Appealed from: United States Court of Federal Claims, Judge Margolis.
Before Rich, Plager, and Bryson, Circuit Judges.
The opinion of the court was delivered by: Plager, Circuit Judge.
In substance this case is one for the recovery by the Internal Revenue Service ("IRS" or "Government") of a large refund paid in error to a taxpayer. In form, however, the taxpayer is seeking money from the Government, having remitted to the IRS an amount similar to the refund, demanded by the IRS in connection with a different, once-disputed but subsequently satisfied income tax liability. The Government claims the right to retain the sum the taxpayer paid in, as an offset against the otherwise now unrecoverable erroneous refund.
The United States Court of Federal Claims granted judgment in favor of the taxpayer, Stanley v. United States, 35 Fed. Cl. 493 (1996). The Government appeals. While we recognize that the taxpayer in this case will receive a windfall, we nonetheless affirm because the IRS failed to act in a manner prescribed by law.
The facts are not in dispute. Mr. Leroy P. Stanley ("Stanley") timely filed an individual income tax return for the calendar year 1982. On January 21, 1986, the IRS issued a notice of deficiency disallowing certain credits and deductions relating to an investment called OEC leasing. The notice indicated that Stanley owed an additional tax of $240,541.37, plus penalties and interest.
In response to the notice of deficiency, Stanley filed a petition in the United States Tax Court contesting the tax liability determination. After a series of exchanges between Stanley's counsel and the IRS, the two parties entered into a settlement agreement. While the agreement did not specify the exact dollar amount owing, it did specify the allowability of certain contested deductions and credits. As part of the settlement, Stanley also admitted liability for a negligence penalty and interest.
Following the settlement, on October 11, 1989, Stanley's attorney mailed a check for $538,276.17 to the IRS along with a letter instructing the IRS on how to apply the remittance. The letter instructed the IRS to apply $190,648.33 to "Tax Due for 1982," $46,833.03 to "Overvaluation Penalty (Section 6659)," and the remainder to "Interest." The IRS received Stanley's check and credited his 1982 income tax account for that amount.
Subsequently, on January 22, 1991, the Tax Court entered a decision in Stanley's still-pending tax case. In an accompanying Order and Decision, the Tax Court entered judgment against Stanley in the amount of $194,592.33 for deficiency in income tax due and another $46,565.20 in overvaluation penalties pursuant to Internal Revenue Code (I.R.C. *fn1 ) section 6659. These two amounts were taken from a "Statement of Account" (IRS Form 3623) prepared by the IRS. That same form reflected receipt of payments on October 16, 1989 of $491,710.97 under the column "INCOME" and $45,565.20 under the column "I.R.C. 6659," for a total of $538,276.17. Although the specific item amounts differed somewhat from those stated in the letter submitted by Stanley on October 11, 1989, the total, $538,276.17 was the same. Because the amount of income tax the IRS acknowledged having received ($491,710.97) exceeded the liability decreed by the Tax Court ($194,592.33), the form showed a balance due to Stanley of $297,118.54. The Tax Court's Order and Decision reflected this stating that "an overpayment [is] due to petitioner for the taxable year 1982 in the amount of $297,118.54" and noted that the assessments had been paid. Also on the IRS form, however, was a type-written note stating that "[t]he overpayment will be applied to accrued interest." There was no separate column for interest. There is no indication in the record that Stanley ever received a copy of this form.
Pursuant to I.R.C. § 6503(a), the statute of limitations for assessing additional tax against Stanley for the 1982 tax year was suspended during the pendency of the 1982 tax case and for 60 days thereafter. That 60 day period expired on June 21, 1991. Three days prior to the running of the statute, on June 18, 1991, the IRS assessed against Stanley additional tax, penalty, and interest for 1982 in the amounts of $194,592.33, $46,565.20, and $274,720.41, respectively, for a total of $515,877.94. These assessments were entered into the IRS computer database for Stanley's 1982 income tax account during the week of July 21-27, 1991.
Meanwhile, the IRS cut Stanley a check in the amount of $637,004.62, and sent it to him. The check indicated on its face that it was a refund of overpaid 1982 income tax, plus interest thereon. The erroneous refund was recorded in Stanley's account on the IRS database during the week of June 30 to July 6, 1991, several weeks prior to the date the new 1982 assessment was entered on its books.
Then on September 9, 1991, the IRS sent Stanley a "Reminder of Unpaid Tax" requesting payment from Stanley in the amount of $630,249.68. The reminder letter broke out the requested amount into "Balance of Prior Assessments" of $515,877.94 and "Interest" of $114,371.74. This was clearly a reference to the new assessment made on June 18, 1991, for the 1982 taxable year. The letter also warned Stanley--"If your payment is not received within 10 days from the date of this notice, additional penalties and interest may be charged."
In response to the reminder letter, on September 20, 1991, Stanley's attorney sent a check to the IRS for the requested amount of $630,249.68. An accompanying letter questioned the propriety of the tax liability in light of the Tax Court decision, which indicated that an overpayment was due Stanley. Accordingly, counsel put two questions before the IRS:
First, how did the Internal Revenue Service compute the various elements of this Reminder and conform them to the final Tax Court Decision entered in this case?
Second, how can an assessment be made of any amount when the Tax Court Decision (Exhibit B) orders the refund ...