Larosa's Intern. Fuel Co., Inc. v. U.S.

• Decision Date: 18 September 2007
• Docket Number: No. 2007-5017.,2007-5017.
• Citation: 499 F.3d 1324
• Parties: LAROSA'S INTERNATIONAL FUEL CO., INC. and Joseph LaRosa, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

499 F.3d 1324

LAROSA'S INTERNATIONAL FUEL CO., INC. and Joseph LaRosa, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.

No. 2007-5017.

United States Court of Appeals, Federal Circuit.

September 18, 2007.

Thomas F. DeCaro, Jr., DeCaro & Howell, P.C., of Upper Marlboro, MD, argued for plaintiffs-appellants.

Ellen Page DelSole, Attorney, Tax Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With her on the brief was Eileen J. O'Connor, Assistant Attorney General.

Before RADER, SCHALL, and LINN, Circuit Judges.

SCHALL, Circuit Judge.

LaRosa's International Fuel Co., Inc., ("LaRosa Fuel") and Joseph LaRosa (together, "taxpayers") appeal the final judgment of the United States Court of Federal Claims dismissing their consolidated tax refund suits. LaRosa's Int'l Fuel Co. v. United States, Nos. 97-834T, 97-835T (Oct. 30, 2006). In their suits, taxpayers sought to recover interest they paid on unpaid taxes for the period while funds belonging to them were subject to Internal Revenue Service ("IRS") levies and were held in an escrow account established by taxpayers and the IRS. On April 3, 2003, the court granted summary judgment in favor of the United States on taxpayers' refund claims. LaRosa's Int'l Fuel Co. v. United States, 56 Fed.Cl. 102, 104 (Apr. 3, 2003) (LaRosa I). The court did so after holding that taxpayers were not entitled to recover the interest they had paid because the levies and the placement of their funds in escrow did not constitute the payment of their unpaid taxes, so as to stop the accrual of underpayment interest under section 6601(a) of the Internal Revenue Code ("I.R.C." or "Code"), 26 U.S.C. Subsequently, on October 27, 2006, the court granted summary judgment in favor of taxpayers on the government's counterclaim for additional interest on unpaid taxes. LaRosa's Int'l Fuel Co. v. United States, 73 Fed.Cl. 625, 626-27 (Oct. 27, 2006) (LaRosa II). Shortly thereafter, the court entered final judgment dismissing taxpayers' complaints. Because we find no error in the decision of the Court of Federal Claims in LaRosa I, we affirm.¹

BACKGROUND

I.

LaRosa Fuel is a Maryland corporation that supplies coal to utility companies. Joseph LaRosa is a shareholder of the corporation; his brother, Dominick LaRosa, is the president. On December 3, 1985, the IRS made jeopardy assessments against taxpayers and Dominick LaRosa, totaling $21,208,383 in taxes, penalties, and interest for the tax years 1981 through 1983. Of that amount, almost $12 million was assessed against LaRosa Fuel, almost $800,000 was assessed against Joseph LaRosa, LaRosa I, 56 Fed.Cl. at 103, and almost $8.5 million was assessed against Dominick LaRosa. From December 3, 1985 to December 11, 1985, pursuant to I.R.C. § 6331, the IRS served levy notices on financial institutions holding liquid assets and other property of taxpayers and Dominick LaRosa.

In December of 1985, $169,955 was remitted to the IRS, which was applied to the assessment against Joseph LaRosa. In December of 1985 and January of 1986, a further $114,098 was remitted to the IRS, which was applied to the assessment against LaRosa Fuel. On January 16, 1986, taxpayers and Dominick LaRosa entered into an escrow agreement with the IRS. Pursuant to the agreement, the liquid assets of taxpayers and Dominick LaRosa were placed in an escrow account pending final resolution of their tax liabilities. LaRosa I, 56 Fed.Cl. at 103.

Following the execution of the escrow agreement, the IRS issued notices of deficiencies to taxpayers and Dominick LaRosa, reflecting the tax liabilities that were the subject of the jeopardy assessments. In response, taxpayers and Dominick LaRosa filed petitions in the United States Tax Court contesting the deficiency determinations. LaRosa's Int'l Fuel Co. v. Comm'r, No. 6173-86 (T.C.); LaRosa v. Comm'r, No. 6172-86 (T.C.). Subsequently, in March of 1991, taxpayers and Dominick LaRosa resolved the Tax Court litigation by settling their tax liabilities — including taxes, penalties, and underpayment interest — in three stipulated decisions. Pertinent to this case, the stipulated decision in LaRosa Fuel's case determined that it was liable for deficiencies and additions to taxes totaling $316,324, while the stipulated decision in Joseph LaRosa's case determined that he was liable for deficiencies and additions to taxes totaling $2,331,566. Taxpayers and Dominick LaRosa paid the stipulated amounts out of funds separate from those in the escrow account. The three stipulations expressly reserved for taxpayers and Dominick LaRosa the right "to pursue an action in the appropriate federal court with respect to the interest claimed to be due by the IRS on the respective deficiencies." LaRosa II, 73 Fed.Cl. at 626. Shortly thereafter, the levies and escrowed funds were released.

II.

In April of 1993, exercising their reserved rights, taxpayers and Dominick LaRosa filed claims with the IRS for the refund of interest. Id. at 627. In their claims, they asserted that they had made excessive interest payments on their former tax liabilities because the IRS had assessed interest after the levies and while their assets remained in escrow. LaRosa I, 56 Fed.Cl. at 103. After the IRS denied the claims, taxpayers filed suit in the Court of Federal Claims seeking a refund of interest payments.² In their suits, they argued that from December of 1985 (when the IRS made jeopardy assessments and serviced levy notices), the IRS had actual or constructive possession of their assets. Id. In view of that possession, taxpayers contended, the IRS should have credited the full value of the assets against their tax assessments, which would have stopped the accrual of underpayment interest against them under I.R.C. § 6601(a). Id. Therefore, taxpayers sought a refund of the underpayment interest the government had charged them and which they had paid as part of the stipulated Tax Court settlement. Id. at 103-04.

In due course, after stipulating to the pertinent facts, the parties cross-moved for summary judgment on the issue of underpayment interest. Id. at 104. In their motion, taxpayers urged that the seizure of their assets by levy and the subsequent placement of their funds in escrow amounted to payment of their tax deficiencies. Id. For its part, the government argued that a tax is paid when funds are actually applied to satisfy a tax assessment. Id. Ruling on the cross-motions, the Court of Federal Claims held that the IRS's levy against taxpayers' assets and the placement of their funds in the escrow account did not constitute payment of their tax liability. In its decision, the court relied on the Supreme Court's decision in Rosenman v. United States, 323 U.S. 658, 65 S.Ct. 536, 89 L.Ed. 535 (1945), which the Court of Federal Claims read as standing for the proposition that, in order for a tax liability to be deemed paid, funds actually must be applied to the tax liability. LaRosa I, 56 Fed.Cl. at 104 (citing Rosenman, 323 U.S. at 662, 65 S.Ct. 536). The court stated that "it is not enough to place funds into a `suspense' account, or escrow, which merely functions as a surety against the future payment of said liability." Id. The court therefore granted summary judgment for the government on the underpayment interest issue.³ Id. As noted above, the court subsequently granted summary judgment for taxpayers on the government's counterclaim for additional interest on unpaid taxes, a ruling that the government has not appealed. See LaRosa II, 73 Fed.Cl. at 631.

After judgment was entered dismissing their complaints, taxpayers appealed. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3).

DISCUSSION

I.

Pursuant to I.R.C. § 6601, interest on a tax underpayment runs from the date the tax was due until the date the tax is paid.⁴ Taxpayers contend that their taxes should be deemed to have been fully paid when the IRS levied on their assets in December of 1985. According to taxpayers, after the attachment of the levy, "the IRS had full dominion and control over the levied assets." Taxpayers argue that the IRS was not required to escrow their funds, and that the IRS's control over their funds was maintained through the transfer to the escrow account and while the funds were in the account. Consequently, taxpayers urge, because there were no unpaid taxes once the IRS levied on their assets and while their funds were in escrow, underpayment interest stopped accruing, and they are entitled to a refund of the interest they paid from the date of the levies until the date of the payments that settled the Tax Court litigation.

The government responds that underpayment interest did not stop accruing at the time of the levies on taxpayers' assets because the IRS did not realize funds from the levies and did not apply taxpayers' funds to satisfy the jeopardy assessments made against taxpayers. The government further argues that this continued to be the case while taxpayers' funds were being held in escrow. Thus, the government argues, the Court of Federal Claims did not err in granting summary judgment in its favor.

The parties' contentions squarely frame the issue before us. The issue is whether taxpayers are entitled to a refund of underpayment interest on the theory that, once the levies on their assets were made and the escrow account was created, the IRS had actual or constructive possession of their assets, thereby constituting payment of their tax liabilities so as to cause underpayment interest to stop accruing. This is an issue of law. We therefore review the decision of the Court of Federal Claims without deference. Mass. Bay Transp. Auth. v. United States, 254 F.3d 1367, 1372 (Fed.Cir.2001).

II.

For the following reasons, we hold that neither the levies nor the depositing of taxpayers' funds into the escrow account constituted payment of taxpayers' tax liabilities, so as to stop the accrual of underpayment...