United States Court of Appeals
United States Court of Appeals
For the First Circuit
For the First Circuit
No. 95-1173
GRENVILLE CLARK III,
Plaintiff, Appellee,
v.
UNITED STATES OF AMERICA,
INTERNAL REVENUE SERVICE,
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Martin F. Loughlin, Senior U.S. District Judge]
Before
Torruella, Chief Judge,
Stahl, Circuit Judge,
and Dominguez,* District Judge.
Kent L. Jones, Tax Assistant to the Solicitor General, with whom
Loretta C. Argrett, Assistant Attorney General, and Gary R. Allen,
David English Carmack, and Sally J. Schornstheimer, Attorneys,
Department of Justice, Tax Division, were on brief for appellants.
Grenville Clark III pro se.
August 29, 1995
*Of the District of Puerto Rico, sitting by designation.
STAHL, Circuit Judge. In this federal income tax
STAHL, Circuit Judge.
case, the government appeals the district court's grant of
summary judgment to taxpayer Grenville Clark III in his suit
to recover monies collected by the Internal Revenue Service
("IRS") by levy. Although we agree with the district court
that summary judgment for the taxpayer was appropriate, we
reduce the amount of the judgment because the district court
erred in finding that Clark had fully extinguished his 1985
tax liability.
I.
I.
Factual Background
Factual Background
The material facts are not in dispute. On August
14, 1986, Clark and his then-spouse, Marguerite Clark, filed
their 1985 income tax return, which the IRS received on
August 18, 1986. The return indicated a total tax liability
of $13,648.00, and on September 29, 1986, the IRS assessed
the Clarks' 1985 tax liability in that amount.1 Because the
1. Typically, when the IRS receives a tax return, it
evaluates the return for accuracy. If, as in this case, it
finds the return satisfactory, it enters an assessment for
the amount of tax the taxpayer calculated to be owing. See
26 U.S.C. 6201, 6203. If it disagrees with the taxpayer's
determination of the tax liability, the IRS may enter a
different assessment, but only after it issues a notice of
deficiency to the taxpayer and gives him or her ninety days
to challenge its calculations in the Tax Court. 26 U.S.C.
6201, 6212, 6213. The IRS has three years from the date a
return is filed to make an assessment of liability. 26
U.S.C. 6501. If the IRS discovers that an assessment "is
imperfect or incomplete in any material respect," it may
correct the problem by making a supplemental assessment if it
does so within the three-year time period for making
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Clarks did not pay the tax in full at the time of filing, the
IRS added penalties and interest to the amount due. The IRS
then placed a lien upon their real and personal property and
demanded that they satisfy the outstanding tax.
As of June 13, 1987, Clark had made several
payments on his 1985 tax liability. He also had an unpaid
tax liability for 1986 in the amount of $13,415.00, plus
interest and penalties. On June 13, 1987, Clark sent the IRS
a check for $13,415.00, which he indicated should be applied
to his 1986 liability by writing in the "memo" portion of the
check: "1040 12/31/86 [Clark's social security number]."2
assessments. 26 U.S.C. 6204.
Once it makes an assessment of a taxpayer's tax
liability for a given year, the IRS generally has sixty days
to issue a notice and demand for payment to the taxpayer, 26
U.S.C. 6303(a), and ten years to collect the assessed
amount, 26 U.S.C. 6502(a)(1). Collection may be made
through administrative methods (including federal liens and
levies), see 26 U.S.C. 6321, 6331, or judicial methods
(suits to foreclose liens or to reduce assessments to
judgment), see 26 U.S.C. 7403. If it does not make an
assessment within three years of the filing of a return, the
IRS may not pursue collection activities after the close of
the three-year period. 26 U.S.C. 6501. It can, however,
file suit for collection without an assessment if it does so
during the three-year period. Id.
2. In a letter to the IRS dated September 22, 1989, Clark
wrote:
This payment was voluntarily made, and
the memo on the check itself clearly
indicates that I designated that it be
applied to my 1986 Form 1040 tax
liability. This memo conforms with the
instruction found at line 67 of my 1986
return which asks that I write my social
security number and "1986 Form 1040" on
it.
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The IRS, however, applied the $13,415.00 payment to Clark's
outstanding tax liability for 1985, which paid off the
balance due3 and yielded an overpayment for that year. On
July 17, 1987, the IRS issued Clark a refund check for
$11,652.28.
Clark and the IRS corresponded over the next
several years, both about the refund and about the balance
due on the 1986 account, which had not been credited with the
$13,415.00 payment. In his correspondence, Clark insisted
that he had made a $13,415.00 payment towards his 1986 tax
liability, but did not explicitly mention that it had been
misapplied to his 1985 account and mostly refunded to him.
Clark points out, however, that the copies of the cancelled
check he repeatedly sent to the IRS showed code numbers
imprinted by the IRS that indicated exactly how the payment
had been applied.
Finally, in November 1990, the IRS realized that it
had misapplied the 1986 payment to Clark's 1985 account.
Clark continued to insist, however, that as he had designated
that the payment be applied to his 1986 account, he should
receive credit for it there. In response, the IRS removed
3. According to our calculations, the balance due on June
19, 1987, the date the IRS received the taxpayer's $13,415.00
payment, was $1,808.59. We calculate this number by adding
the payments Clark had made prior to the misapplication
($14,140.72) and subtracting that number from the charges
reflected in his account ($15,949.31).
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the $13,415.00 payment from his 1985 account and applied it
to his 1986 account,4 leaving his 1985 account with, in the
IRS's view, a balance due of $13,415.00, plus penalties and
interest. After some additional correspondence about his
1985 taxes, the IRS collected $24,546.34 from Clark by
levying upon his bank accounts and seizing and subsequently
selling his car. Clark then filed a claim with the IRS for a
refund, but the claim was denied.
On January 3, 1994, Clark brought suit in the
United States District Court for the District of New
Hampshire, seeking a refund of the $24,546.34, plus interest.
Both parties moved for summary judgment. In his motion,
Clark argued that the IRS's collection activities were
unlawful because they were not done pursuant to an assessment
as required by 26 U.S.C. 6502(a)(1), since the assessment
that the IRS had entered in September 1986 had been
extinguished. The government responded that assessments
cannot be extinguished and that its crediting of Clark's 1986
account resulted in an underpayment in his 1985 account,
leaving the IRS its statutory rights to collect the unpaid
1985 tax liability on the basis of the original assessment.
4. Because the taxpayer had already satisfied his 1986
account to avoid further penalties, the transfer resulted in
an overpayment on the 1986 account. Pursuant to the
taxpayer's direction, the IRS applied the overpayment to his
tax liabilities for 1988 and 1989.
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The district court relied on the Fifth Circuit's
decision in United States v. Wilkes, 946 F.2d 1143 (5th Cir.
1991), to hold that a full payment extinguishes an assessment
and that subsequent refunds do not revive extinguished
assessments. The district court also found that Clark's 1985
assessment had been extinguished. Although acknowledging
that Clark was getting "an undeserved windfall," the district
court granted Clark's motion for summary judgment, thus
rendering moot the government's cross motion for summary
judgment. The government appeals.
II.
II.
Discussion
Discussion
A. Standard of Review
As always, we review a district court's grant of
summary judgment de novo and, like the district court, review
the facts in the light most favorable to the nonmoving party.
See, e.g., Udo v. Tomes, 54 F.3d 9, 12 (1st Cir. 1995).
Summary judgment is appropriate when "the pleadings,
depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any, show that there
is no genuine issue as to any material fact and that the
moving party is entitled to a judgment as a matter of law."
Fed. R. Civ. P. 56(c).
B. Analysis
1. Can Assessments be Extinguished?
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The government argues that the district court erred
in holding that assessments are extinguished by payment.
Under the government's theory, assessments cannot be
extinguished, so if there is an underpayment of the amount
recorded in the assessment at any time during the ten-year
period for collection, then the IRS may institute procedures
to collect that amount. The government reasons that because
Clark's 1985 account reflected an underpayment of $13,415.00,
plus interest and penalties, after the IRS removed the
misapplied $13,415.00 payment, and because the ten-year
limitations period had not expired, the IRS was entitled to
implement administrative procedures to collect the amount
due. The government's argument has essentially three prongs.
First, the government argues that assessments
cannot be extinguished because they are merely administrative
records of a taxpayer's tax liability for a given year.
According to the government, assessments are not affected by
payment, but remain as permanent records of tax liability
regardless of whether the taxpayer satisfies that liability
or not. As such, assessments are not like promissory notes
or mortgages, which create liability and are cancelled when
the debt is satisfied. In fact, the government contends that
assessments create no liability at all, since tax liability
is created by the Internal Revenue Code and may be collected
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even without an assessment if the IRS brings suit within
three years of the filing of a return.
Second, the government argues that the Internal
Revenue Code's distinction between rebate refunds and non-
rebate refunds5 supports its position that assessments
cannot be extinguished. This argument is based on the
government's contention that when the IRS erroneously refunds
an amount to a taxpayer, it can reclaim that amount in two
ways: (1) by bringing an erroneous-refund suit under 26
U.S.C. 7405, or (2) through administrative collection
procedures.6 Under the government's view, if assessments
can be extinguished, then the IRS would not be able to pursue
5. Rebate refunds are generated when the IRS recalculates a
taxpayer's tax liability for a given year, as when, for
example, a taxpayer submits an amended return showing
additional deductions. According to the government, when the
IRS issues a rebate refund, the original assessment is abated
to the extent of the refund so that it reflects the
taxpayer's actual tax liability for the year in question.
Non-rebate refunds, on the other hand, stem not from a
recalculation of the taxpayer's tax liability, but rather
from a determination that the taxpayer paid more than the
assessed amount. According to the government, non-rebate
refunds do not affect the original assessment, which remains
intact as an accurate record of the taxpayer's tax liability.
6. The government contends that the legislative history of
7405 shows that the section was not intended to be the IRS's
exclusive method for collecting erroneous refunds. Rather,
as a Senate Report explaining the predecessor of 7405
states, "the erroneous refund may [also] be recovered by
assessment in the ordinary manner." S. Rep. No. 960, 70th
Cong., 1st Sess. 42 (1928); see also Brookhurst, Inc. v.
United States, 931 F.2d 554, 557 (9th Cir.) (IRS not limited
to 7405 because imperfect assessment may be reassessed
within three years from date tax return was filed), cert.
denied, 502 U.S. 907 (1991).
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administrative collection procedures to recover non-rebate
refunds. The government explains that if an erroneous refund
was a rebate refund, then before the IRS can implement
administrative collection procedures, it must first enter a
supplemental assessment, since the original assessment was
abated to the extent of the refund and does not reflect the
taxpayer's true tax liability; the IRS has the authority to
enter a supplemental assessment under 26 U.S.C. 2604
because erroneous rebate refunds constitute deficiencies
under 26 U.S.C. 6211. The government contends, however,
that if the erroneous refund was a non-rebate refund, then
the original assessment still reflects the taxpayer's total
tax liability and so provides a basis for implementing
administrative collection procedures immediately. The
government argues that not only is there no need for the IRS
to enter a supplemental assessment, but that it actually
could not, since non-rebate refunds do not constitute
deficiencies under 6211 and since the original assessment
still exists and there cannot be two valid assessments for
the same tax liability. The government reasons that if
assessments could be extinguished, then the IRS would not be
able to pursue administrative collection procedures to
recover erroneous non-rebate refunds. Because the government
thinks that administrative collection procedures should be
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available for recovering non-rebate refunds, it contends that
assessments cannot be extinguished.
Third, the government cites three cases that
support its view that assessments cannot be extinguished.
See Davenport v. United States, 136 B.R. 125, 127 (W.D. Ky.
1991) (holding that "[a] non-rebate erroneous refund simply
gives back to the taxpayer a part of the taxpayer's assessed
tax and the assessed balance due may be collected by ordinary
collection procedures"); Sanfellipo v. United States, 90-2
U.S. Tax Cas. (CCH) 50,567, at 85,943 (N.D. Cal. 1990)
(taxpayer's payment of assessments "did not extinguish the
liabilities or otherwise foreclose the IRS from attempting to
collect the erroneous refunds"); Groetzinger v. Commissioner,
69 T.C. 309, 315-16 (1977) (viewing all transactions together
to determine that erroneous refund resulted in an
underpayment of tax).
We decline to adopt the government's position that
assessments cannot be extinguished. Instead, we follow the
Fifth and Seventh Circuits, the only circuits to have
addressed this issue thus far, in holding that when a
taxpayer tenders payment on a tax assessment, that payment
extinguishes the assessment to the extent of the payment.
O'Bryant v. United States, 49 F.3d 340, 346 (7th Cir. 1995);
Wilkes, 946 F.2d at 1152; see also Karp v. United States, 868
F. Supp. 235, 237 (N.D. Ill. 1994); United States v. Brown,
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782 F. Supp. 321, 324-25 (N.D. Tex. 1990); Rodriguez v.
United States, 629 F. Supp. 333, 344 (N.D. Ill. 1986); United
States v. Young, 79-2 U.S. Tax Cas. (CCH) 9609, at 88,221
(D. Del. 1979); LaFollette v. United States, 176 F. Supp.
192, 195 (S.D. Cal. 1959). We also agree that an erroneous
refund does not revive an extinguished assessment. See
O'Bryant, 49 F.3d at 346; Wilkes, 946 F.2d at 1152. As the
Seventh Circuit explained in O'Bryant, 49 F.3d at 346, there
is a fundamental difference between money taxpayers possess
as the result of an erroneous refund and money they
originally owed the IRS (their tax liability): taxpayers who
receive erroneous refunds owe the IRS "because they have been
unjustly enriched by it, not because they have not paid their
taxes." Thus,
[w]hen a taxpayer mails the IRS a check
in the full amount of his assessed tax
liability, and the IRS cashes it, the
taxpayer's liability is satisfied, and
unless a new assessment is made later on,
any erroneous, unsolicited refund that
the IRS happens to send the taxpayer must
be handled on its own terms, not under
the rubric of the assessed liability.
Id. at 347.
As our discussion indicates, we are unpersuaded by
the government's assertion that assessments are merely
bookkeeping devices that cannot be extinguished by payment.
Like the Seventh Circuit, we think this argument misses the
point.
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Regardless of whether the assessment is a
record of the taxpayer's tax liability or
is the liability itself, the liability
has already been satisfied and cannot be
sued on to collect a refund that results
not from that liability or any
reevaluation thereof but from a simple
mistake.
Id. at 346.
We are also unpersuaded by the government's
argument that the difference between rebate and non-rebate
refunds shows that assessments cannot be extinguished. In
our view, once an assessment has been paid, it is
extinguished. If the IRS thereafter issues an erroneous
refund, it may recover that refund under 7405 or under
administrative collection procedures if those are
available.7 As the Seventh Circuit observed in O'Bryant, 49
F.3d at 347,
7. The cases relied on by the government for the proposition
that after issuing an erroneous refund, the IRS may collect
the money either under 7405 or by implementing
administrative collection procedures all involve rebate
refunds, and thus do not hold either that assessments cannot
be extinguished or that non-rebate refunds may be collected
on the basis of the original assessment. See Brookhurst, 931
F.2d at 555; Ideal Realty Co. v. United States, 561 F.2d
1123, 1124-25 (4th Cir. 1977) (per curiam); Warner v.
Commissioner, 526 F.2d 1, 2 (9th Cir. 1975); Black Prince
Distillery, Inc. v. United States, 586 F. Supp. 1169, 1170-71
(D.N.J. 1984) (erroneous refund given on basis of taxpayer's
refund claim that incorrectly reported operating-loss
deductions). In United States v. C & R Invs., Inc., 404 F.2d
314, 315-16 (10th Cir. 1968), which involved a non-rebate
refund, the Tenth Circuit remanded the case to the district
court to determine whether deficiency procedures were
available.
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it is an unjustified leap of logic to say
that because nonrebate refunds cannot be
recovered by reassessment, they must be
collectible by resort to the original
assessment. There is no indication in
the Code that Congress intended such a
result and we refuse to reach it,
especially when doing so would require us
to mischaracterize an erroneous refund as
tax liability.
Finally, because their holdings are logically
excluded by ours, we disagree with Davenport, Sanfellipo, and
Groetzinger.
2. Was Clark's 1985 Assessment Extinguished?
Although not invited to do so by either party, we
nonetheless find it necessary to consider whether Clark fully
satisfied the assessment for his 1985 tax liability. The
district court held that the 1985 assessment was extinguished
no later than July 20, 1987, the date on which the IRS
misapplied Clark's $13,415.00 payment to his 1985 account.8
That misapplication, however, had two results: (1) it
satisfied Clark's $1,808.59 outstanding tax liability, and
8. Given the thrust of the government's brief on appeal, and
because the IRS removed the $13,415.00 payment from the
taxpayer's 1985 account and moved it to his 1986 account, we
assume for the purposes of this case that taxpayers may
direct how the IRS must apply their payments. Cf. Rodriguez,
629 F. Supp. at 344 (checks tendered to satisfy outstanding
tax liability for three years extinguished liability for all
three years, even though the IRS applied too much money to
one account and too little to another and therefore issued a
refund); Young, 79-2 U.S. Tax Cas. (CCH) at 88,220-88,221
(payment made towards individual tax liability extinguished
assessment, even though the IRS credited the payment to the
taxpayer's sole proprietorship tax account and refunded it).
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(2) it generated a large overpayment, which the IRS refunded
to Clark.
This situation is similar to that considered by the
Fifth Circuit in Wilkes, which involved income taxes paid by
an estate. Because the estate had miscalculated the amount
of tax due, it paid $218.11 less than the actual amount due.
The IRS, however, erroneously credited an unrelated
taxpayer's payment to the estate's account, which had two
results: (1) it satisfied the outstanding $218.11 balance,
and (2) it generated in a large overpayment, which the IRS
refunded to the estate. Several years later, the IRS
realized its mistake and sued the estate to reduce the
assessment to judgment, hoping thereby to collect the entire
tax liability again on the basis of the original
assessment.9 The Fifth Circuit held that the IRS was
entitled to recover only $218.11, the only portion of the
assessment remaining that had not been extinguished by
payment. Wilkes, 946 F.2d at 1152. Accordingly, the Fifth
Circuit entered judgment against the estate, but only for
$218.11, that portion of the assessment that remained
unextinguished. Id.
9. There was some question in that case about whether the
IRS had ever actually entered an assessment. The Fifth
Circuit, however, assumed arguendo that it had. Wilkes, 946
F.2d at 1148.
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We follow the Fifth Circuit and hold that
assessments may only be extinguished by payment tendered by
the taxpayer, and not by an IRS error. Prior to the
misapplication, Clark had paid all but $1,808.59 of the
amount due under his 1985 assessment. Accordingly, prior to
the misapplication, Clark had extinguished the assessment,
except for the $1,808.59 still outstanding. It has always
been Clark's position that he never tendered the $13,415.00
towards the 1985 assessment; rather, that amount was always
to be applied to his 1986 liability. Thus, Clark never
tendered the $1,808.59 due under the 1985 assessment.
Because he never tendered the $1,808.59, Clark still remained
liable for it. The IRS was therefore entitled to collect
that amount under the original assessment.
III.
III.
Conclusion
Conclusion
For the foregoing reasons, we affirm the grant of
summary judgment to Clark, but reduce the amount of that
judgment by $1,808.59, plus interest due, which the IRS was
entitled to collect. This case is remanded for action in
accordance with this opinion.
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