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reduce the amount of a deficiency recoverable by the
Government by the amount of an otherwise barred
overpayment of the taxpayer. * * *
Petitioner correctly points out that none of these cases,
nor any others relied upon by respondent, specifically address
the situation that confronts us; i.e., whether equitable
recoupment applies where, in the main action, the Court finds
that there is an increase in a taxable item, but because of
another adjustment in the main action, which is in the taxpayer's
favor (the allowance of the credit for prior transfers), there is
no additional tax owed to the Government. Further examination of
the origin and nature of equitable recoupment is, therefore,
appropriate.
The doctrine of equitable recoupment in tax cases was first
articulated in Bull v. United States, supra. The Commissioner
had determined a deficiency in estate tax, which the estate paid.
Thereafter, the Commissioner inconsistently determined that there
was a deficiency in the income tax liability of the estate based
on the same item. The taxpayer paid the income tax deficiency
and brought suit for refund. It was ultimately determined that
the additional income tax liability, as determined by the
Commissioner, was correct, but that the additional estate tax
liability determined by the Commissioner based on the same item,
was incorrect. The problem was that the additional estate tax
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