Daniel Greer v. Comm'r of Internal Revenue ( 2009 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 09a0061p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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DANIEL C. GREER and WINNIE L. GREER,
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Petitioners-Appellants,
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No. 08-1014
v.
,
>
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COMMISSIONER OF INTERNAL REVENUE,
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Respondent-Appellee.
On Appeal from the United States Tax Court.
No. 21795-03.
Argued: December 2, 2008
Decided and Filed: February 19, 2009
Before: BOGGS, Chief Judge; CLAY, Circuit Judge; and BERTELSMAN, District
*
Judge.
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COUNSEL
ARGUED: Kenton L. Ball, SLONE & BENTON PSC, Lexington, Kentucky, for
Appellants. Kenneth W. Rosenberg, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellee. ON BRIEF: Kenton L. Ball, SLONE & BENTON
PSC, Lexington, Kentucky, Joy L. Hall, HORWITZ LAW FIRM, Crescent Springs,
Kentucky, for Appellants. Kenneth W. Rosenberg, Bridget Maria Rowan, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
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OPINION
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BOGGS, Chief Judge. Daniel and Winnie Greer claimed a number of tax
benefits from a 1982 investment. The IRS subsequently disallowed the benefits and, in
2003, imposed penalties on the Greers for negligently underpaying their taxes. The
*
The Honorable William O. Bertelsman, United States District Judge for the Eastern District of
Kentucky, sitting by designation.
1
No. 08-1014 Greer, et al. v. Comm’r Page 2
Greers challenged, inter alia, the amount of those penalties in the Tax Court, arguing
that they had made a remittance in 1995 that paid their tax liability and thus reduced
their penalties. The Tax Court rejected this argument, and the Greers appeal. We affirm
because the 1995 court-ordered refund of the Greers’ payment, with interest, negated the
effect of that payment on their penalty obligation.
I
In 1982, the Greers invested $50,000 in a partnership called Madison Recycling
Associates. Based on this investment, the Greers claimed a number of tax benefits for
tax years 1979–1982 and received refunds for 1979–1981.
In 1984, the IRS began auditing the Madison partnership. In 1987, it issued a
notice of Final Partnership Administrative Adjustment (FPAA) disallowing the tax
benefits the Greers had claimed. In 1988, Madison partners (including the Greers) other
than the tax matters partner filed a petition for readjustment in the Tax Court pursuant
to IRC § 6226. Their only argument was that the IRS did not issue the FPAA within the
statutory period. Madison Recycling Assocs. v. C.I.R., T.C. Memo 1992-605, at *1. On
October 13, 1992, the Tax Court denied summary judgment for the partners, holding that
a waiver of the statute of limitations by the tax matters partner was valid. Id. at *6.
On December 21, 1992, with the Tax Court litigation still awaiting resolution on
the merits, the Greers mailed amended returns for 1979–1981 calculating the additional
tax they owed if the Madison benefits were disallowed; with interest, the total liability
was $189,769. The Greers included a check for the full amount (the “1992 remittance”),
with a cover letter stating that the remittance was intended as a payment of the Greers’
tax liability and allocating the remittance so as to satisfy each year’s proposed tax and
interest liability. They also sent a claim for a refund and a second set of returns, which
were labeled “protective claim” and stated their tax liability if the Madison benefits were
allowed.
Approximately eight months later, on August 19, 1993, the Greers filed suit in
the United States District Court for the Eastern District of Kentucky seeking a refund of
No. 08-1014 Greer, et al. v. Comm’r Page 3
their “wrongfully collected . . . payment,” with interest. The IRS moved to dismiss for
lack of jurisdiction, and the district court granted the motion on September 21, 1994, in
a brief order. Although the district court refused to “concede . . . the absence of subject
matter jurisdiction under 28 U.S.C. § 1346” (which grants jurisdiction over wrongful
payment claims), it nonetheless felt that it was “appropriate to dismiss the action without
prejudice, subject to the plaintiff’s right to refile pending the outcome of related tax
court litigation, now awaiting resolution in excess of six years.”
However, despite the dismissal of the suit, the court then ordered the IRS to
“repay the [Greers] the amount of tax deficiency paid by the [Greers] as a prerequisite
to the filing of this action, plus interest.” Neither party appealed, and the IRS refunded
the $189,769, plus interest, in June 1995 (the “1995 refund”).
On April 9, 2001, the Tax Court finally ruled on the merits of the Madison
partners’ readjustment petition, rejecting the statute of limitations claim and upholding
the FPAA. Madison Recycling Assocs. v. C.I.R., T.C. Memo 2001-85. The Second
Circuit affirmed that decision on July 9, 2002. Madison Recycling Assocs. v. C.I.R., 295
F.3d 280 (2d Cir. 2002).
Once the FPAA was final, the IRS could assess deficiencies, see IRC § 6225, and
on September 29, 2003, the IRS mailed notices of deficiency to the Greers for all four
tax years affected by their Madison investment. The IRS also imposed several penalties
on the Greers, including a continuing interest penalty under IRC § 6653(a)(2) (1982).1
Section 6653(a)(2) states:
There shall be added to the tax . . . an amount equal to 50 percent of the
interest payable . . .
(A) with regard to the portion of [an] underpayment [of
tax] which is attributable to . . . negligence . . ., and
1
The IRS applies the penalty provisions that were in effect at the time of the underpayments.
See, e.g., Thomas v. United States, 166 F.3d 825, 826 n.1 (6th Cir. 1999). Section 6653 was repealed in
1989 and replaced with IRC § 6662, which imposes a general accuracy penalty on understatements.
Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, 103 Stat. 2106.
No. 08-1014 Greer, et al. v. Comm’r Page 4
(B) for the period beginning on the last date prescribed by
law for payment of such underpayment (determined
without regard to any extension) and ending on [1] the
date of the assessment of the tax (or [2], if earlier, the
date of the payment of the tax).
The IRS asserted that the Greers were negligent in claiming the Madison tax benefits and
that their entire 1981 and 19822 underpayments were attributable to that negligence. The
IRS determined that the penalty period ended on the date of the assessment because the
Greers’ 1981 and 1982 taxes had not been paid.
The Greers filed a petition with the Tax Court challenging, inter alia, the amount
of the § 6653(a)(2) penalties. They argued that the 1992 remittance was a “payment of
the tax,” and, as such, ended the penalty period. The Tax Court rejected this argument
for two reasons. First, it held that the 1992 remittance was a deposit, not a payment, and
thus had no effect on the § 6653(a)(2) penalties. Second, the Tax Court concluded that
even if the remittance was a payment, the Greers were not entitled to relief because the
1995 refund revived the tax liability underlying the § 6653(a)(2) penalties. The Greers
appeal.
II
We review Tax Court decisions “in the same manner and to the same extent as
decisions of the district courts.” IRC § 7482(a)(1). Thus, we review the Tax Court’s
factual findings for clear error and its legal conclusions de novo. Smith v. C.I.R., 926
F.2d 1470, 1474 (6th Cir. 1991).
III
The only question on appeal is whether the § 6653(a)(2) penalty period ended on
the date of the 1992 remittance or on the date of the assessment. After a thorough
consideration of the record, we conclude that the 1992 remittance was a payment, not
a deposit, and thus extinguished the Greers’ tax liability. See Ameel v. United States,
2
The notices of deficiency also asserted § 6653(a)(2) penalties for 1979 and 1980. However, the
IRS has conceded these penalties because § 6653(a)(2) was added by the Economic Recovery Act of 1981,
Pub. L. No. 97-34, 95 Stat. 172, and therefore was not in effect for tax years 1979 or 1980.
No. 08-1014 Greer, et al. v. Comm’r Page 5
426 F.2d 1270, 1271–73 (6th Cir. 1970) (adopting a facts-and-circumstances test for
determining whether a remittance is a deposit or a payment). As a result, the
§ 6653(a)(2) penalty period normally would have ended on the date of the 1992
payment.3 IRC § 6653(a)(2)(B). However, we hold that the penalty period actually
ended on the date of the assessment because the 1995 refund negated the 1992
remittance’s “payment of the tax,” thereby reviving the Greers’ tax liability and
continuing the penalty period.
We have previously held that a refund can revive an extinguished tax liability.
In Beer v. C.I.R., we ruled that erroneous rebate refunds—refunds issued because the
IRS mistakenly calculates that the taxpayer overpaid his or her tax liability—can be
recovered through a supplemental assessment of deficiency. 733 F.2d 435, 436–37 (6th
Cir. 1984) (per curiam); see also Singleton v. United States, 128 F.3d 833, 838–39 (4th
Cir. 1997); Brookhurst, Inc. v. United States, 931 F.2d 554, 557 (9th Cir. 1991); Stanley
v. United States, 140 F.3d 1023, 1027 (Fed. Cir. 1998) (dicta); Bilzerian v. United States,
86 F.3d 1067, 1069 (11th Cir. 1996) (per curiam) (dicta); Clark v. United States, 63 F.3d
83, 87 (1st Cir. 1995) (dicta); O’Bryant v. United States, 49 F.3d 340, 345–47 & n.8 (7th
Cir. 1995) (dicta). Because only tax liabilities may be assessed as a deficiency, Pacific
Gas and Elec. Co. v. United States, 417 F.3d 1375, 1379, 1381–83 (Fed. Cir. 2005);
United States v. Frontone, 383 F.3d 656, 659–61 (7th Cir. 2004), Beer necessarily held
that an erroneous rebate refund revives tax liability. See also Brookhurst, 931 F.2d at
557–58 (recognizing that an erroneous rebate refund makes a previously paid tax
liability “unpaid”); Frontone, 383 F.3d at 657, 659–61 (holding that an erroneous rebate
refund revives tax liability because the “ultimate source of the IRS’s claim [to the
amount erroneously refunded] is a tax owed”); cf. IRC § 6211 (counting (presumably
erroneous) rebate refunds as tax amounts that increase a taxpayer’s assessable
3
The potential effect of the 1992 payment is more complicated than this suggests. In 1992, the
Greers correctly calculated their 1981 underpayment, and therefore the 1992 payment paid their 1981 tax
liability in full. As a result, the penalty period for the 1981 underpayment would have ended. However,
the Greers did not correctly calculate their 1982 underpayment, and therefore the 1992 payment did not
pay their 1982 tax liability in full (they underpaid by $18,976). As a result, the 1992 payment, despite
satisfying part of the Greers’ 1982 tax liability, was not a “payment of the [full] tax,” and therefore did not
end the penalty period for the 1982 underpayment. Because this complication is irrelevant to our
resolution of the Greers’ appeal, we ignore it.
No. 08-1014 Greer, et al. v. Comm’r Page 6
deficiency). But see Bilzerian, 86 F.3d at 1069 (stating, in dicta, that “once a tax liability
is paid, no erroneous refund—whether rebate or non-rebate—can revive it”).
This principle has already been applied in this case. The Greers originally paid
their 1979–1981 tax liabilities in full; their underpayment for those years was the result
of rebate refunds made after they submitted amended returns in 1982 claiming carryback
tax benefits from their Madison investment. Those rebate refunds were erroneous
because the IRS later disallowed the tax benefits on which they were premised. Cf.
Beer, 733 F.2d at 436 (holding that refunds issued based on a claimed exemption that
was later disallowed are erroneous). By assessing the amount of the 1982 rebate refunds
as a deficiency, the IRS treated the erroneous rebate refunds as reviving the Greers’
1979–1981 tax liability.
Erroneous rebate refunds revive tax liability because they are tax amounts; the
refund returns (part of) the taxpayer’s payment, thus negating the payment and reviving
tax liability. See Frontone, 383 F.3d at 659–61; cf. IRC § 6211. Although the 1995
refund was not an erroneous rebate refund (it was not the result of a substantive
determination that the Greers had overpaid their taxes), we conclude that it was a tax
amount because it was the deliberate return of the Greers’ 1992 payment of taxes. The
link between the 1995 refund and the 1992 payment is strong: the Greers submitted an
administrative request for a refund with their 1992 payment, their district court
complaint specifically requested the payment’s return, and the district court specifically
ordered the IRS to “repay . . . the amount of tax deficiency paid by [the Greers].”
Furthermore, the 1995 refund completely negated the 1992 payment as an economic
matter because the refund included interest, leaving the IRS and the Greers in the same
economic position as if the 1992 payment never been made.
Because the refund was a tax amount, the Greers’ tax liability was revived; it
became “unpaid,” Brookhurst, 931 F.2d at 557–58. Thus, when the IRS imposed the
§ 6653(a)(2) penalty, the Greers’ taxes were not paid, and the IRS correctly determined
that the penalty period ended on the date of the assessment.
No. 08-1014 Greer, et al. v. Comm’r Page 7
The Greers argue that the 1995 refund did not negate the 1992 “payment of
[their] tax.” They rely on case law holding that an “erroneous nonrebate refund”—a
refund made for any reason other than a substantive calculation that the taxpayer
overpaid his or her tax liability, e.g., a clerical error—does not revive tax liability, but
rather creates a nontax unjust enrichment liability.4 See Bilzerian, 86 F.3d at 1069;
Clark, 63 F.3d at 87–88; O’Bryant, 49 F.3d at 346–47; United States v. Wilkes, 946 F.2d
1143, 1152 (5th Cir. 1991); see also Pacific Gas and Elec. Co., 417 F.3d at 1382–83
(approvingly discussing this case law in dicta); Mildred Cotler Trust v. United States,
184 F.3d 168, 171–72 (2d Cir. 1999) (same); Singleton, 128 F.3d at 837 (same).
At first glance, the 1995 refund appears to be an erroneous nonrebate refund: it
is not a rebate refund, and the district court should not have ordered it without making
a substantive determination that the Greers overpaid their taxes. However, we conclude
that the “erroneous nonrebate refund” case law does not control this case for two
reasons: first, the 1995 refund was not “erroneous”; and second, the rationale for treating
erroneous nonrebate refunds as nontax liabilities does not apply to the 1995 refund.
First, we do not believe that the 1995 refund was “erroneous.” Court-ordered
refunds, even if unmerited, are not “erroneous” for the purposes of tax law. Deeming
such refunds to be “erroneous” would allow the IRS to circumvent the court’s order:
after making the refund, the IRS could immediately recover it by suing the taxpayer
under IRC § 7405, which creates a cause of action for the recovery of erroneous refunds.
See United States v. Russell Mfg. Co., 349 F.2d 13, 16–18 (2d Cir. 1965) (Friendly, J.)
(holding that a refund is not erroneous, and therefore not recoverable by a § 7405 suit,
when it was “deliberately made” by the IRS to satisfy a court order, regardless of the
merits of that order). This is consistent with the case law, which gives only IRS
mistakes as examples of erroneous nonrebate refunds. See, e.g., O’Bryant, 49 F.3d at
342 (IRS clerical and computer errors).
4
There is a tension between the Greers’ argument and their failure to challenge the IRS’s
assessment of the amount of the 1995 refund as a tax liability. A similar tension is evident in some of the
erroneous nonrebate refund cases. See, e.g., Bilzerian, 86 F.3d at 1069 (stating that although “no erroneous
refund—whether rebate or non-rebate—can revive [a paid tax liability],” nonrebate refunds may be
recovered through a supplemental assessment); cf. Frontone, 383 F.3d at 662 (recognizing this tension).
No. 08-1014 Greer, et al. v. Comm’r Page 8
Second, we do not believe that the rationale behind the erroneous nonrebate
refund case law applies here. The cases hold that such refunds do not revive tax
liabilities because they are not tax amounts. The O’Bryant court explained:
[There is a] fundamental difference in character between the money that
the O’Bryants now possess (a refund caused by the IRS’[s] error) and the
money they originally owed the IRS (their tax liability). The money the
O’Bryants have now is not the money that the IRS’[s] original
assessment contemplated, since that amount was already paid. Rather,
it is a payment the IRS accidentally sent them. They owe it to the
government because they have been unjustly enriched by it, not because
they have not paid their taxes. Because it is a refund, the money the
O’Bryants received is not part of the taxpaying transaction as the IRS
asserts . . . . [E]rroneous [nonrebate] refunds and tax liabilities are
simply not of the same ilk.
49 F.3d at 346–47; see also, e.g., Wilkes, 946 F.2d at 1151–52 (explaining that an
“unsolicited, erroneous [nonrebate] refund” is not a tax amount and therefore cannot
revive a previously satisfied tax liability).
As we explained above, the 1995 refund was a tax amount, and therefore it
resulted in a tax liability, not an unjust enrichment liability. The district court
specifically ordered the IRS to refund the “tax deficiency paid by the [Greers].”
Furthermore, the 1995 refund was neither accidental nor unsolicited; it was deliberately
made in response to the Greers’ requests and a court order to return the 1992 payment.
Given the direct and intentional link between the 1995 refund and the 1992 payment, we
conclude that the refund was “part of the [Greers’] taxpaying transaction.”
IV
This is a unique case because the 1995 refund does not fit neatly into the
established categories of “erroneous rebate refund” or “erroneous nonrebate refund.”
On these facts, we conclude that the 1995 refund was a tax amount that revived the
Greers’ tax liability. Because the tax liability underlying the § 6653(a)(2) penalties was
unpaid when the IRS assessed the Greers’ underpayment, only the assessment ended the
penalty period. The judgment of the Tax Court is therefore AFFIRMED.