United States Court of Appeals,
Eleventh Circuit.
Alfers L. ALLEN, Plaintiff-Appellant,
v.
UNITED STATES of America, Defendant-Appellee.
No. 94-8393
Non-Argument Calendar.
May 9, 1995.
Appeal from the United States District Court for the Northern
District of Georgia. (No. 1:92-02284-CV-RCF), Richard C. Freeman,
Judge.
Before KRAVITCH, EDMONDSON and COX, Circuit Judges.
KRAVITCH, Circuit Judge:
The Commissioner of Internal Revenue offset the refund of a
fraud penalty, improperly imposed on Allen, with new negligence and
delinquency penalties for the same tax year. Allen sued for the
balance; the district court concluded that the Commissioner's
action was proper and denied the refund. We agree and AFFIRM.
I.
The material facts are not in dispute. Appellant Allen
refused to pay his income taxes for the 1975 and 1976 tax years,
submitting "protest" documents in lieu of the required returns.
Allen was convicted for willful failure to file federal income tax
returns under the former 26 U.S.C. § 7203, 1 and sentenced to one
year imprisonment and three years probation. As a condition of his
probation, Allen was required to file acceptable tax returns for
1
Unless otherwise indicated, all statutory references to
"former" Internal Revenue Code provisions are to those in effect
for the tax years in issue, 1975 and 1976.
1975 and 1976.
After the criminal proceedings concluded, the IRS conducted a
civil audit to aid Allen's compliance with the probation condition.
The agency's examination report calculated certain outstanding tax
liabilities and non-fraud penalties for the two tax years; it also
determined that Allen was liable for approximately $6,600 in
combined fraud penalties pursuant to former 26 U.S.C. § 6653(b).
In an agreement with the IRS executed on August 16, 1985, Allen
assented to payment of all outstanding tax liabilities, but did not
agree to pay the penalties. Allen later paid all penalties as
well, but sought an administrative refund (albeit only of the fraud
penalties).
While the IRS was attempting to extract the fraud penalties
from Allen, the Tax Court, in Kotmair v. Commissioner, 86 T.C.
1253, 1259-62, 1986 WL 22144 (1986) (en banc), held that assessment
of such penalties in a tax protester case like Allen's was
improper. In light of Kotmair, the IRS decided, in December 1990,
to refund the fraud penalty assessment. The agency concluded,
however, that it was entitled to offset about $1800 from the $6600
refund by imposing, instead, delinquency2 and negligence3 penalties
for the 1975 and 1976 tax years.
After exhausting his administrative remedies, Allen filed suit
in the district court. He contended that levying delinquency and
negligence penalties in December 1990 was improper because the
statute of limitations on imposing additional tax liability for the
2
See former 26 U.S.C. § 6651(a).
3
See former 26 U.S.C. § 6653(a).
1975 and 1976 tax years had already run. The district court
concluded that the assessment of the new penalties was proper even
if it occurred outside of the applicable limitations period; 4 it
therefore granted summary judgment to the government. See Allen v.
United States, 73 A.F.T.R.2d (P-H) ¶ 94-811, 94-1 U.S. Tax Cas.
(CCH) ¶ 50,102, 1994 WL 116812 (N.D.Ga.1994).
II.
A.
On appeal, Allen concedes that the delinquency and negligence
penalties would have been proper if assessed by August 1988,
because his conviction for willful failure to file tax returns
collaterally estops him from claiming that his failure to file in
1975 and 1976 was either "due to reasonable cause" within the
meaning of former § 6651(a)(1) (and therefore non-delinquent), or
that he was not negligent within the meaning of former § 6653(a).
See Kotmair, 86 T.C. at 1262-64 ("willful failure to file"
conviction precludes challenge to delinquency and negligence
penalties). Allen contends, however, that the running of the
statute of limitations abrogated the IRS's power to impose such
penalties.
4
Allen contended that the August 1985 agreement was a
"return" within the meaning of 26 U.S.C. § 6020(a), triggering
the three-year statute of limitations under former 26 U.S.C. §
6501(a). The district court assumed, solely for the purpose of
ruling on the government's summary judgment motion, that the
limitations period had run in August 1988. We proceed on the
same assumption on appeal; accordingly, we do not address
Allen's arguments regarding the scope of permitted discovery or
the propriety of the Carroll affidavit, as both relate solely to
the issue of whether the statute of limitations had expired. We
express no view, however, on whether the August 1985 agreement
was actually a "return" within the meaning of § 6020(a).
This argument is foreclosed by Lewis v. Reynolds, 284 U.S.
281, 52 S.Ct. 145, 76 L.Ed. 293, modified, 284 U.S. 599, 52 S.Ct.
264, 76 L.Ed. 514 (1932). In Lewis, the taxpayer, after the
expiration of the statute of limitations on additional tax
assessment, filed a claim for refund alleging that certain
deductions had been improperly disallowed. The Commissioner
concurred, but refused to refund any money, contending that the
amount of proper deductions improperly disallowed was less than the
amount of certain other improper deductions that had been
erroneously allowed on the same tax return. The taxpayer argued
that the Commissioner lacked authority to reassess tax liability
after the statute of limitations had expired. The Supreme Court
disagreed, noting that
"the ultimate question presented for decision, upon a claim
for refund, is whether the taxpayer has overpaid his tax.
This involves a redetermination of the entire tax liability.
While no new assessment can be made, after the bar of the
statute [of limitations] has fallen, the taxpayer,
nevertheless, is not entitled to a refund unless he has
overpaid his tax.'
* * * * * *
While the statutes authorizing refunds do not
specifically empower the Commissioner to reaudit a return
whenever repayment is claimed, authority therefor is
necessarily implied. An overpayment must appear before a
refund is authorized. Although the statute of limitations may
have barred the assessment and collection of any additional
sum, it does not obliterate the right of the United States to
retain payments already received when they do not exceed the
amount which might have been properly assessed and demanded
[within the limitations period].
Id. at 283, 52 S.Ct. at 146 (quoting, in part, Lewis v. Reynolds,
48 F.2d 515, 516 (10th Cir.1931)) (emphasis added). See also
Patterson v. Belcher, 302 F.2d 289, 295 (5th Cir.)5 (following
Lewis ; after statute of limitations runs, IRS is "entitled to set
off any monies still owing to the Government against the amounts
claimed for refund"), amended on other grounds, 305 F.2d 557 (5th
Cir.), cert. denied, 371 U.S. 921, 83 S.Ct. 289, 9 L.Ed.2d 230
(1962).6
B.
In Lewis, the government's setoff claim flowed from a
reassessment of underlying tax liability—i.e. denial of
previously-allowed deductions, and consequent recalculation of the
taxpayer's adjusted gross income. Allen contends that when, as
here, the setoff derives from additions to tax such as delinquency
and negligence penalties, the rule of Lewis does not apply. This
contention, however, is contrary to the former Revenue Code's clear
prescription that "penalties ... shall be assessed, collected, and
5
Decisions of the former Fifth Circuit rendered prior to
October 1, 1981, are binding in the Eleventh Circuit. See Bonner
v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (en
banc).
6
Accord Dysart v. United States, 340 F.2d 624, 627-30
(Ct.Cl.1965) (even outside limitations period, a refund suit
opens the taxpayer's entire tax liability up for redetermination,
for only "if the overall balance moves his way can he recover");
Estate of Bender v. Commissioner, 827 F.2d 884, 887-89 (3rd
Cir.1987) (following Dysart ); Cuba R.R. v. United States, 254
F.2d 280, 281-82 (2d Cir.) (Learned Hand, J.) (even after statute
of limitations runs, "when the taxpayer seeks a refund for a
credit mistakenly denied, he must be content to allow his tax for
the same year to be corrected because of errors through which he
has profited"), cert. denied, 358 U.S. 840, 79 S.Ct. 64, 3
L.Ed.2d 75 (1958); United States v. Pfister, 205 F.2d 538, 541-
42 (8th Cir.1953) (outside limitations period, "[t]he validity of
any deduction claimed by the taxpayer in his income tax return is
[still] in issue in his action to recover alleged overpayments of
income tax"); Arthur C. Harvey Co. v. Malley, 60 F.2d 97, 101
(1st Cir.1932) (following Lewis ), aff'd on other grounds, 288
U.S. 415, 53 S.Ct. 426, 77 L.Ed. 866 (1933).
paid in the same manner as taxes ... [and that any] reference ...
to "tax' imposed ... shall be deemed also to refer to ...
penalties." See former 26 U.S.C. § 6659(a). Furthermore, in
Loftin & Woodard, Inc. v. United States, 577 F.2d 1206, 1245-47
(5th Cir.1978), our predecessor court applied Lewis to permit the
government to offset a refund claim (made after the running of the
statute of limitations on further tax liability) with an increased
delinquency penalty.7 The fact that, in the instant case, the
government has asserted a different penalty rather than a larger
amount of the same penalty as setoff does not materially
distinguish this case from Loftin & Woodard—Lewis sweeps broadly to
permit redetermination of the entire tax liability by retaining any
tax payment "which might have been properly assessed and demanded."
Lewis, 284 U.S. at 283, 52 S.Ct. at 146.8
C.
"The refund claim is ... not a[n]
everything-to-gain-nothing-to-lose matter." John C. Chommie,
Federal Income Taxation 905 (2nd ed. 1973). The district court
correctly determined that, under Lewis and Loftin & Woodard, the
IRS could properly impose delinquency and negligence penalties as
7
See also Acker v. United States, 519 F.Supp. 178, 183-84
(N.D.Ohio 1981) (after running of statute of limitations, fraud
penalty could be imposed and set off against refunded delinquency
and negligence penalties); Rev.Rul. 56-492, 1956-2 C.B. 949
(applying Lewis to "interest and penalties for the taxable year
barred by the statute [of limitations]").
8
Furthermore, it is logically inconsistent for Allen to
argue that penalties are "tax" under former 26 U.S.C. § 6501(a),
so that their collection is barred by the three-year statute of
limitations, yet at the same time are not "tax" for Lewis
purposes in determining whether there has been a net overpayment
of "tax" by the taxpayer.
an offset to the fraud penalty refund irrespective of whether the
statute of limitations had run. Accordingly, we AFFIRM the grant
of summary judgment in favor of the government.