United States v. MacPhail

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 05a0789n.06
Filed: September 12, 2005
No. 04-3472
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
UNITED STATES OF AMERICA, )
)
Plaintiff-Appellee, )
)
v. ) ON APPEAL FROM THE
) UNITED STATES DISTRICT
ANGUS N. MacPHAIL, ) COURT FOR THE SOUTHERN
) DISTRICT OF OHIO
Defendant-Appellant; )
)
SARAH W. CRANE, )
)
Defendant-Cross-Appellee. )
Before: BOGGS, Chief Judge; ROGERS, Circuit Judge; and SHADUR, District Judge.1
BOGGS, Chief Judge. This case concerns the allegedly erroneous repayment of a
tax refund by the IRS. Appellant Angus MacPhail appeals from a grant of summary judgment to
Appellee the United States on its claim that a tax refund MacPhail received properly belonged in
its entirety to his ex-wife Sarah Crane, and from denial of his own summary judgment motion on
his cross-claim against cross-Appellee Crane that she should reimburse him for any money he
had to repay to the IRS. We affirm the district court’s ruling that MacPhail had no right to the
tax refund from the IRS, but we vacate the court’s ruling that the refund was Crane’s sole
1
The Honorable Milton I. Shadur, United States District Judge for the Northern District
of Illinois, sitting by designation.
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MacPhail v. United States
separate property, and we dismiss the cross-claim for lack of subject matter jurisdiction under
the domestic relations exception.
I
Sarah Crane and Angus MacPhail were married in 1983. Wishing to end their marriage,
on April 9, 1997, they entered into a separation agreement. This agreement represented, in
theory, a complete settlement of all property rights between the parties, and each party released
the other from any interest in the other’s property. On July 1, 1997, the Licking County
Common Pleas Court, Division of Domestic Relations, issued a Judgment Entry Decree of
Dissolution incorporating the April separation agreement and dissolving the couple’s marriage.
Until the dissolution of the marriage, the couple filed a joint Form 1040 United States
Individual Income Tax Return. As part of the dissolution agreement, they opted to file their
1996 income tax jointly, while future income tax returns would be filed separately. The
separation agreement made no provision for any refund arising from the 1996 return.
The couple’s 1996 tax liability was determined by December 31, 1996. Most of the
income the couple declared on their tax return came from Crane’s family money. The district
court found that in 1996, 99% of the couple’s $1,853,533.00 in gross income came from Crane’s
family money; $87.00 was attributable to MacPhail alone; and the couple had a joint loss of
$45,014, due mostly to the operation of Columbus Alive!, a free local newspaper that the couple
published. Crane and MacPhail earned no wages from the newspaper.
Between 1991 and 1996, Crane and MacPhail’s joint income taxes were paid in full by
Stanbery, Ltd., a general partnership set up by Crane and her siblings to disburse money earned
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from investments and from the family businesses. Crane had a one-quarter ownership interest in
Stanbery. MacPhail had no ownership interest, control, or participation in the partnership.
Stanbery customarily paid the estimated taxes for Crane and MacPhail in quarterly
installments. Prior to the signing of the separation agreement, Stanbery had already paid
$384,563.32 in estimated taxes on the couple’s behalf. This represented $190,464 less than the
couple’s total 1996 tax liability. On April 15, 1997, Stanbery applied for a filing extension, and
at the same time sent in a check for $490,000, because it was Stanbery’s practice to make the
following year’s estimated first quarterly payment when filing for a due date extension. The
$490,000 check was drawn on Stanbery, Ltd., and the memo line read “Angus MacPhail [social
security number] Form 4868 1996 Ext.,” because the couple’s joint returns were indexed by the
IRS under MacPhail’s taxpayer number. Crane and MacPhail signed and filed their 1996 joint
income tax return on October 15, 1997. The return elected to have the overpayment of $299,536
applied to the filers’ estimated tax liability for 1997.
In 1998, MacPhail filed his individual return, reflecting taxable income of $10,675 and a
tax liability of $1,275, which he paid in full upon filing. He claimed no part of the 1996
overpayment, nor did he request any portion of it as a refund. As usual, pursuant to a filing
extension, Crane did not file her 1997 returns until October 1998, and on her returns she listed
the entire 1996 overpayment as taxes she had paid. In the meantime, however, on June 8, 1998,
on its own initiative and without audit or examination, the IRS refunded the entire $299,536 to
MacPhail as an overpayment on his 1997 returns. Subsequently, upon receiving Crane’s 1997
returns, the IRS refused to credit the 1996 overpayment against her 1997 tax liability.
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In 1999, the IRS twice refused Crane’s request to credit the overpayment to her, stating
that division of the refund was a civil matter between her and MacPhail. Eventually the IRS
changed its mind, and on February 22, 2000, the agency notified MacPhail that the refund had
been erroneous and gave him until March 29 to repay it without interest penalty. In late March
2000, the IRS credited the entire $299,536 to Crane’s 1997 tax account. MacPhail refused to
repay the refund and litigation followed.
Initially, the IRS brought suit against MacPhail on May 31, 2000, pursuant to I.R.C. §§
7401 and 7405(b), (26 U.S.C.), alleging that the refund to MacPhail was erroneous and that the
overpayment was properly attributable to Crane. In August 2001, after the completion of
discovery, the United States was permitted to amend its complaint in order to join Crane as a
defendant, on the ground that MacPhail had raised sufficient material questions about the proper
allocation of the refund to make Crane a necessary party.
Crane denied any liability as to the United States and cross-claimed against MacPhail to
recover from him any amount the United States might recover from her. In response, MacPhail
cross-claimed against Crane for any amount the United States might be awarded from him. In
October 2002, Crane moved for summary judgment on her cross-claim against MacPhail and on
the claims of the United States and MacPhail against her. MacPhail moved for summary
judgment on Crane’s cross-claim against him. In June 2003, the district court granted Crane’s
motion against the United States and denied MacPhail’s motion against her on the ground that
refunds are distributed in proportion to the amount the spouses paid in taxes, and the entire
$490,000 final payment, which the court found generated the overpayment, was made out of
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MacPhail v. United States
money controlled by Crane. The judge dismissed as moot Crane’s motion against MacPhail’s
cross-claim since it sought relief only to the extent that the United States prevailed against her.
Relying on the grant of summary judgment in favor of Crane, the United States then
moved for summary judgment against MacPhail. In February 2004, the district court granted the
motion, directing judgment in favor of the United States in the amount of $299,536 plus interest.
MacPhail appeals the decisions against him. The United States does not appeal the grant of
summary judgment to Crane against the United States.
II
The grant of summary judgment on behalf of the Government against MacPhail raises
questions that are different from and prerequisite to the dispute between MacPhail and Crane, so
we will begin with the question of the ownership of the 1996 overpayment from the perspective
of federal tax law and then turn to the cross-claims concerning the payment of indemnification
between the former spouses.
The court reviews de novo a grant of summary judgment. DiCarlo v. Potter, 358 F.3d
408, 414 (6th Cir. 2004). Summary judgment is proper when the facts, viewed “in the light most
favorable to the nonmovant,” demonstrate no genuine issue of material fact and demonstrate that
the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); accord
Summers v. Leis, 368 F.3d 881, 885 (6th Cir. 2004).
The district court held that Crane was entitled to the refund because, under the tax code,
overpayments by joint filers are apportioned in proportion to each filer’s contribution to the
overpayment, and Crane’s final payment of $490,000 generated the entire overpayment. While
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MacPhail v. United States
we agree with the district judge’s conclusion, we do not agree with his reasoning. According to
26 U.S.C. § 6513(b)(2), “[a]ny amount paid as estimated income tax for any taxable year shall be
deemed to have been paid on the last day prescribed for filling the return . . . for such taxable
year (determined without regard to any extension of time for filing such return).” In other
words, all of the money that Crane and MacPhail paid in estimated taxes in 1996 and as carry-
over from their 1995 taxes was deemed paid on April 15, 1997. Therefore, the final payment of
$490,000 did not itself create the overpayment. Furthermore, under 26 U.S.C. § 6407, an
overpayment credit does not exist until the IRS authorizes the refund or credit. The simple act of
sending in the check on April 15, 1997 did not call into existence a tax overpayment.
As many courts have noted, 26 U.S.C. § 6402(a) permits the IRS to credit an
overpayment to “the person who made the overpayment . . . .” (Emphasis added.) The person
who made the payment does not have to be the person who incurred the liability. United States
v. Elam, 112 F.3d 1036, 1038 (9th Cir. 1997) (“Simply put, the person who overpaid is entitled
to claim the overpayment credit.”). In the case of joint filers, “a joint income tax return does not
create new property interests for the husband or the wife in each other’s income tax
overpayment. [T]he wife having paid the entire amount of the tax is entitled to the entire amount
of the overpayment. Accordingly, the Service may not credit the overpayment on the joint return
against the separate tax liability of the husband for a prior year.” Rev. Rul. 74-611, 1974-2 C.B.
399. Therefore, courts have consistently found that a refund should be disbursed in proportion to
the amount each spouse paid to the taxes owed. Ragan v. Comm’r, 135 F.3d 329, 333 (5th Cir.
1998) (“‘the source of an overpayment of income tax determines the character of the refund . . .
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.’ In re Bathrick, 1 B.R. 428, 430 (Bkrtcy. S.D. Tex. 1979)”); Elam, 112 F.3d at 1038; Conklin v.
Comm’r, 897 F.2d 1027, 1031 (10th Cir. 1990); Gordon v. United States, 757 F.2d 1157, 1160
(11th Cir. 1985).
While Crane certainly benefitted from filing her 1996 taxes jointly because it enabled her
to take additional deductions, arising in particular from a large loss on Columbus Alive!, which
she would otherwise have had to split with MacPhail, the fact that MacPhail’s portion of the
deductions changed the total tax liability is irrelevant to the consideration of the proper
ownership of the overpayment. The IRS looks to the source of the payment, not to the person
who incurred the liability. Between 1991 and 1996, Stanbery, Ltd. paid all of the joint taxes of
Crane and MacPhail, including the credit from 1995 that was used to make the first quarter
estimated 1996 tax payment. Only Crane had any interest in Stanbery, therefore the money is
attributable only to her.2
The Government seeks to recoup the refund from MacPhail under 26 U.S.C. § 7405(b),
which gives it the right to recover “[a]ny portion of a tax imposed by this title which has been
erroneously refunded . . . .” To obtain repayment for an allegedly erroneous refund under 26
U.S.C. § 7405(b), the Government must show that the money was erroneously paid and that the
2
MacPhail claims in a deposition and brief that he and his wife “loaned” money to Crane
Plastics in approximately 1991, and that therefore this gives him an interest in some of
Stanbery’s funds. Crane Plastics, a family-owned business, operated as a family bank for family
deposits. Stanbery, Ltd., however, was a general partnership independent of Crane Plastics,
which disbursed funds generated by investments and profits earned by the group of Crane-family
businesses. Furthermore, MacPhail did not substantiate his claims with any evidence other than
his own assertions.
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MacPhail v. United States
Government brought suit within the two-year statute of limitations. In some circuits, case law
has added a judicial gloss that it not be inequitable to require repayment. MacPhail argues that §
7405(b) does not apply because the refund was not erroneous and because the Government is
equitably estopped under a theory of unjust enrichment from recovering the money after it twice
ruled the refund was rightly his. We do not agree with MacPhail’s arguments.
MacPhail contends that the refund was not erroneous because the IRS gave the refund
voluntarily, based on its own initial mistake of fact concerning ownership of the refund. Section
7405(b) does not explain what makes a refund “erroneous.” But nothing in the statute or in prior
judicial interpretation of § 7405(b) indicates that the voluntariness of the refund plays any role in
adjudicating the question of error. The obvious consequence of MacPhail’s claim would be that
the IRS could not demand repayment of refunds that were made knowingly and voluntarily, but
contrary to the tax code, and would very rarely be able to recover windfalls that taxpayers
received but did not legally deserve. Under the plain language of 26 U.S.C. § 7405, “[t]he
government is entitled to recoup the refund . . . . Equity has no power to change this wholly
legal result.” Valley Ice & Fuel Co. v. United States, 30 F.3d 635, 640 (5th Cir. 1994).
Moreover, MacPhail’s position also violates the long-standing policy that the Government
should not be harmed by the actions of its agents in incorrectly disbursing funds from the public
fisc when the error arose from a mistake of fact.3 Wisconsin Cent. R.R. v. United States, 164
3
MacPhail relies on an out-of-context passage from a district court case from 1927 to
argue that the Government is obligated by the voluntary payment “made by it through its duly
authorized representatives . . . .” United States v. Detroit Steel Prods. Co., 20 F.2d 675, 677
(E.D. Mich. 1927). In Detroit Steel, however, the issue was one of a change in the law. For
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U.S. 190, 212 (1896) (reaffirming “the principle that parties receiving moneys illegally paid by a
public officer are liable ex aequo et bono to refund them.”); United States v. Burchard, 125 U.S.
176, 180-81 (1888) (Government may recover monies paid out due to mistake of fact); see also
United States v. Wurts, 303 U.S. 414, 415 (1938) (“The Government by appropriate action can
recover funds which its agents have wrongfully, erroneously, or illegally paid.”).
Nor is MacPhail entitled to keep the refund under the doctrine of unjust enrichment. He
argues that after the IRS gave him the money, it twice reaffirmed its distribution of the refund to
him as a matter of law, and therefore he reasonably believed the money was his, so the
Government is not entitled to restitution. However, we have been very clear in the past that a
mistake of law by a Government agent, acting without audit or examination, does not amount to
an act or interpretation upon which MacPhail could justifiably rely. United States v. Guy, 978
F.2d 934, 937 (6th Cir. 1992) (“‘[T]hose who deal with the government are expected to know the
law and may not rely on the conduct of government agents contrary to the law.’”) (quoting
Heckler v. Community Health Servs., 467 U.S. 51, 63 (1984)); Beer v. Comm’r of Internal
Revenue, 733 F.2d 435, 437 (6th Cir. 1984) (“The administrative refunds . . . did not amount to a
final determination of the tax that might ultimately be due; they were subject to final audit and
adjustments.”); Comm’r of Internal Revenue v. Mooneyhan, 404 F.2d 522, 528 (6th Cir. 1968)
several years Detroit Steel paid an excise tax on a product it manufactured. The IRS then issued
a ruling that the product was not subject to the tax. Detroit Steel applied for and was granted a
refund of its payments. The following year, the IRS reversed itself, deciding that the prior ruling
had been incorrect, and demanded that Detroit Steel pay the back taxes. The court found that
Detroit Steel had paid the taxes, that the IRS had decided the taxes were not owed, and that it
could not then later change its mind and penalize the taxpayer for not paying the tax.
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(“The doctrine of equitable estoppel . . . cannot prevent the Commissioner from correcting a
mistake of law no matter where respondent was led.”). See also Restatement (First) of
Restitution § 46 (1937) (“A person who has conferred a benefit upon another because of an
erroneous belief induced by a mistake of law that he is under a duty to do so, is entitled to
restitution as though the mistake were one of fact if: (a) the benefit was conferred by a State or
subdivision thereof . . . .”) In addition, the initial IRS letters did not affirmatively instruct
MacPhail that the refund was his. Instead, they indicated that the dispute “was a civil matter”
that “fall[s] under the jurisdiction of a state court,” so he was on notice that no final decision had
been made. Finally, the fact that MacPhail did not report the 1996 overpayment on his 1997
return indicates rather forcefully that he had no expectation that any of that money was his.
Therefore, with regard to the IRS's involvement, we hold that the district court did not err
in granting the Government's motion for summary judgment and awarding the entire
overpayment to Crane.
III
We now turn to the state law matter of the cross-claims for indemnification between the
former spouses. As a threshold matter, we must consider whether the district court properly took
supplemental jurisdiction over the cross-claims. While the cross-claims would appear to fall
under that court’s ancillary jurisdiction because they “aris[e] out of the transaction or occurrence
that is the subject matter of . . . the original action,” Fed. R. Civ. P. 13(g), whenever a claim
concerns marital matters, we must decide whether the family law character of the claim
precludes the exercise of supplemental jurisdiction. Ex parte Burrus, 136 U.S. 586, 593-94
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(1890) (“The whole subject of the domestic relations of husband and wife, parent and child,
belongs to the laws of the States and not to the laws of the United States.”); Mansell v. Mansell,
490 U.S. 581, 587 (1989) (“[D]omestic relations are preeminently matters of state law”); Moore
v. Sims, 442 U.S. 415, 435 (1979) (“Family relations are a traditional area of state concern”). In
general, this exception extends to questions of divorce, alimony, and child custody.
Ankenbrandt v. Richards, 504 U.S. 689, 703 (1992). “Thus, while rare instances arise in which
it is necessary to answer a substantial federal question that transcends or exists apart from the
family law issue . . . , in general it is appropriate for the federal courts to leave delicate issues of
domestic relations to the state courts.” Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, __,
124 S. Ct. 2301, 2309 (2004).
The district court believed that it had jurisdiction because it characterized the
overpayment as arising solely from the $490,000 paid by Stanbery on April 15, 1997, several
days after the couple had signed the separation agreement. However, as explained above, the
district court erred in determining the source of the tax overpayment based solely on the origin of
the April 15 payment. Instead, the court was required to take into account the totality of the tax
payments made during the 1996 tax year. Thus, resolution of the indemnification cross-claims
requires allocation of the refund into some combination of separate or marital property. We
decline to hazard an opinion as to what that division will or should be because the determination
is solely resolved by Ohio domestic relations law.
The division of property as either separate or marital raises exactly the kind of “delicate
issue[ ]” that is more “appropriate for the federal courts to leave . . . to the state courts.”
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Newdow, 124 S. Ct. at 2309; see also McLaughlin v. Cotner, 193 F.3d 410, 413-14 (6th Cir.
1999) (holding in case arising under diversity jurisdiction that federal court lacked jurisdiction in
case “arising out of conflict over a divorce decree”). Under these circumstances, we hold that
Ohio courts are the more appropriate forum for deciding how the money credited to Crane by the
IRS should be divided, if at all, between the former spouses. United States v. Confederate Acres
Sanitary Sewage & Draining Sys., Inc., 935 F.2d 796, 800 (6th Cir. 1991) (federal courts “should
avoid needless decisions of state law both as a matter of comity and to promote justice between
the parties by procuring for them a surer-footed reading of applicable law.”).
IV
In light of the foregoing, we AFFIRM the grant of summary judgment on behalf of the
Government, but we VACATE the denial of MacPhail’s motion for summary judgment and
direct that the district court DISMISS MacPhail’s cross-claim.
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