Singleton v. United States ( 1997 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
CARROLL EUGENE SINGLETON, and
SHEILA SINGLETON,
Plaintiffs-Appellants,
No. 96-1924
v.
UNITED STATES OF AMERICA,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of North Carolina at Raleigh.
W. Earl Britt, District Judge.
(CA-95-15-5-BR)
Argued: May 7, 1997
Decided: October 20, 1997
Before NIEMEYER and HAMILTON, Circuit Judges, and
LEGG, United States District Judge for the
District of Maryland, sitting by designation.
_________________________________________________________________
Reversed by published opinion. Judge Legg wrote the majority opin-
ion, in which Judge Hamilton joined. Judge Niemeyer wrote a dis-
senting opinion.
_________________________________________________________________
COUNSEL
ARGUED: David D. Dahl, Charles Edward Nichols, Jr., MANNING,
FULTON & SKINNER, Raleigh, North Carolina, for Appellants.
Thomas Vincent Linguanti, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Loretta C.
Argrett, Assistant Attorney General, David English Carmack, Janice
McKenzie Cole, United States Attorney, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
_________________________________________________________________
OPINION
LEGG, District Judge:
This appeal arises from an entry of judgment for the government
by the United States District Court for the Eastern District of North
Carolina. On May 8, 1996, the district court granted the government's
motion for summary judgment, denying the Singletons' cross-motion
for summary judgment. The court subsequently amended its judgment
on June 24, 1996, to adjust the calculation of interest. The Singletons
filed this appeal.
I.
In August 1988, the Singletons filed a joint federal individual
income tax return for 1987. With their return, they submitted a Form
3800 - General Business Credit, indicating a business credit carryfor-
ward of $92,429. Based on the advice of their tax preparer, the Sin-
gletons reported, however, that they were ineligible to receive a credit
for the full amount, and were entitled to a credit of only $423.1
Accordingly, the Singletons reported that their total 1987 tax liabil-
ity was $160,370 ($160,793 tax liability - $423 general business
credit). Because they had made total payments of $190,661, they
reported that they were entitled to a refund of the $30,291 difference.
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1 A general business credit is limited to the smaller of three figures: (1)
the amount of the carryforward, (2) the excess of the taxpayer's net
income tax liability over the taxpayer's tentative minimum tax, and (3)
the excess of the taxpayer's net income tax liability over "25 percent of
the taxpayer's net regular tax liability as exceeds $25,000." 26 U.S.C.
§ 38(c)(1).
2
On October 3, 1988, the Internal Revenue Service ("IRS") sent the
Singletons a Correction Notice stating: "[A]n error was made when
your general business credit was figured on your form 3800."2 (J.A.
76). Under the IRS' calculations, the Singletons were entitled to a
business credit carryforward of $92,429, not merely $423. Accord-
ingly, the IRS refunded to the Singletons an additional $92,006
($92,429 credit due - $423 credit already taken). 3
Nearly three years later, on January 28, 1991, the IRS advised the
Singletons that it had increased their tax liability for 1987 by $1,173,
based on changes in the laws governing the alternative minimum tax.
(J.A. 77). Shortly thereafter, on February 11, 1991, the IRS again
wrote the Singletons, stating that: "As a result of recent changes in the
tax laws, rulings, or regulations, we changed your tax return for the
above tax year to correct your minimum tax or alternative minimum
tax and other credits." (J.A. 79). This second letter stated that the Sin-
gletons' tax liability for 1987 had been recalculated, increasing it by
$93,179 plus statutory interest of $34,012.96.4 The IRS assessed the
$127,191.96 total and demanded immediate payment. No"notice of
deficiency" was issued by the IRS.
Having no notice of deficiency, the Singletons were unable to chal-
lenge this assessment in United States Tax Court. 5 Consequently, to
forestall lien foreclosure on their primary residence, the Singletons
sold their beach house, turning the proceeds over to the IRS, and
entered into an installment agreement to pay $1,750 per month. The
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2 According to the Declaration of Doris Beard, a Lead Tax Examiner
of the Reject Unit in the Error Correction/Reject Section of the IRS, Cor-
rection Notices are issued when the IRS believes that the taxpayer has
made a mathematical or clerical error on his or her return. (J.A. 161-62).
The IRS then assesses the amount due. Id.3 The $92,006 refund was in addition to the anticipated $30,291 refund,
resulting in a total refund of $122,297. (J.A. 76).
4 Unlike the first letter, which referred to specific Code provisions and
contained a thorough explanation of the changes in the tax laws (as well
as an apology), the second letter was terse, vague, and contained no Code
references whatsoever.
5 A notice of deficiency is a prerequisite to filing suit in Tax Court to
challenge an assessment. 26 U.S.C. § 6213(a).
3
Singletons paid the entire $93,179 principal balance, but only paid a
fraction of the accrued interest ($58,965.19 as of September 11,
1995).
Having avoided foreclosure, the Singletons then sought a refund
from the IRS on August 31, 1992. When none was forthcoming, they
filed this action. The government filed a counterclaim for the unpaid
statutory interest under 26 U.S.C. § 6601. Both parties moved for par-
tial summary judgment as to liability.
In their summary judgment motion, the Singletons contended that
the 1991 assessment was unlawful because the IRS failed to follow
required statutory procedures. Under § 6213(a), the IRS is prohibited
from assessing a deficiency unless it first issues a notice of deficiency
to the taxpayer. After issuing the notice, the IRS must wait 90 days
before assessing and collecting the amount due, to give the taxpayer
an opportunity to litigate the deficiency in Tax Court. Id.
The government, in response, argued that the procedures outlined
in § 6213(a) were not required here. It contended that the Singletons'
1987 return was correct, and that IRS mistakes resulted in an errone-
ous refund to the Singletons in 1988. When the IRS realized its mis-
take, in 1991, the government argued, it properly made a
"supplemental assessment," pursuant to 26 U.S.C. § 6204, for the full
amount of tax reported on the Singletons' original return. Under
§ 6204, the government asserted, the IRS may make a supplemental
assessment, "whenever it is ascertained that any assessment is imper-
fect or incomplete in any material respect." Id. In addition, the gov-
ernment claimed that the IRS was not required to issue a notice of
deficiency prior to making a supplemental assessment, because the
Singletons' erroneous refund was of a type exempted from such pro-
cedural requirements.
In support of this argument, the government contended that the
procedures followed in making a supplemental assessment depend
upon whether the refund is a "rebate refund" or a "non-rebate refund."
A rebate refund, the government argued, occurs when the IRS
determines that a taxpayer's liability under the Code is less than the
amount reported on his or her return. 26 U.S.C.§ 6211(b)(2). In other
4
words, it occurs when the IRS reviews a taxpayer's return, determines
that the taxpayer overcalculated his or her tax liability, and then
refunds the overpayment. Id. If the IRS were to later recalculate and
determine that it had misapplied the tax rules and regulations, it could
collect the erroneous rebate refund by making a supplemental
assessment.6 26 U.S.C. § 6204. This supplemental assessment, the
government conceded, should be preceded by a "notice of defi-
ciency." 26 U.S.C. § 6213(a).
The government contended, however, that there is a second cate-
gory of refunds which is excepted from this notice of deficiency
requirement. These so-called "non-rebate" refunds are returned to the
taxpayer not because of a determination that no tax is owed, but
because of a mistake, such as a computer error. See O'Bryant, 49 F.3d
at 342. For example, a non-rebate refund occurs when the IRS acci-
dentally credits a taxpayer's payment twice. Id.
In this case, the government argued that the $92,006 refund issued
to the Singletons was a non-rebate refund. As a result, it contended,
the IRS was entitled to make a corrective, supplemental assessment
in 1991 to reclaim the erroneous refund -- without first issuing a
notice of deficiency. The government explained that no notice was
required because the erroneous refund was issued by mistake, and the
Singletons' tax liability, as reported on their 1987 return, never
changed.7
Alternatively, the government argued to the district court that the
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6 See Bilzerian v. United States , 86 F.3d 1067, 1069 (11th Cir. 1996);
Clark v. United States, 63 F.3d 83, 88 (1st Cir. 1995); O'Bryant v.
United States, 49 F.3d 340, 346 (7th Cir. 1995). Because the taxpayer's
initial payments extinguished the original assessment, the IRS would be
required to make a second assessment for any subsequent liability. Id.;
Wilkes v. United States, 946 F.2d 1143 (5th Cir. 1991); 26 U.S.C.
§ 6213(a).
7 Before the district court, the government conceded that it was not
entitled to collect the $1,173 portion of the 1991 assessment. Because
this amount was based on a substantive recalculation of the Singletons'
alternative minimum tax, the government conceded that its failure to
issue a notice of deficiency was improper.
5
Singletons had "waived" their right to a refund when they signed the
installment agreement, effectively admitting that they were entitled to
a business credit of only $423 (not $92,429).
The district court rejected the government's supplemental assess-
ment argument, holding that the IRS was required to issue a notice of
deficiency before it lawfully could assess and collect the $92,006 lia-
bility. The court accepted the government's alternative argument,
however, that the Singletons' installment agreement constituted a
waiver of their right to a refund. Accordingly, the court granted judg-
ment for the government as to the $92,006 tax debt and the
$58,965.19 unpaid statutory interest. The Singletons then filed this
appeal.8
II.
The issue on appeal is whether the IRS was required by statute to
issue a notice of deficiency to the Singletons prior to making its 1991
supplemental assessment.9
On appeal, the Singletons reiterate the argument they made to the
district court: that the IRS must, before assessing and collecting this
tax liability, follow the statutory procedures in 26 U.S.C. § 6213(a),
including first issuing a notice of deficiency. In response, the govern-
ment concedes that the IRS did not follow these procedures. It con-
tends, however, that the IRS was not required to do so because the
1991 assessment was merely a supplemental assessment to reclaim an
erroneous non-rebate refund. In support of this argument, the govern-
ment re-asserts the purported distinction between rebate and non-
rebate refunds which it argued to the district court.
In addition, the government explains that no notice of deficiency
was required because, by definition, no deficiency existed. A "defi-
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8 The district court's grant of summary judgment is subject to review
de novo. Riley v. Dorton, 93 F.3d 113, 115 (4th Cir. 1996).
9 The government has abandoned its waiver argument on which the dis-
trict court based its opinion, believing the reasoning to be incorrect.
Accordingly, the Court will not address the waiver issue.
6
ciency" can be defined loosely as the amount by which a taxpayer's
liability exceeds the tax reported on his or her return.10
Technically, the government argues, the Singletons had no defi-
ciency. Their 1987 tax return reported liability of $160,370, the same
amount assessed by the IRS ($68,364 in 1988 + $92,006 in 1991).
There were no "rebates," the government contends, because the Sin-
gletons' $92,006 refund was of the non-rebate variety.11 As a result,
the government argues, the refund should not be included in the defi-
ciency calculation, resulting in a deficiency of zero. Because no defi-
ciency exists, the government argues, no notice of deficiency needed
to be issued. The Court rejects this argument.
A.
IRS procedures for assessing taxes have been succinctly summa-
rized by the Seventh Circuit as follows:
Typically, when the IRS receives a tax return it evaluates
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10 Specifically, a deficiency is the amount by which the liability
exceeds the excess of:
(1) the sum of:
(a) the tax reported, and
(b) any prior assessments,
(2) less any rebates.
26 U.S.C. § 6211(a).
11 As discussed above, a rebate refund is issued when the IRS deter-
mines that the tax imposed is less than the tax reported. Specifically, the
term "rebate" is defined as "an abatement, credit, refund, or other repay-
ment," made on the ground that the tax imposed was less than:
(1) the sum of:
(a) the tax reported, and
(b) any prior assessments,
(2) less any prior rebates.
26 U.S.C. § 6211(b)(1).
7
the return for accuracy. If it finds the return satisfactory, it
enters an assessment for the amount of tax that the taxpayer
has calculated to be owing. If the IRS disagrees with the tax-
payer's determination of his tax liability, it can enter a dif-
ferent assessment, but only after it issues a notice of
deficiency to the taxpayer and gives him 90 days to chal-
lenge its calculations in the Tax Court. The IRS has three
years from the date the refund is filed to make an assess-
ment of liability. 26 U.S.C. §§ 6201, 6212, 6213.
Once it makes an assessment the IRS generally has 60 days
to issue a notice and demand for payment to the taxpayer,
and ten years to collect the assessed amount. 26 U.S.C.
§§ 6303, 6502(a)(1). Collection may be made through
administrative methods (including federal liens, summonses,
and levies) or judicial methods (suits to foreclose liens or
reduce assessments to judgment). 26 U.S.C. #8E8E # 6321-6326,
7403. If the IRS discovers that "any assessment is imperfect
or incomplete in any material respect," it may correct the
problem by making a supplemental assessment within three
years of the filing of the return. 26 U.S.C. § 6204.
O'Bryant v. United States, 49 F.3d 340, 342 (7th Cir. 1995). See also
Clark v. United States, 63 F.3d 83, 85 n. 1 (1st Cir. 1995).
If, on the other hand, the taxpayer's reported liability is less than
the amount paid to the Treasury, the IRS will issue a refund.
O'Bryant, 49 F.3d at 342. Occasionally, the IRS makes mistakes dur-
ing this process, by miscalculating the refund or by issuing the refund
check twice. Id. In these cases, the IRS can reclaim the erroneous
refund in one of two ways. Id. First, the IRS can bring an erroneous
refund suit under 26 U.S.C. § 7405, within two years after the refund
was made. Id. at 342-43. Second, the IRS can pursue the "post-
collection assessment procedures" outlined above (§ 6213 notice of
deficiency and demand for payment, followed by judicial or adminis-
trative action). Id. at 343. Here, the IRS chose the latter course of
action, albeit without complying with the procedural requirements.12
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12 Presumably, the IRS did not file an erroneous refund suit here
because the two-year statute of limitations imposed by 26 U.S.C.
§ 6532(b) had expired when the IRS realized its error.
8
Several circuit courts have rejected IRS attempts to reclaim errone-
ous refunds through such procedural shortcuts. See, e.g., Bilzerian, 86
F.3d 1067; Clark, 63 F.3d 83; O'Bryant , 49 F.3d 340. In each of these
cases, the IRS mistakenly had issued a refund to the taxpayer, which
the IRS later sought to collect through summary procedures. Id. In
each case, the government argued that, because the erroneous refunds
were of the non-rebate variety, the IRS was not required to make a
new assessment or follow deficiency procedures before collecting the
money.
Each court rejected this argument. Declining to accept the govern-
ment's proposed distinction between the treatment of rebate and non-
rebate refunds, our sister circuits uniformly held that the IRS had
acted improperly by failing to follow the statutory methods for
reclaiming an erroneous refund. Bilzerian, 86 F.3d at 1069 (holding
that "once a tax liability is paid, no erroneous refund -- whether
rebate or non-rebate -- can revive it"); Clark, 63 F.3d at 87-88;
O'Bryant, 49 F.3d at 346-47; Wilkes, 946 F.2d at 1152.
In those cases, however, the courts criticized the IRS' failure to
issue a supplemental assessment. Here, the IRS did issue a supple-
mental assessment to the Singletons before attempting to collect the
erroneous refund. Thus, unlike these previous opinions, the Court
must consider an additional wrinkle: Before issuing the 1991 supple-
mental assessment, was the IRS required to follow the assessment
procedures in 26 U.S.C. § 6213(a), notably sending the Singletons a
notice of deficiency? The Court concludes that a notice of deficiency
was required and that, in its absence, the assessment was invalid.
B.
Section 6204, which authorizes the IRS to make supplemental
assessments, explicitly incorporates the assessment procedures
described in § 6213.13 This latter provision states:
[N]o assessment of a deficiency . . . shall be made, begun,
or prosecuted until such notice has been mailed to the tax-
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13 "For restrictions on assessment of deficiency in income, estate, gift,
and certain excise taxes, see § 6213." 26 U.S.C. § 6204(b).
9
payer, nor until the expiration of such 90-day [ ] period . . .
nor, if a petition has been filed with the Tax Court, until the
decision of the Tax Court has become final.
26 U.S.C. § 6213(a). In other words, sections 6204(b) and 6213(a)
prohibit the IRS from issuing a supplemental assessment without first
issuing a notice of deficiency and giving the taxpayer an opportunity
to contest the assessment in Tax Court.
The Court finds no applicable exception to these procedural
requirements. Section 6213(a) applies to all assessments; it does not
distinguish between assessments intended to reclaim rebate refunds
versus those intended to reclaim non-rebate refunds.
1.
Section 6213(b) describes the sole statutory exceptions to these
assessment procedures. Section 6213(b)(1) specifies that, in the case
of "mathematical or clerical errors," no notice of deficiency is
required before the IRS assesses the tax due.14 This category is lim-
ited, however, to errors appearing on the taxpayer's return. Id.When a taxpayer makes such "mathematical or clerical errors," the
IRS must send a notice to the taxpayer "set[ting] forth the error
alleged and an explanation thereof." 26 U.S.C.§ 6213(b)(1). Accord-
ing to § 6213(b)(1), this notice does not constitute a notice of defi-
ciency and does not entitle the taxpayer to file a petition with the Tax
Court. Denying the taxpayer access to the Tax Court in this circum-
stance is understandable, however, because any increase in tax due
would result from the taxpayer's own computational error rather than
from a substantive IRS calculation. As a result, access to Tax Court
is unnecessary.
In the Singletons' case, however, this exception to the assessment
procedures is inapplicable. The government does not contend that the
Singletons made a "mathematical or clerical" error on their return; in
_________________________________________________________________
14 Section 6213(b)(2) & (3) relate to taxpayer requests to abate an
assessment specified in a notice of deficiency;§ 6213(b)(4) permits the
IRS to assess one's taxes upon receipt of payment.
10
fact, the government asserts the accuracy of their return as the basis
for the IRS' supplemental assessment.
2.
According to the government, no notice of deficiency was required
in this case because no deficiency existed. This argument is premised
on the assumption that the $92,006 refund issued to the Singletons
was a non-rebate refund and, therefore, was excluded from the defi-
ciency formula.15
The Court disagrees with this analysis. Following our sister cir-
cuits, the Court frowns upon the government's attempt to bypass
congressionally-mandated procedures in the case of purported non-
rebate refunds. See Bilzerian, 86 F.3d at 1069; Clark, 63 F.3d at 87-
88; O'Bryant, 49 F.3d at 346-47; Wilkes , 946 F.2d at 1152.
Even assuming, arguendo, that the distinction between rebate and
non-rebate refunds is valid, the Court concludes that this case
involves a rebate refund. Unlike obvious mistakes such as those in
O'Bryant, in which the IRS credited a taxpayer's payment twice and
in Clark, in which the IRS applied a tax payment to the wrong year,
the Singletons' erroneous refund is not easily classified as a non-
rebate refund.
Instead, the Court finds that the changes in the Singletons' tax sta-
tus were based not on computer or computational errors, as the gov-
ernment contends, but on substantive recalculations of their tax
liability. Indeed, in its February 1991 letter to the Singletons, the IRS
explicitly stated that their liability had increased due to "recent
changes in the tax laws, rulings, or regulations." (J.A. 79). As a result,
the Court finds that the IRS recalculated the Singletons' tax liability
(albeit erroneously) when it mistakenly permitted the full business
credit carryforward in 1988, and the IRS recalculated a second time
when it realized this error and sought to collect the erroneous $92,006
refund in 1991. Accordingly, the 1988 refund would be characterized
_________________________________________________________________
15 As noted above, a deficiency is defined as the amount by which a
taxpayer's liability exceeds the tax reported on the return, less any rebate
refunds. 26 U.S.C. § 6211(a).
11
properly as a rebate refund, and would be included in the deficiency
calculation.
C.
In sum, the Court finds that the IRS issued a rebate refund to the
Singletons in 1988. Because rebate refunds are included in the defi-
ciency formula, the 1988 $92,006 rebate refund resulted in a defi-
ciency of $92,006 when the IRS supplementally assessed the
Singletons in 1991. 26 U.S.C. § 6211(a). Accordingly, the IRS was
required to issue the Singletons a notice of deficiency for this amount
before making a supplementary assessment and collecting the tax due.
Moreover, the Court frowns upon the IRS' attempt to bypass these
assessment procedures by characterizing refunds as non-rebate. The
requirement that a notice of deficiency be issued to the taxpayer is not
a mere technicality. This notice serves as a jurisdictional prerequisite
for a taxpayer to challenge an assessment in Tax Court. Taxpayers
should not be deprived of their access to the Tax Court because of a
mistake by the IRS.
Without a notice of deficiency, the taxpayer's only recourse is to
pay the disputed bill and later file for a refund, as the Singletons did
here. As illustrated by this case, a subsequent suit in federal court to
recover the disputed funds could result in a lengthy delay, while the
IRS retains the disputed funds.
Accordingly, the Court holds that the IRS was required to issue a
notice of deficiency before making its supplemental assessment in
1991. Because this notice was never sent, the Singletons were
deprived of their opportunity to contest the tax due (as well as the
mounting interest). In the absence of this vital procedural step, the
IRS assessment was invalid.
The judgment of the District Court is hereby
REVERSED.
NIEMEYER, Circuit Judge, dissenting:
The question presented in this case is whether the taxpayer may
retain a $92,006 refund made by the IRS in error.
12
The Singletons correctly reported their tax liability for 1987 and
requested an appropriate refund. The IRS, however, made a computa-
tional error in recording their tax and refunded an additional $92,006
as the result of that error. When the IRS discovered the error over two
years later, it sent the taxpayer a supplemental assessment to collect
the erroneously refunded money, and the taxpayer and the IRS
entered into a payback arrangement. But thereafter, the taxpayer sued
the IRS in the district court for the amount of the erroneous refund,
claiming that the IRS was not entitled to collect the erroneous refund
without first sending them a notice of deficiency, which the IRS did
not do, and that it was now too late to correct the procedure, because
any further assessment would be beyond the three-year limitation
period provided by the Tax Code.
Because I believe the IRS was not required to give notice of defi-
ciency, since no deficiency, as defined by the Code, was involved, I
would affirm the IRS's method of proceeding, and for that reason I
would affirm the judgment of the district court.
More than two years after the IRS discovered its refund error, it
issued a supplemental assessment under I.R.C. § 6204, correcting its
error. It then began with efforts to collect from the Singletons the
amounts erroneously refunded. The IRS did not issue a notice of defi-
ciency before issuing the supplemental assessment because the tax
reported by the taxpayer was never less than that due under the Tax
Code and therefore a deficiency as defined by the Tax Code was
never involved.
Both parties agree that, in general, the IRS may recover erroneous
refunds resulting from erroneous initial assessments in one of two
ways. First, the IRS may file suit under I.R.C.§ 7405, which explic-
itly authorizes suits to recover erroneous refunds. Second, the IRS
may make a "supplemental assessment" to correct the original error
in the tax assessment, under I.R.C. § 6204(a) (authorizing "supple-
mental assessment whenever it is ascertained that any assessment is
imperfect or incomplete in any material respect"). The IRS may then
follow administrative or judicial procedures for collecting the amount
due.
In this case, the IRS did not file suit under I.R.C.§ 7405, appar-
ently because it did not discover the erroneous refund within the two-
13
year period after the refund as allowed by the Code. See I.R.C.
§ 6532(b) (allowing suit under § 7405"only if such suit is begun
within two years after the making of such refund"). Instead, the IRS
made a "supplemental assessment" under I.R.C.§ 6204. The question
before us is whether the IRS correctly followed procedures in making
such a "supplemental assessment" without first issuing a notice of
deficiency. If it did, the IRS may retain the money that has been col-
lected from the Singletons and may collect the remaining sums not
yet paid. And if the IRS was not allowed to omit a notice of defi-
ciency, the Singletons must be awarded the money because no addi-
tional assessments may now be made. See I.R.C. § 6204(a) (allowing
supplemental assessments "within the period prescribed for assess-
ment"); I.R.C. § 6501 (requiring assessments to be made within three
years of filing of return, except as otherwise provided). While the
question might appear rather straightforward, it quickly plunges us
into the dense, technical definitions of the Internal Revenue Code,
which I respectfully suggest the majority has misread.
Section 6204 of the Tax Code, which authorizes supplemental
assessments, incorporates as "restrictions on assessment" the provi-
sions of § 6213 (relating to deficiencies). Section 6213, in turn, pro-
vides that "no assessment of a deficiency . . . and no levy or
proceeding in court for its collection shall be made, begun, or prose-
cuted until such notice [of deficiency] has been mailed to the tax-
payer." I.R.C. § 6213(a). It is on the basis of this section that the
majority says that the Tax Code "prohibit[s] the IRS from issuing a
supplemental assessment without first issuing a notice of deficiency."
Slip op. at 10. To make that conclusion, however, the majority must
assume that a deficiency existed, or it simply misreads the statute.
The Tax Code does not prohibit supplemental assessments without
a notice of deficiency. It prohibits supplemental assessments of a
deficiency without notice of a deficiency. See I.R.C. § 6213(a) ("no
assessment of a deficiency . . . shall be made" without notice (empha-
sis added)). In this regard, the majority misreads"Section 6213(a) [to]
appl[y] to all assessments." Slip op. at 10. That section, however,
reads only to require a notice of deficiency when there is a deficiency
at stake. When no deficiency is involved, as is the case before us, then
the notice of deficiency is not required. Accordingly, we must turn to
14
whether a deficiency was involved in this case, recognizing that "defi-
ciency" is a specifically defined term under the Code.
Section 6211 defines deficiency as:
The amount by which the tax imposed by [the Code]
exceeds the excess of . . . the amount shown as the tax by
the taxpayer upon his return . . . plus . . . the amounts previ-
ously assessed (or collected without assessment) as a defi-
ciency over . . . the amount of rebates, as defined in
subsection (b)(2) made.
I.R.C. § 6211(a). In other words, a deficiency is equal to the Code-
imposed tax, minus the taxpayer's calculated amount of tax and prior
deficiency assessments, plus prior rebates. Moreover, "rebate" is also
specifically defined by the Code as:
So much of an abatement, credit, refund, or other repay-
ment, as was made on the ground that the tax imposed by
[the Code] was less than the excess of the amount specified
in subsection (a)(1) over the rebates previously made.
I.R.C. § 6211(b)(2). In other words, a rebate is money sent to the tax-
payer because the taxpayer's calculation (plus prior deficiency assess-
ments) was greater than the Tax Code liability (minus past rebates).
Notably, a "rebate" does not include all of a refund, but only so much
of it as is made "on the ground that" the taxpayer overestimated his
tax liability (when past deficiencies and rebates are accounted for). In
this limitation on the definition inheres the distinction between "re-
bate" and "non-rebate" refunds.
At the risk of oversimplification, a deficiency, as defined by the
Tax Code, is a measurement defined in respect to Tax Code liability.
Thus, if the Tax Code imposes liability for an amount greater than
reported by the taxpayer, the difference, as adjusted by any rebates,
is the deficiency. And a rebate is likewise a Tax Code-liability mea-
surement defined to be the difference between a tax payment made to
a taxpayer and the Tax Code liability.
15
In this case, the Tax Code liability of the Singletons was the same
as they reported on their tax return, and therefore there was neither
a deficiency nor a rebate involved. The IRS refunded $92,006, not
because the taxpayer calculated his liability to be greater than the Tax
Code imposed it, but because the IRS made a computational error.
The IRS's refund of $92,006 was thus a "non-rebate refund" for
which no notice of deficiency is required. The limitation imposed by
I.R.C. § 6213(a), requiring a notice of deficiency, applies only when
there is an "assessment of a deficiency." (Emphasis added).
For these reasons, I respectfully submit that the IRS's position
reflects, not an "attempt to bypass congressionally-mandated proce-
dures," see slip op. at 11, but a recognition that Congress mandated
a notice of deficiency only with respect to the assessment of a
deficiency.
While it would have been much simpler if the IRS had discovered
its error within the two years and therefore been able to file suit under
I.R.C. § 7405, the fact that it discovered the error within three years
entitled it to file a supplemental assessment without giving a notice
of deficiency because a deficiency was not involved. Accordingly,
following its assessment, it was entitled to collect the erroneously
refunded money.
For these reasons, I would affirm the judgment of the district court.
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