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Use of equitable recoupment is limited to defending against
a valid claim. It allows an otherwise time-barred tax claim
arising out of the same transaction to be used as a defense or
credit against any additional tax ultimately found to exist in
the main action.15 If all or part of the Government's claim for
additional tax is sustained, equitable recoupment can be used to
reduce or eliminate it. However, once equitable recoupment of
the time-barred tax overpayment completely eliminates the
additional tax liability in the main action, equitable recoupment
has served its restricted defensive purpose.16 Equitable
recoupment cannot be used affirmatively to recover a tax
overpayment, the refund of which is barred by the statute of
limitations.
Where the Government claims that the taxpayer owes
additional tax and the court finds that there is no additional
tax due to the Government, there is nothing left to defend
against.17 The additional estate tax liability that would have
15See United States v. Dalm, 494 U.S. at 605.
16See United States v. Timber Access Indus. Co., 54 F.R.D.
36 (D. Or. 1971). The defendant was entitled to an affirmative
recovery against the Government on a separate counterclaim;
however, recoupment against the Government was restricted to the
amount that the Government was entitled to recover in the main
cause of action initiated by the Government.
17See Evans Trust v. United States, 199 Ct. Cl. 98, 106, 462
F.2d 521, 526 (1972), stating:
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