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April 13, 1993


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 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.

A. The Code

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 ...

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