Principal Life Ins. Co. v. The United States

• Decision Date: 12 November 2010
• Docket Number: No. 07-0006T,07-0006T
• Parties: PRINCIPAL LIFE INSURANCE COMPANY AND SUBSIDIARIES, Plaintiff, v. THE UNITED STATES, Defendant.
• Court: U.S. Claims Court

PRINCIPAL LIFE INSURANCE COMPANYAND SUBSIDIARIES, Plaintiff,

v.THE UNITED STATES, Defendant.

No. 07-0006T

United States Court of Federal Claims

Filed: November 12, 2010

Tax refund suit; Cross-motions for partial summary judgment; Relationship between tax liability, assessments, and overpayments; Timeliness of assessment; 26 U.S.C. § 6204; Relationship between 26 U.S.C. §§ 6213(b)(4) and 6503(a); Conversion of deposit into payment; Rosenman and progeny; Rev. Procs. 84-58 and 2005-18; Deposits versus payments under the decisional law; Assessment timely; Even if untimely, no overpayment under 26 U.S.C. § 6401(a).

OPINION

Bruce Graves, Brown Winick, P.L.C., Des Moines, Iowa, for plaintiff.

Bart Duncan Jeffress, United States Department of Justice, Washington, D.C., with whom was Acting Assistant Attorney General John A. DiCicco, for defendant.

ALLEGRA, Judge:

"The procedural aspects of the tax laws are of overriding importance in many controversies," one commentator has noted, "eclipsing or making moot substantive issues such as the allowance of deductions or credits, recognition or deferral of income, and methods of accounting." Theodore D. Peyser, 627-3rd Tax Management Portfolio, "Limitations Periods, Interest on Underpayments and Overpayments, and Mitigation" at 1 (2010). At times, the questions spawned by these procedures take on an almost "metaphysical" cast, Baral v. United States, 528 U.S. 431, 436 (2000), like "when is taxable income taxed?" The ontology needed to solve such abstruse inquiries comes not from philosophical tomes, but from Chapters 63 through 66 of the Internal Revenue Code of 1986, which supply interfused rules mapping the contours of commonly-used, but frequently-misunderstood, tax concepts such as "assessment," "deposit," and "overpayment."

Though the background provided by these rules can be numbing in its intricacy, the dispute presented by the cross-motions for summary judgment pending before the court can be stated simply: Plaintiff, Principal Life Insurance Company and Subsidiaries (plaintiff or Principal) argues that it is entitled to certain overpayments because its taxes were not timely assessed by the Internal Revenue Service (IRS). Defendant responds that the taxes in question were timely assessed and that even if they were not, they are not recoverable as an overpayment. Plaintiff is wrong; defendant is right. It remains to explain why.

I. BACKGROUND

Plaintiff, an Iowa corporation with principal offices in Des Moines, is engaged, and at all times relevant to this action, was engaged, in the business of writing various forms of individual and group life and health insurance and annuities.

Plaintiff filed returns for its taxable years 1999 and 2000 and then entered into an agreement (on IRS Form 872) with the IRS extending the period to assess an income tax deficiency for those years until December 31, 2004. On December 29, 2004, the IRS issued its notice of deficiency claiming the following additions to taxes and penalties due from Principal:

Tax Year Ended	Tax Deficiency	Penalty	Total
Dec. 31, 1996	$ 8, 806, 758	$ 961, 609	$ 9, 768, 367
Dec. 31, 1997	22, 097, 933	780, 951	22, 878, 884
Dec. 31, 1998	37, 509, 413	7, 491, 744	45, 001, 157
Dec. 31, 1999	164, 888, 638	10, 848, 700	175, 737, 338
Dec. 31, 2000	128, 727, 605	7, 294, 419	136, 022, 024
Total	$ 362, 030, 347	$ 27, 377, 423	$ 389, 407, 770

On January 13, 2005, in order to stop the accrual of underpayment interest, plaintiff remitted to the IRS, via wire transfer, $444 million. That same day, plaintiff's attorney delivered a letter to the IRS designating the remittance as "a deposit in the nature of a cash bond" pursuant to section 6603 of the Code (26 U.S.C. § 6603) and section 4.01 of Revenue Procedure 84-58, 1984-2 C.B. 501, and designating portions of the deposit for each of plaintiff's taxable years 1996 through 2000.¹ The letter also specified that the entire deposit was made "with respect to a 'disputable tax' as that term is defined in section 6603(d)(2)(A) of the Code."²

After several conversations with the IRS, on January 28, 2005, plaintiff delivered another letter to the IRS requesting that, "[i]n accordance with Sections 3.02 and 3.03 of Revenue Procedure 2002-26," the IRS "now (today) apply the deposit for each year to payment of the federal income tax, interest and penalty in the following amounts for each year in ascending order: "

Year	Tax	Penalty	Interest
1996	$ 8, 806, 758	$ 961, 609	$ 2, 032, 704.38
1997	22, 097, 933	780, 951	1, 728, 429.98
1998	37, 509, 413	7, 491, 744	6, 303, 004.87
1999	164, 888, 638	10, 848, 700	24, 358, 720.79
2000	128, 727, 605	7, 294, 419	19, 182, 961.25

The letter further indicated that any portion of the deposit not applied to these amounts was to "be applied to payment of the deficiency for the year 2000 in the amount of $344,372.111," andthat any deposit remaining after the payment "of all deficiencies (including interest) for these years should be refunded."³ Although the IRS received this letter, it did not post the deposits to plaintiff's accounts for taxable years 1996 through 2000, as payments of tax, interest, and penalty.

On May 27, 2005, the IRS assessed deficiencies in income tax and penalties against plaintiff for taxable years 1996 through 2000, as outlined in the notice of deficiency. That same day, the IRS used plaintiff's deposit to pay the deficiencies assessed. Most of the deficiencies assessed for plaintiff's taxable years 1996 through 2000 were attributable to net operating or capital loss carrybacks, with the exception of assessments totaling $31,552, 157 in tax and $10,848, 700 in penalties for 1999, and $59,062, 216 in tax and $7,294, 419 in penalties for 2000.

On various dates, plaintiff timely filed refund claims with the IRS for all of the income tax and penalties, plus interest, assessed for taxable years 1996 through 2000. After receiving a notice of partial disallowance of these claims, plaintiff filed a tax refund suit in this court on January 4, 2007. On September 4, 2009, defendant filed a motion for partial summary judgment, focusing on issues concerning the validity of the assessments of the taxes in question.⁴ On October 2, 2009, plaintiff filed a cross-motion for partial summary judgment regarding the same issues.⁵ After briefing on the motions was completed, the court, on April 29, 2010, conducted oral argument on the cross-motions.

II. DISCUSSION

Plaintiff claims that certain of its tax liabilities were not timely assessed and that the portion of its "payments" attributable to these liabilities are overpayments which must be refunded. It relies, in this regard, primarily on section 6401(a) of the Code, which provides that "[t]he term 'overpayment' includes that part of the amount of the payment of any internal revenue tax which is assessed... after the expiration of the period of limitations properly applicable thereto." 26 U.S.C. § 6401(a). Defendant believes that this provision is inapplicable for two reasons. First, it asserts that the liabilities in question were timely assessed, rendering this provision inapposite. Second, it contends that even if the liabilities in question were not timely assessed, their payment did not result in "overpayments" refundable under section 6401(a).

To put these disputes in context, it is useful to begin by summarizing a few of the basic rules governing "assessments" and "overpayments."

A. (Very) General Rules Involving Assessments and Overpayments

Liability of any corporate taxpayer for federal income tax arises upon its receipt of "taxable income." 26 U.S.C. § 11(a). The fixing of that liability does not depend upon any subsequent "assessment"-the latter term a reference to "a 'recording' of the amount the taxpayer owes the Government." Hibbs v. Winn, 542 U.S. 88, 100 (2004) (quoting 26 U.S.C. § 6203).⁶ This view is confirmed by various provisions of the Code, among them 26 U.S.C. § 6151(a), which specifies that "when a return of tax is required... the person required to make such return shall, without assessment... pay such tax to the internal revenue officer with whom the return is filed, and shall pay such tax at the time and place fixed for filing the return." See also 26 U.S.C. §§ 6012(a); 6072(b). Hence, on the date a return is filed, "the taxpayer has a positive obligation to the United States to pay its tax." Manning v. Seeley Tube & Box Co., 338 U.S. 561, 565 (1950); see also Fleetboston Fin. Corp. v. United States, 68 Fed. Cl. 177, 179 (2005) ("The last date prescribed for the payment of tax is the due date for the tax return on which the tax is reported."). And this obligation arises and persists whether vel non that tax is assessed. See Baral, 528 U.S. at 1009; United States v. Kelley, 539 F.2d 1199, 203 (9th Cir. 1976), cert. denied, 419 U.S. 963 (1976) ("Tax liability is imposed by statute independent of anyadministrative assessment."); Philip N. Jones, "The Supreme Court Clarifies the Role of Assessments in Tax Controversies," 92 J. Tax'n 275, 277 (2000) (hereinafter "Jones").⁷

So if an "assessment" does not fix a taxpayer's income tax liability, what does it do? Even a cursory review of the Code reveals that the concept is important to the administration of the tax laws. Thus, section 6201(a) of the Code provides that "[t]he Secretary is authorized and required to make... assessments of all taxes... imposed by this title which have not been duly paid... at the time and in the manner provided by law," including "all taxes determined by the taxpayer or by the Secretary as to which returns or lists are made under this title." See also Hibbs, 542 U.S. at 100 n.3 (discussing this provision). Section 6501(a) of the Code further proclaims that "the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed," adding that "no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period." 26 U.S.C. § 6501(a). And section 6303(a)...