The opinion of the court was delivered by: McDADE, District Judge.
Before the Court are Cross Motions for Summary Judgment and
Plaintiffs' Motion to Dismiss/Strike Defendant's
Counterclaims. For the reasons which follow, Plaintiffs'
Motion for Summary Judgment is GRANTED. Defendant's Motion for
Partial Summary Judgment is DENIED. Plaintiffs' Motion to
Dismiss Count I of Defendant's Counterclaim is ALLOWED.
Plaintiffs' Motion to Strike Count II of the Counterclaim is
DENIED.
Plaintiffs' civil suit is an action to quiet title to real
estate owned by Plaintiffs in Knox County Illinois. Title is
presently clouded by Notices of Federal Tax Lien filed on
November 7, 1991*fn1 and February 28, 1992, by the Internal
Revenue Service (IRS), with the Knox County Recorder for
taxable periods ending December 31, 1984, and December 31,
1989. Jurisdiction in this case is conferred by 28 U.S.C. § 1340,
1346(b) and (c), and 26 U.S.C. § 7402(a). The United
States has waived its immunity to be sued in a quiet title
action pursuant to 28 U.S.C. § 2410.
Although ostensibly before the Court on cross motions for
summary judgment, the parties actually seek judgment on the
stipulated facts. The facts are as follows. Plaintiffs,
Raymond E. O'Bryant and Dorothy J. O'Bryant, are husband and
wife and own the real estate in Knox County upon which the IRS
has filed Notices of a Federal Tax Lien. The liens at issue
concern the taxable period ended December 31, 1984. In 1984,
the tax return filed by Plaintiffs apparently did not
accurately calculate their tax liability; thus, on November
25, 1985, the IRS made an additional assessment totalling
$22,593.20 for 1984. On August 6, 1987, Plaintiffs paid to the
IRS the sum of $27,999.93, representing full payment of all
tax, interest, and penalties then due, and the IRS released
the federal tax lien previously filed against plaintiffs.*fn2
The United States concedes that the IRS mistakenly credited
Plaintiffs' August 6, 1987 payment twice to Plaintiffs'
account for 1984, creating what appeared to be an overpayment
and generating a refund of $28,925.39 ($27,999.93 plus $925.46
in accrued interest) which was sent to Plaintiffs by check
dated January 1, 1988, from the United States Treasury.
Sometime later in 1988, the IRS discovered its error and
issued a Statement of Adjustment to Account, dated October 24,
1988, requesting payment from Plaintiffs of the refunded
amount plus accrued interest ($3,624.96) totalling $31,624.89.
On December 9, 1988, the IRS responded by letter to an inquiry
by Plaintiffs, stating that Plaintiffs' current balance was
$31,354.84. Although Plaintiffs did not request a refund of
any amounts paid for 1984, there is no question that
Plaintiffs have refused to remit the amount erroneously
refunded by the United States.
The United States did not pursue collection by making a new
assessment, admitting that it neither issued a new notice of
deficiency for 1984 nor made a new assessment of liability for
1984. The United States also did not pursue an erroneous
refund action, pursuant to 26 U.S.C. § 7405(a), which is
governed by a two-year statute of limitations under
26 U.S.C. § 6532.*fn3 The parties agree that the five-year exception is
inapplicable because Plaintiffs never requested this refund.
Rather, the United States admits that it now seeks to collect
the alleged amount of tax due for 1984 and assessed in 1987,
pursuant to 26 U.S.C. § 6201(a)(1), through summary collection
procedures, pursuant to 26 U.S.C. § 6502(a)(1), because the
original assessment is allegedly still valid, due and
owing.*fn4
The parties are now before the Court in an "age-old attempt
to ascertain who owes what to whom." Plaintiffs do not
challenge the merits or the amount of tax originally assessed
against them for 1984. Rather, Plaintiffs challenge the
procedural validity of the
tax liens and request judgment invalidating the liens with
respect to the 1984 assessment. Plaintiffs argue that the tax
liens are invalid because (1) the original assessment for 1984
was "extinguished" by payment on August 6, 1987, and (2) the
IRS did not make a new assessment of additional income tax for
1984 upon which to file the liens. Specifically, Plaintiffs
contend that they paid the tax assessed for 1984 and "received
no notice of deficiency as required by Internal Revenue Code
Section 6213 before an [additional] assessment of income tax
may be made for the taxable period." See Complaint, para. 16
and 17. Plaintiffs also argue that, pursuant to 26 U.S.C. § 6325(a)
and (f), the IRS' concomitant release of the original
tax lien on August 6, 1987, recorded in Sarasota, Florida,
conclusively demonstrates that liability for the original
assessment has been satisfied and extinguished.*fn5
The Government has counterclaimed to reduce the 1984
assessment to judgment, contending that Plaintiffs have not
satisfied their tax liability for 1984, even though they paid
the assessed tax, because the IRS mistakenly refunded the
amount paid (plus interest) to Plaintiffs on or about January
1, 1988, leaving an unpaid balance in Plaintiffs' account for
1984. The Government contends that an action to collect an
erroneous refund (through enforcement of a lien) may be
pursued either under Sections 7405 and 6532(b) or through
summary collection of the original assessment under Section
6502. The Government also argues that the original "assessment
remains unpaid as a result of the erroneous return of the
payment," and may be collected without resort to further
assessment because the Code sections governing deficiencies do
not require the IRS to implement statutory deficiency
procedures to collect nonrebate, erroneous refunds. 26 U.S.C. § 6211-6215.
The Government concludes that it may collect the
amount due on the 1984 assessment without resort to further
assessment, because this refund does not constitute a rebate.
This case has nothing to do with rebates. The question in
this case is whether the IRS may collect an erroneous refund
without resort to further assessment, where a taxpayer has
once paid and satisfied his assessed tax liability. An
understanding of these arguments requires a fairly lengthy
discussion of the Code and the case law on this issue.
If a taxpayer's income tax return states an inaccurate
amount of tax due, or if the taxpayer fails to file their
return on time, the Internal Revenue Code gives the IRS
authority to make an "assessment" of liability for the taxable
period. However, before an assessment differing from the tax
reported in a taxpayer's return is made, the Code requires the
IRS to issue a "notice of deficiency," called a 90-day letter.
26 U.S.C. § 6212.
Issuance of the notice of deficiency begins a
ninety-day period during which the delinquent
taxpayer may file a petition in Tax Court. No
assessment of any tax or collection through levy
or proceeding in court may begin until after the
notice has been mailed and this ninety-day period
has expired. When a taxpayer timely files a
petition with the Tax Court, no assessment or
collection is permitted until the Tax Court
renders a final decision. The taxpayer may seek
appropriate injunctive relief if the IRS attempts
collection or assessment before the ...