Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 93 C 1041 -- James B. Zagel, Judge.
Before FLAUM and MANION, Circuit Judges, and SHARP, *fn1 District Judge.
The United States appeals from a decision of the district court determining that it must refund as an overpayment money remitted by taxpayers Owen and Jean Moran because the government had failed to assess their taxes in a timely manner. The government contends that the late assessment, which followed a liability settlement between the parties in tax court over alleged income tax deficiencies for 1980 and 1981, is inconsequential because the taxpayers had actually paid their taxes shortly after filing their case in the tax court, a time well before the period within which to assess any tax. We now reverse.
Owen and Jean Moran filed joint federal income tax returns for the tax years 1980 and 1981 on April 15, 1981, and April 15, 1982, respectively. The Internal Revenue Service ("IRS") audited those returns, determined that additional taxes were due, and on July 8, 1985, issued a notice of deficiency to the taxpayers. The taxpayers responded by filing a petition with the tax court contesting the deficiency determination.
On December 13, 1985, and July 14, 1986, the Morans remitted to the IRS $331,000 and $255,383, respectively. In letters accompanying the remittances, the Morans' tax preparer stated:
we have been requested to submit the following check . . . which is to be treated as a partial payment of tax and interest (not as a deposit in the nature of a cash bond) under the purview of Section 6, Revenue Procedure 84-58. (emphasis in original).
The remainder of each letter indicated how much of the remittance should be allocated toward the alleged tax deficiency and how much should be applied to interest owed.
Approximately four years later, the IRS and the Morans settled the case. The settlement reflected an agreement that there were deficiencies for 1980 and 1981 but in amounts less than those asserted in the deficiency notice, the total owed approaching $220,000 plus interest. The tax court entered a decision reflecting the settlement, in which the parties agreed to overpayments for 1980 of $99,246 and for 1981 of $114,315, respectively, on November 15, 1990.
Following the November decision, the IRS had until April 15, 1991 -- 150 days following the tax court decision -- to assess the tax due under the decision. The IRS failed to do this until September 9, 1991, when the IRS gave the Morans credit, including interest, for the remittances that had been made in 1985 and 1986, and applied the overpayments, including interest, against the Morans' acknowledged liabilities for another tax year. The taxpayers responded to the IRS's tardiness by filing a refund claim on November 12, 1991, for the amounts sent to the IRS in 1985 and 1986 that had been assessed on September 9. The Morans argued that the late assessment vitiated their additional 1980 and 1981 tax liability and required the IRS to refund the earlier remittances.
The IRS denied the refund claims, whereupon the Morans filed the instant suit. The Morans contended that the government had not assessed any tax and that there could be no tax liability without an assessment; therefore, the money they had remitted in 1985 and 1986 should be refunded. The government responded that the Morans' earlier remittances were in fact tax payments, as indicated in their letters, making the late assessment irrelevant. Even if the Morans were entitled to a refund, the government continued, they could not collect because they had not requested their refund in a timely fashion. The government also filed a counterclaim for any excess interest credited to the Morans account. The government asserted that the only way the Morans would be entitled to a refund would be if their 1985 and 1986 remittances could be classified as deposits in the nature of a cash bond and not as payments of taxes and that taxpayers may only earn interest on the latter.
On cross-motions for summary judgment, the district court ruled in favor of the Morans. Relying on the Supreme Court's decision in Rosenman v. United States, 323 U.S. 658 (1945), the court viewed the money sent to the IRS simply as the Morans' way of halting the accrual of penalties and interest until the IRS could formally assess a tax. While the court acknowledged the possibility that a taxpayer might intend to pay a tax prior to receiving a formal assessment, the district court concluded that did not occur here, where the taxpayers protested their liability in tax court for a number of years following the remittance. The district court also found that the taxpayers had filed timely claims for refunds since the allegedly relevant statute of limitations only applied where ...