Singleton v. U.S., 96-1924

• Decision Date: 20 October 1997
• Docket Number: No. 96-1924,96-1924
• Parties: -7360, 97-2 USTC P 50,849 Carroll Eugene SINGLETON, and Sheila Singleton, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 833

128 F.3d 833

80 A.F.T.R.2d 97-7360, 97-2 USTC P 50,849

Carroll Eugene SINGLETON, and Sheila Singleton, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 96-1924.

United States Court of Appeals, Fourth Circuit.

Argued May 7, 1997.

Decided Oct. 20, 1997.

ARGUED: David D. Dahl, Charles Edward Nichols, Jr., Manning, Fulton & Skinner, Raleigh, NC, for Appellants. Thomas Vincent Linguanti, United States Department of Justice, Washington, DC, for Appellee. ON BRIEF: Loretta C. Argrett, Assistant Attorney General, David English Carmack, Janice McKenzie Cole, United States Attorney, United States Department of Justice, Washington, DC, for Appellee.

Before NIEMEYER and HAMILTON, Circuit Judges, and LEGG, United States District Judge for the District of Maryland, sitting by designation.

Reversed by published opinion. Judge LEGG wrote the majority opinion, in which Judge HAMILTON joined. Judge NIEMEYER wrote a dissenting opinion.

LEGG, District Judge:

This appeal arises from an entry of judgment for the government by the United States District Court for the Eastern District of North Carolina. On May 8, 1996, the district court granted the government's motion for summary judgment, denying the Singletons' cross-motion for summary judgment. The court subsequently amended its judgment on June 24, 1996, to adjust the calculation of interest. The Singletons filed this appeal.

I.

In August 1988, the Singletons filed a joint federal individual income tax return for 1987. With their return, they submitted a Form 3800--General Business Credit, indicating a business credit carryforward of $92,429. Based on the advice of their tax preparer, the Singletons reported, however, that they were ineligible to receive a credit for the full amount, and were entitled to a credit of only $423. ¹

Accordingly, the Singletons reported that their total 1987 tax liability was $160,370 ($160,793 tax liability--$423 general business credit). Because they had made total payments of $190,661, they reported that they were entitled to a refund of the $30,291 difference.

On October 3, 1988, the Internal Revenue Service ("IRS") sent the Singletons a Correction Notice stating: "[A]n error was made when your general business credit was figured on your form 3800." ² (J.A. 76). Under the IRS' calculations, the Singletons were entitled to a business credit carryforward of $92,429, not merely $423. Accordingly, the IRS refunded to the Singletons an additional $92,006 ($92,429 credit due--$423 credit already taken). ³

Nearly three years later, on January 28, 1991, the IRS advised the Singletons that it had increased their tax liability for 1987 by $1,173, based on changes in the laws governing the alternative minimum tax. (J.A. 77). Shortly thereafter, on February 11, 1991, the IRS again wrote the Singletons, stating that: "As a result of recent changes in the tax laws, rulings, or regulations, we changed your tax return for the above tax year to correct your minimum tax or alternative minimum tax and other credits." (J.A. 79). This second letter stated that the Singletons' tax liability for 1987 had been recalculated, increasing it by $93,179 plus statutory interest of $34,012.96. ⁴ The IRS assessed the $127,191.96 total and demanded immediate payment. No "notice of deficiency" was issued by the IRS.

Having no notice of deficiency, the Singletons were unable to challenge this assessment in United States Tax Court. ⁵ Consequently, to forestall lien foreclosure on their primary residence, the Singletons sold their beach house, turning the proceeds over to the IRS, and entered into an installment agreement to pay $1,750 per month. The Singletons paid the entire $93,179 principal balance, but only paid a fraction of the accrued interest ($58,965.19 as of September 11, 1995).

Having avoided foreclosure, the Singletons then sought a refund from the IRS on August 31, 1992. When none was forthcoming they filed this action. The government filed a counterclaim for the unpaid statutory interest under 26 U.S.C. § 6601. Both parties moved for partial summary judgment as to liability.

In their summary judgment motion, the Singletons contended that the 1991 assessment was unlawful because the IRS failed to follow required statutory procedures. Under § 6213(a), the IRS is prohibited from assessing a deficiency unless it first issues a notice of deficiency to the taxpayer. After issuing the notice, the IRS must wait 90 days before assessing and collecting the amount due, to give the taxpayer an opportunity to litigate the deficiency in Tax Court. Id.

The government, in response, argued that the procedures outlined in § 6213(a) were not required here. It contended that the Singletons' 1987 return was correct, and that IRS mistakes resulted in an erroneous refund to the Singletons in 1988. When the IRS realized its mistake, in 1991, the government argued, it properly made a "supplemental assessment," pursuant to 26 U.S.C. § 6204, for the full amount of tax reported on the Singletons' original return. Under § 6204, the government asserted, the IRS may make a supplemental assessment, "whenever it is ascertained that any assessment is imperfect or incomplete in any material respect." Id. In addition, the government claimed that the IRS was not required to issue a notice of deficiency prior to making a supplemental assessment, because the Singletons' erroneous refund was of a type exempted from such procedural requirements.

In support of this argument, the government contended that the procedures followed in making a supplemental assessment depend upon whether the refund is a "rebate refund" or a "non-rebate refund."

A rebate refund, the government argued, occurs when the IRS determines that a taxpayer's liability under the Code is less than the amount reported on his or her return. 26 U.S.C. § 6211(b)(2). In other words, it occurs when the IRS reviews a taxpayer's return, determines that the taxpayer overcalculated his or her tax liability, and then refunds the overpayment. Id. If the IRS were to later recalculate and determine that it had misapplied the tax rules and regulations, it could collect the erroneous rebate refund by making a supplemental assessment. ⁶ 26 U.S.C. § 6204. This supplemental assessment, the government conceded, should be preceded by a "notice of deficiency." 26 U.S.C. § 6213(a).

The government contended, however, that there is a second category of refunds which is excepted from this notice of deficiency requirement. These so-called "non-rebate" refunds are returned to the taxpayer not because of a determination that no tax is owed, but because of a mistake, such as a computer error. See O'Bryant, 49 F.3d at 342. For example, a non-rebate refund occurs when the IRS accidentally credits a taxpayer's payment twice. Id.

In this case, the government argued that the $92,006 refund issued to the Singletons was a non-rebate refund. As a result, it contended, the IRS was entitled to make a corrective, supplemental assessment in 1991 to reclaim the erroneous refund--without first issuing a notice of deficiency. The government explained that no notice was required because the erroneous refund was issued by mistake, and the Singletons' tax liability, as reported on their 1987 return, never changed. ⁷

Alternatively, the government argued to the district court that the Singletons had "waived" their right to a refund when they signed the installment agreement, effectively admitting that they were entitled to a business credit of only $423 (not $92,429).

The district court rejected the government's supplemental assessment argument, holding that the IRS was required to issue a notice of deficiency before it lawfully could assess and collect the $92,006 liability. The court accepted the government's alternative argument, however, that the Singletons' installment agreement constituted a waiver of their right to a refund. Accordingly, the court granted judgment for the government as to the $92,006 tax debt and the $58,965.19 unpaid statutory interest. The Singletons then filed this appeal. ⁸

II.

The issue on appeal is whether the IRS was required by statute to issue a notice of deficiency to the Singletons prior to making its 1991 supplemental assessment. ⁹

On appeal, the Singletons reiterate the argument they made to the district court: that the IRS must, before assessing and collecting this tax liability, follow the statutory procedures in 26 U.S.C. § 6213(a), including first issuing a notice of deficiency. In response, the government concedes that the IRS did not follow these procedures. It contends, however, that the IRS was not required to do so because the 1991 assessment was merely a supplemental assessment to reclaim an erroneous non-rebate refund. In support of this argument, the government re-asserts the purported distinction between rebate and nonrebate refunds which it argued to the district court.

In addition, the government explains that no notice of deficiency was required because, by definition, no deficiency existed. A "deficiency" can be defined loosely as the amount by which a taxpayer's liability exceeds the tax reported on his or her return. ¹⁰

Technically, the government argues, the Singletons had no deficiency. Their 1987 tax return reported liability of $160,370, the same amount assessed by the IRS ($68,364 in 1988 + $92,006 in 1991). There were no "rebates," the government contends, because the Singletons' $92,006 refund was of the non-rebate variety. ¹¹ As a result, the government argues, the refund should not be included in the deficiency calculation, resulting in a deficiency of zero. Because no deficiency exists, the government argues, no notice of deficiency needed to be issued. The Court rejects this argument.

A.

IRS procedures for assessing taxes have been succinctly summarized by the Seventh Circuit as follows:

Typically, when the IRS receives a tax return it evaluates the return...