U.S. v. Peterson
| Decision Date | 08 September 2010 |
| Docket Number | No. CV 08-3160,CV 08-3160 |
| Citation | 738 F.Supp.2d 869,106 A.F.T.R.2d 2010 |
| Parties | UNITED STATES of America, Plaintiff, v. Randal J. PETERSON and Valera L. Peterson, Defendants. |
| Court | U.S. District Court — Central District of Illinois |
Douglas W. Snoeyenbos, U.S. Dept. of Justice, Washington, DC, for Plaintiff.
Thomas H. Wilson, Sorling Northrup Hanna Cullen & Cochran, Springfield, IL, for Defendants.
This matter comes before the Court on Plaintiff United States' Motion for Summary Judgment (d/e 13) (Government Motion) and Defendants Randal J. Peterson and Valera L. Peterson's Motion for Summary Judgment (d/e 14) (Peterson Motion). The Government brought this action to recover erroneously paid refunds from the Petersons' 1997 and 2002 joint income tax returns, pursuant to 26 U.S.C. § 7405. For the reasons set forth below, the Motions are allowed in part and denied in part.
The Petersons are married and filed joint income tax returns in 1997 and 2002. The Petersons reported in their 1997 tax return that they had an adjusted gross income of $785,823.00 and a total tax liability of $297,090.00. The Petersons paid this tax liability with estimated tax payments. The Petersons reported in their 2002 tax return that they had an adjusted gross income of $828,716.00 and a total tax liability of $320,342.00. They paid this tax liability with a combination of withholding and estimated tax payments. Stipulation of Facts (d/e 12), ¶¶ 1, 2.
On April 8, 2006, the Petersons filed amended tax returns for 2002 and 1997. The 2002 amended return claimed a net decrease in income of $1,219,206.00 resulting in a negative gross income of $390,490.00. The Petersons made the following statement in the return:
This return is intended to claim as an ordinary business loss all monies expended by the taxpayer in capital contributions, legal fees, loan guarantees and other expenditures. The taxpayer acknowledges that some of these expenses may be in the nature of a capital loss, but given the lack of reporting from the pass-thru entities, has elected to protect his interests by asserting the maximum claim in the absence of complete facts.
Id. ¶ 3. The Petersons claimed a refund of $281,559.00. The Petersons' 1997 amended return claimed a refund of tax in the amount of $148,765.00 based on the carry back of the net operating loss from 2002 in the amount of $364,728.00. Id. ¶ 3, 4.
The Internal Revenue Service (IRS) issued checks on July 17, 2006, to the Petersons for income tax refunds for 1997 and 2002. The checks were dated July 14, 2006. The 1997 refund check was for $148,765.00, representing tax principal only. The 2002 refund check was for $334,979.21, representing $281,559.00 in tax and $53,420.21 in interest. The Petersons negotiated both checks. The 1997 refund check cleared the Federal Reserve on July 21, 2006. The 2002 refund check cleared the Federal Reserve on July 25, 2006. The Government filed this action on July 25, 2008. Id. ¶ 5-7, 10.
The Petersons actually incurred ordinary business losses of $605,961.78 in 2002, rather than $1,219,206.00. If the $605,961.78 was applied as deductions to the Petersons' 2002 income tax liability, then the Petersons' corrected income tax liability for 2002 would be $81,355.00. Interest on the overpayment from April 15, 2003, to July 17, 2006, would be $45,345.34. Under this computation, $50,646.87 of the 2002 refund was erroneous. Id. ¶¶ 8, 10.
Under this computation, there was no excess loss to carry back to 1997 tax year. The parties, however, stipulate:
Shortly before this suit was filed, the two-year statutory period of limitations in 26 U.S.C. § 6532(b) expired with respect to the commencement of an actionto recover, as an erroneous refund, the refund that was issued to the defendants for the year 1997. (This stipulation shall not be construed to waive the United States' contention that the erroneous refund for 1997 may be offest against the refund that was claimed by the Petersons for the year 2002, so that a portion of the 2002 refund that was made to the Peterson may be considered erroneous under the doctrine of recoupment and may be recovered for that reason.)
Id. ¶ 9. The Government further makes no claim that the Petersons committed any fraud in filing the amended returns in 2006 or claiming therein the refunds for 1997 and 2002. Complaint (d/e 1); United States' Motion for Summary Judgment (d/e 13), at 5.
Both parties move for summary judgment. At summary judgment, the moving party must present evidence that demonstrates the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The Court must consider the evidence presented in the light most favorable to the non-moving party. Any doubt as to the existence of a genuine issue for trial must be resolved against the moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Once the movant has met its burden, the non-moving must present evidence to show that issues of fact remain with respect to an issue essential to its case, and on which it will bear the burden of proof at trial. Celotex Corp., 477 U.S. at 322, 106 S.Ct. 2548; Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
The Government filed this action to recover part of the 2002 refund and all of the 1997 refund. Complaint, at 2. The Internal Revenue Code (Code) authorizes the Government to recover an erroneous refund. 26 U.S.C. § 7405. The Government must bring a § 7405 action within two years of payment of the refund. 26 U.S.C. § 6532(b). The two-year statute starts to run when the refund check clears the Federal Reserve and is actually paid. O'Gilvie v. United States, 519 U.S. 79, 91, 117 S.Ct. 452, 136 L.Ed.2d 454 (1996). The 1997 refund check cleared on July 21, 2006, and the 2002 refund check cleared the Federal Reserve on July 25, 2006. The Government commenced this action on July 25, 2008. The Government concedes that the claim for the 1997 refund check is barred. The Petersons are, therefore, entitled to partial summary judgment for the Government's claim to recover the 1997 refund payment on July 21, 2006. The remaining issue is the amount of the 2002 refund check that may be recovered as erroneously paid.
To prevail on an erroneous refund suit, the Government must show: (1) that a refund was paid to the taxpayers, (2) the amount of the refund, (3) the Government's action is timely, and (4) the taxpayers were not entitled to the refund which the Government seeks to recover. United States v. Commercial Nat. Bank of Peoria, 874 F.2d 1165, 1169 (7th Cir.1989). The parties agree that the Government established the first three elements with respect to the 2002 refund. The issue is the amount of the 2002 refund that was erroneously paid.
The Government claims that it made two errors when it paid the 2002 refund: (1) the Government miscalculated the 2002 refund by $50,646.87; and (2) the Government erroneously failed to exercise its common law right of setoff or recoupment to retain $148,765.00 in satisfaction of its then existing claim against the Petersons to recover the erroneous 1997 refund.The Petersons concede the $50,646.87 is due and owing as an erroneous payment. The Government, therefore, is entitled to partial summary judgment on this portion of the claim of erroneous payment in the 2002 refund. The only issue is the Government's claim that the $148,765.00 was erroneously paid.
The Government first asserts that it could have kept the $148,765.00 on July 25, 2006, under the common law theory of setoff, but erroneously failed to do so.1 The Government may use common law remedies to recover money owed to it, including setoff. See e.g., United States v. Maxwell, 157 F.3d 1099, 1102 (7th Cir.1998); United States v. Tafoya, 803 F.2d 140, 141-42 (5th Cir.1986); Dunn & Black, P.S. v. United States, 492 F.3d 1084, 1093 n. 10 (9th Cir.2007). The common law right of setoff may be invoked when two parties owe each other mutual, mature, and liquidated debts. See e.g., In re Clark Retail Enterprises, Inc., 308 B.R. 869, 895 (Bankr.N.D.Ill.2004); In re Allen-Main Associates, Ltd. Partnership, 233 B.R. 631, 635 (Bankr.D.Conn.1999); Willett v. Lincolnshire Management, Inc., 302 A.D.2d 271, 756 N.Y.S.2d 9, 10 (N.Y.A.D. 1st Dept.2003); Bank of Chicago-Garfield Ridge v. Park Nat. Bank, 237 Ill.App.3d 1085, 1091-92, 179 Ill.Dec. 240, 606 N.E.2d 72, 76 (Ill.App. 1st Dist.1992); Rexius Forest By-Products, Inc. v. A & R Lumber Sales, Inc., 112 Or.App. 114, 117, 827 P.2d 1359, 1361 (Or.App.1992); Nutter v. Occidental Petroleum Land & Development Corp., 117 Ariz. 458, 460, 573 P.2d 532, 534 (Ariz.App.1977).
In this case, issues of fact exist regarding whether the offsetting debts were mutual, mature and liquidated. At a minimum, it is unclear whether the debts were liquidated.2 A debt is liquidated if the amount owed can be easily ascertained without intervention of the courts to determine. Bank of Chicago-Garfield Ridge, 179 Ill.Dec. 240, 606 N.E.2d at 76; Rexius Forest By-Products, Inc., 827 P.2d at 1361. The 1997 refund and the 2002 refund were both based on the Petersons' net operating loss deduction in the 2002 tax year. The Petersons did not know if the 2002 loss deduction was accurate because of the "lack of reporting from the pass-thru entities." Stipulation of Facts ¶ 3. The quoted statement indicates that the actual amount of the loss deduction could not have been readily ascertained when the Petersons filed the amended returns on April 8, 2006. If so, then theamount that each party actually owed the other was uncertain on July 25, 2006. On the other hand, the parties have stipulated that the Petersons' actual ordinary business losses were $605,961.78. Id. ¶ 8. When viewed favorably to the Government, this stipulation supports an inference that the amount of...
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