Moran v. U.S.

• Decision Date: 24 August 1995
• Docket Number: 94-3874,Nos. 94-3654,s. 94-3654
• Citation: 63 F.3d 663
• Parties: -6104, 95-2 USTC P 50,459 Owen A. MORAN and Jean B. Moran, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 663

63 F.3d 663

76 A.F.T.R.2d 95-6104, 95-2 USTC P 50,459

Owen A. MORAN and Jean B. Moran, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

Nos. 94-3654, 94-3874.

United States Court of Appeals Seventh Circuit.

Argued May 18, 1995.

Decided Aug. 24, 1995.

Thomas A. Pasquesi (argued), Theodore A. Pasquesi, Pasquesi, Cengel & Pasguesi, Highland Park, IL, for Owen A. Moran and Jean B. Moran.

Gary R. Allen, Gilbert S. Rothenberg, Robert L. Handros, Dept. of Justice, Tax Div., Appellate Section, Sally J. Schornstheimer (argued), Dept. of Justice, Tax Div., Washington, DC, for U.S.

Before FLAUM and MANION, Circuit Judges, and SHARP, ^* District Judge.

FLAUM, Circuit 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.

I.

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, 65 S.Ct. 536, 89 L.Ed. 535 (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 a tax has actually been paid. The court apparently rejected the government's counterclaim too, although it did so without directly addressing the issue in its written opinion. This appeal followed.

II.

On appeal, the government raises a number of arguments based on both the merits of and our jurisdiction over this case. It first argues that the Morans had no right to a refund because they did not overpay their taxes. It also asserts that 26 U.S.C. Sec. 6511(a) deprived the district court of jurisdiction over the case because the refund claims were untimely, coming more more than three years after the returns were due and more than two years after the taxes were paid. The government similarly contends that 26 U.S.C. Sec. 6512 abrogated jurisdiction because it prohibits a suit for a refund in a district court where the taxpayer has filed a petition in the tax court with respect to a notice of deficiency regarding the same matter. All these contentions essentially hinge on one issue: whether the remittances made by the Morans in 1985 and 1986 were payments of tax or deposits that the IRS converted into payments in September, 1991. We review the district court's decision on this legal question de novo. Hefti v. I.R.S., 8 F.3d 1169, 1171 (7th Cir.1993). ¹

Initially, determining whether the Morans made a deposit or a payment depends on what significance attaches to a formal IRS tax assessment. A refund suit like the Morans' will lie only where the government has collected more money from the taxpayer than it had a right to take. An assessment often precedes any tax collection, but that is not necessarily the case. In Lewis v. Reynolds, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293 modified, 284 U.S. 599, 52 S.Ct. 264, 76 L.Ed. 514 (1932), an estate administrator sought a refund after paying taxes following an audit. The administrator claimed that deductions for state taxes should have been allowed. The IRS responded by determining that even if the administrator were correct, the administrator had not been entitled to certain other deductions he had taken for attorney's fees. The administrator replied that the time for collecting and assessing those other deductions had passed, and the IRS cannot offset a valid refund claim with money allegedly owed but basically uncollectable. The Court adopted the position of the IRS. Quoting the Tenth Circuit's decision below, the Supreme Court noted:

While no new assessment can be made, after the bar of the statute has fallen, the taxpayer, nevertheless, is not entitled to a refund unless he has overpaid his tax. The action to recover on a claim for refund is in the nature of an action for money had and received and it is incumbent upon the claimant to show that the United States has money which belongs to him.

Id. at 283, 52 S.Ct. at 146.

Thus, an assessment is not a prerequisite to tax liability. Though the Morans make it out to be more, an assessment is only a formal determination that a taxpayer owes money. Stevens v. United States, 49 F.3d 331, 336 (7th Cir.1995). It is more or less a bookkeeping procedure that permits the government to bring its administrative apparatus to bear in collecting a tax. Laing v. United States, 423 U.S. 161, 170 n. 13, 96 S.Ct. 473, 479 n. 13, 46 L.Ed.2d 416 (1976); 26 U.S.C. Sec. 6203. Indeed, our tax system would function poorly were not most taxes "self-assessed." United States v. Boyle, 469 U.S. 241, 249, 105 S.Ct. 687, 691, 83 L.Ed.2d 622 (1985). A formal IRS assessment is an important determination in many cases, and the threat of one is a significant means of maintaining a system of voluntary compliance, see United States v. National Bank of Commerce, 472 U.S. 713, 721, 105 S.Ct. 2919, 2924, 86 L.Ed.2d 565 (1985), but it is neither the beginning nor the end of tax liability. The Morans owed taxes, and the government's failure to assess them timely does not change that fact. The question is whether the government had the means by which to collect them. The government concedes that any taxes collected on the 1991 assessment would be untimely collected. The government maintains, however, that the Morans actually paid their taxes in 1985 and 1986, thus rendering any subsequent assessment unnecessary.

The Morans respond that the government was merely holding their 1985 and 1986 remittances as deposits. Unlike the Lewis administrator, who had paid taxes and then requested a refund, the Morans submit that they have never paid any tax. They instead point us to a line of cases, beginning with Rosenman v. United States, 323 U.S. 658, 65 S.Ct. 536, 89 L.Ed. 535 (1945),...