Pacific Gas and Elec. Co. v. US, 03-5173.

• Decision Date: 10 August 2005
• Docket Number: No. 03-5173.,03-5173.
• Citation: 417 F.3d 1375
• Parties: PACIFIC GAS AND ELECTRIC COMPANY and PG & E Corporation, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

417 F.3d 1375

PACIFIC GAS AND ELECTRIC COMPANY and PG & E Corporation, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.

No. 03-5173.

United States Court of Appeals, Federal Circuit.

August 10, 2005.

Craig Martin Buchsbaum, Pacific Gas and Electric Company, of San Francisco, California, argued for plaintiffs-appellants.

Andrea R. Tebbets, Attorney, Tax Division, Appellate Section, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With her on the brief were Eileen J. O'Connor, Assistant Attorney General and Richard Farber, Attorney.

Before MICHEL, Chief Judge,^* ARCHER, Senior Circuit Judge, and BRYSON, Circuit Judge.

ARCHER, Senior Circuit Judge.

Pacific Gas and Electric Company and PG & E Corporation (collectively "PGE") appeal the United States Court of Federal Claims' judgment that the Internal Revenue Service ("IRS" or "Service") properly offset statutory interest that was erroneously paid to PGE ("erroneous interest") with respect to the tax year 1982, against a later refund of tax and interest determined to be due PGE for the same tax year. Pac. Gas & Elec. Co. v. United States, 55 Fed.Cl. 271 (2003) ("PGE I"). Because the IRS made this offset after the statute of limitations under 26 U.S.C. § 6532(b) would have precluded the government from filing suit to recover the erroneous interest, we reverse.

I

This case involves statutory interest erroneously paid to PGE for tax year 1982. PGE timely filed its 1982 tax return. PGE thereafter filed claims for refund for 1982 and the IRS made other adjustments with respect to that year, which are not necessary to detail. Suffice it to say that in August 1988, the IRS determined that PGE had overpaid its 1982 tax. In determining the statutory interest under 26 U.S.C. § 6611 to be paid to PGE on this overpayment, the IRS made errors in its calculation resulting in too much interest being paid to PGE.¹

PGE thereafter filed additional refund claims for tax and interest for the tax year 1982 primarily to claim certain statutorily authorized carryback adjustments from tax year 1984. In reviewing those refund claims, the IRS discovered the interest computation errors it had previously made in the August 1988 refund and determined that it had erroneously overpaid PGE $3,370,535 in statutory interest. The IRS then used the amount of this erroneous interest previously paid to PGE in 1988 to offset and reduce the tax and interest for the tax year 1982 that it refunded to PGE in 1992.

PGE filed suit in the Court of Federal Claims, contending it was entitled to the additional amount of $5,037,109 in connection with the 1992 refund.² PGE argued that the IRS was not permitted to offset such erroneous interest against its allowable refund of tax and interest in 1992 because it was done after the expiration of the statute of limitations for filing suit to recover an erroneous refund under 26 U.S.C. § 7405. 26 U.S.C. §§ 7405, 6532(b). The government argued that its use of the offset was permissible. Both parties moved for summary judgment.

The Court of Federal Claims held that the IRS's offset action in 1992 was proper. PGE I, 55 Fed.Cl. at 277. Although recognizing that a suit under 26 U.S.C. § 7405 for the amount of the erroneously paid interest would have been time-barred, the court said "there is no provision in the Internal Revenue Code forbidding the administrative remedy the Service chose here." Id. at 276. The court was not persuaded by PGE's efforts to distinguish precedent the court found controlling. Specifically, the court explained:

The most clearly applicable precedents, Lewis, Dysart, and Fisher, all contemplate the allowance of an offset by the government when, as here, the same tax, taxpayer, and tax year are at issue. Plaintiff has attempted to distinguish the facts of this case from Lewis and Fisher.... The most important fact for the court is that this case involves the same tax, with the same taxpayer, for the same tax year. As the Court of Appeals for the Federal Circuit stated in Fisher, "Lewis and Dysart together stand for the proposition that the government may offset against a tax refund claim any additional amounts the taxpayer owes with respect to the tax shown on the return, even though the statute of limitations would bar assessing the additional amount owed." 80 F.3d at 1579. Here, plaintiff received an amount in overpayment with respect to tax year 1982. By requesting another refund in 1992 with respect to tax year 1982, plaintiff opened the door to the Service's offsetting the 1988 overpayment amount. Therefore, the Service's action in 1992 was legal.

Id. at 277. The court further determined that the offset was implemented correctly.

PGE now appeals the issues of whether the offset was permissible and, if it was, whether the IRS implemented it properly. We have jurisdiction under 28 U.S.C. § 1295(a)(3).

II

"We review the Court of Federal Claims' grant of summary judgment without deference." Agwiak v. United States, 347 F.3d 1375, 1377 (Fed.Cir.2003).

III

We must determine whether the IRS was entitled to offset the erroneous interest paid to PGE in 1988 against amounts due and owing PGE on a subsequent refund relating to the same tax year when the government could not have maintained a suit for such erroneous interest due to the expiration of the statute of limitations. See 26 U.S.C. §§ 7405, 6532(b). Surprisingly, this issue appears be one of first impression.³

PGE argues that when a taxpayer receives an erroneous refund of statutory interest it is not a tax liability but an ordinary debt obligation to the government. Thus, such erroneous interest mistakenly paid cannot be assessed or collected by the IRS in the same manner as a tax liability. PGE contends that it must be recovered, if at all, only by suit for an erroneous refund under 26 U.S.C § 7405 or by means otherwise afforded to the government for collection of debts (e.g., through a common-law right of offset, provided that the right is exercised within the period of limitations applicable to suits brought under 26 U.S.C. § 7405). PGE also asserts that there is no statutory or regulatory basis for extending the Supreme Court's decision in Lewis v. Reynolds, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293 (1932), and its progeny to non-tax liabilities.

The government responds simply that under Lewis v. Reynolds and its progeny the taxpayer's 1992 claim for refund of its 1982 overpayment reopened its entire 1982 liability to redetermination by the IRS. As such, it argues that the remedy of offset was available to the IRS.

A

Lewis v. Reynolds was an income tax refund suit in which, in response to the refund claimed, the Commissioner of Internal Revenue determined that a deduction taken on the return, which was previously allowed, had been improperly taken. In determining the amount of the refund, the improper deduction was disallowed by the Commissioner. The limitations period for assessing an additional tax to reflect the disallowance of the deduction had passed when the Commissioner acted. The Supreme Court agreed with the Court of Appeals' conclusion that the relevant statutory provisions "clearly limit refunds to overpayments. It follows that the ultimate question presented for decision, upon a claim for refund, is whether the taxpayer has overpaid his tax and this involves a redetermination of the entire tax liability." Id. at 283, 52 S.Ct. 145 (quoting Lewis v. Reynolds, 48 F.2d 515, 516 (10th Cir.1931) (emphasis added)). Affirming the Commissioner's action, the Court stated:

While the statutes authorizing refunds do not specifically empower the Commissioner to reaudit a return whenever repayment is claimed, authority therefor is necessarily implied. An overpayment must appear before refund is authorized. Although the statute of limitations may have barred the assessment and collection of any additional sum, it does not obliterate the right of the United States to retain payments already received when they do not exceed the amount which might have been properly assessed and demanded.

284 U.S. at 283, 52 S.Ct. 145 (emphases added). Thus, the Court simply applied the statutory provisions dealing with refunds⁴ which require that an overpayment must be shown by the taxpayer before a refund can be authorized. Accordingly, where the taxpayer has filed a claim for a tax refund, the IRS may offset against the refund claim a tax deficiency for the same tax year that previously had not been assessed, even though the assessment of such tax is barred by the expiration of the applicable period of limitations. Otherwise, a refund might be made when there was not, in fact, an "overpayment," an event that would be inconsistent with the statute. See supra at n. 4, 3.

This defense of "lack of overpayment," permitting the government to offset a refund claim with a tax deficiency for the same tax year owed by the same taxpayer, was further explored by our predecessor court in Dysart v. United States, 169 Ct. Cl. 276, 340 F.2d 624 (1965). In this case, the taxpayer sought a refund of an erroneously assessed and collected penalty for the tax year 1954. The government conceded that the penalty was collected in error but claimed an offset in view of a tax deficiency that exceeded the penalty, despite the fact that the statute of limitations barred the assessment of the tax deficiency.⁵ The court ruled that "the tax penalty is an addition to the tax, 26 U.S.C. § 294 (1952), and as such is considered as part of the income tax for the taxable year. See Rev.Rul 56 — 492, 1956 WL 10960; 1956 — 2 Cum.Bul. 949." Id. at 626 n. 1.

Another issue before the court was "whether in a suit for refund where both the taxpayers' claim and the government's setoff concern the same tax for the same year by the same taxpayers, the right of the government to assert such a defense is an unconditional right ... or whether ... such a right is subject to the court's...