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altogether fortuitous existence of some unrelated credit or other
adjustments, in this case the credit for tax on prior transfers.
Let me take another cut at what it means to say that the
defense of equitable recoupment can't be used offensively, like a
counterclaim, to generate an overpayment. Suppose we didn't have
the previously taxed property credit problem. Suppose also that
the estate had reported the value of the shares at $1,500 per
share and there was no estate tax audit and the period of
limitations expired on the assessment of an estate tax deficiency
and the filing of an estate tax claim for refund. The
Administration Trust, which reported its gain on the sale of the
shares using the date-of-death value basis of $1,500 per share,
then files an income tax claim for refund just before the period
of limitations expires, contending that it should have used a
basis of $1,700 per share, and sues for the refund. The
Government answers with a denial, but also asserts equitable
recoupment. The District Court upholds the $1,700 date-of-death
value, which means that the estate is entitled to an income tax
refund of approximately $266,000. The Government says that means
there is a time-barred deficiency in estate tax of approximately
$957,000. Allowing recoupment means that the $266,000 refund
claim is wiped out, but the statute of limitations bars the
Government from collecting the balance of the estate tax
deficiency of $691,000.
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