taxes--but then no court is, unless the imposition would be

unconstitutional.").   In fact, the Court made no mention of McCoy

when it decided Freytag 4 years later.

     In sum, Congress, through the 1969 Act, elevated the status

of this Court to a court of law, and the Supreme Court in Freytag

held that Congress' action was constitutional.   As a Federal

court of law, this Court naturally possesses the inherent powers
                              - 65 -


of any other Federal court of law, e.g., the Federal District

Courts, including the power to apply equitable principles such as

equitable recoupment.   Because the Court holds as much today, I

concur in our decision.

     PARR, FOLEY, VASQUEZ, THORNTON, and MARVEL, JJ., agree with
this concurring opinion.
                               - 66 -


     CHABOT, J., dissenting:   The majority hold that this Court

has authority to apply the doctrine of equitable recoupment and

"that petitioner is entitled to recoup the residuary legatee's

excessive payment of income tax against the estate tax

deficiency."   Supra majority op. pp. 2-3.   For the reasons set

forth in my dissent in Estate of Mueller v. Commissioner, 101

T.C. 551, 565-571 (1993) (Mueller II), I respectfully dissent.

     The majority opinion and Judge Laro's concurring opinion do

not attempt to deal with the substance of that dissent; instead,

they focus on this Court's status as a Court, as a result of the

amendments made by the Tax Reform Act of 1969 (TRA '69), Pub. L.

91-172, sec. 951, 83 Stat. 730.   I am well aware of the text of

TRA '69, its legislative history, and the Congress' intentions.

I am satisfied that there is nothing in the materials considered

by or generated by the Congress in connection with TRA '69 that

speaks to the issue of equitable recoupment; however, it is clear

that the Congress did not intend to make this Court an "Article

III court".

     Firstly, clearly, this Court is a court.

     Secondly, this Court is not a Federal District Court.    This

Court is a Federal trial court, like the District Courts, and

must abide by the same Federal Rules of Evidence.   However this

Court has statutory authority to prescribe its own Rules of

Practice and Procedure (sec. 7453), which in many respects are
                             - 67 -


different from the Federal Rules of Civil Procedure.   This Court

has statutorily prescribed deficiency jurisdiction, which the

District Courts do not have; the District Courts have refund

jurisdiction, which this Court does not have (except where an

overpayment is developed in a case that began as a deficiency

case, or in a "TEFRA partnership" or S corporation case).   This

Court has developed the "Lawrence doctrine", modified by the

"Golsen doctrine", as described in Lardas v. Commissioner, 99

T.C. 490, 493-495 (1992), which does not have a practical

counterpart in the District Courts.   This Court's burden of proof

rules in deficiency cases differ in some respects from those

applicable in refund cases in the District Courts.   See in this

connection Helvering v. Taylor, 293 U.S. 507, 514 (1935).     As to

other differences between this Court and the District Courts, see

Commissioner v. Lundy, 516 U.S. 235, 244-245, 252 (1996).

     Thirdly, as to the critical dispute in the instant case,

this Court and the District Courts differ in their statutory

powers in such a way that equitable recoupment fits what the

District Courts do (decide directly how much, including interest,

the Government must pay to the taxpayer, or vice versa) and does

not fit what this Court does, redetermine the amount of the

deficiency, if any, which is merely one factor in how much must

be paid.
                                - 68 -


     Fourthly, nothing in the concepts of a "court", or a "court

of law", makes equitable recoupment an essential characteristic

of a court, or of a court of law.

     My position remains that we are to resolve those matters

which affect the amount of the estate tax deficiency to be set

forth on the decision document we enter in the instant case.

Equitable recoupment does not affect any of the elements of the

deficiency, as statutorily defined, and so does not affect the

decision we enter.   Judge Beghe's concurring opinion does deal

with this Court's deficiency jurisdiction, which is the only

jurisdiction that brings the instant case before us.    Judge

Beghe’s concurring opinion suggests a route by which the square

peg of recoupment could be squeezed into the round hole of the

statutory definition of deficiency.1

     However, several aspects of this suggested route remain to

be paved.   Firstly, "deficiency" and "underpayment" are defined

terms.   Secs. 6211, 6664(a).   They are not legal fictions.    The

amount, if any, that a taxpayer may have to pay to the Government

may well be different from the amount of the deficiency or any

underpayment.

     Secondly, the Supreme Court has recently indicated that, as

to the Tax Court, the statute of limitations (the major


     1
        This imagery is generally thought to have originated in
Sidney Smith's reference to “a square person has squeezed himself
into the round hole.” Sketches of Moral Philosophy (1850).
                                - 69 -


impediment that equitable recoupment is designed to circumvent)

must be given a strict application, and the equities are

unavailing.   See Commissioner v. Lundy, 516 U.S. 235 (1996).

Thus, this Court was barred from holding that Lundy overpaid his

income taxes even if his claim for refund would have been timely

in a District Court.   See id. at 251-253 (majority op.), 253-254,

263 (Thomas, J., dissenting).    Also, Lundy lost even though it

was clear that Lundy and his wife had substantially overpaid

their income taxes.    See id. at 237.   Lundy did not involve the

staleness, missing documents, and faded memories that statutes of

limitations are generally established to guard against.    The

majority of the Supreme Court determined that there was no room

for legal fictions suggested by Justices Thomas and Stevens, the

Court of Appeals for the Fourth Circuit, or Lundy's counsel, to

correct this obvious injustice, and the Government was permitted

to hold onto the Lundys' overpaid taxes solely because of the

text of the then-applicable statute of limitations.    Of course,

Lundy’s situation does not fit into the current mold of equitable

recoupment.   The relevance of Lundy to our discussion is the

Supreme Court’s focus on the details of statutory grants and

limitations of power and jurisdiction, and that Court’s

reluctance to modify the strictness of the statute even to

correct an obvious injustice.
                             - 70 -


     Thirdly, Judge Beghe's concurrence relies on the analysis of

equitable recoupment in Justice Stevens' dissent in United States

v. Dalm, 494 U.S. 596, 612-623 (1990).   Although much

understanding may be gleaned from a distinguished jurist's

dissent, the fact remains that the dissent is what the Supreme

Court's majority rejected.

     COHEN and WHALEN, JJ. agree with this dissent.
