- 11 -
40 T.C. 597, 654-655 (1963), vacated and remanded pursuant to
stipulation (2d Cir. 1965) (holding that the decision in Lewis v.
Reynolds, supra, was controlling and allowing a reduction in an
overpayment claimed by the taxpayer); Estate of Carruth v.
Commissioner, 28 T.C. 871, 880 (1957).6 Applying the doctrine of
Lewis v. Reynolds, supra, to this case, we find that even though
assessment and collection of petitioner's tax liability is now
barred by the statute of limitations, respondent has the right to
retain prior timely payments to the extent they do not exceed the
amount of petitioner's actual tax liability.7
6Our holding in Morris v. Commissioner, T.C. Memo. 1966-245,
is distinguishable. In Morris, the taxpayer received and cashed
a refund check of $5,752.28 from the Commissioner relating to her
1957 tax year. Later, in 1964, after the period of limitations
for assessment had expired, the Commissioner assessed $7,817.98
(representing the erroneous refund of $5,752.28 plus interest).
In 1965, the Commissioner collected by way of a levy on funds the
taxpayer had on deposit at a savings bank. We held that "The
rationale underlying Lewis v. Reynolds is not properly applicable
where, as here, the assessment and collection by the Commissioner
was illegal." Here, respondent has neither assessed nor
collected the funds illegally.
7The statutes authorizing tax refunds and suits for their
recovery are predicated upon equitable principles. Stone v.
White, 301 U.S. 532, 535 (1937). In a Tax Court proceeding,
either party is free to raise equity-based defenses to the
assertions of the other party, and the Court, insofar as it has
jurisdiction over the main claim, is free to entertain those
defenses. Estate of Mueller v. Commissioner, 101 T.C. 551, 557
(1993). Here, we have jurisdiction to determine the overpayment
under sec. 6512(b)(1) and, therefore, respondent is free to raise
the defense provided in Lewis v. Reynolds, 284 U.S. 281 (1932).
See Estate of Mueller v. Commissioner, supra; Woods v.
Commissioner, 92 T.C. 776 (1989).
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