1994 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

10-4-1994

Freck v. IRS

Precedential or Non-Precedential:

Docket 93-7007

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Recommended Citation

"Freck v. IRS" (1994). 1994 Decisions. Paper 151.

http://digitalcommons.law.villanova.edu/thirdcircuit_1994/151
 UNITED STATES COURT OF APPEALS 

 FOR THE THIRD CIRCUIT 

 ___________ 

 No. 93-7007 

 ___________ 

 LUCY FRECK, a/k/a Lucy Cameron, 

 Appellant 

 v. 

 INTERNAL REVENUE SERVICE, 

 Appellee 

 ___________ 

 Appeal from the United States District Court 

 for the Middle District of Pennsylvania 

 (D.C. Civil Action No. 90-02141) 

 

 ___________ 

 Submitted Under Third Circuit LAR 34.1(a) 

 July 21, 1993 

 PRESENT: STAPLETON, HUTCHINSON and ROTH, Circuit Judges

 (Filed October 6, 1994) 

 ____________ 

Lucy Freck 

P.O. Box 411 

Gilbert, PA 18331 

 Pro Se Appellant 

Michael L. Paup, Esquire 

 Acting Assistant Attorney General 

James J. West, Esquire 

 United States Attorney 

Gary R. Allen, Esquire 

Gilbert S. Rothenberg, Esquire 

Curtis C. Pett, Esquire 

United States Department of Justice 

Tax Division 

P.O. Box 502 
Washington, DC 20044 

 Attorneys for Appellee 
 ____________ 

 OPINION OF THE COURT 

 ____________ 

HUTCHINSON, Circuit Judge. 

 Appellant, Lucy Freck ("Freck"), a/k/a Lucy Cameron, 

appeals pro se a judgment the United States District Court for 

the Middle District of Pennsylvania entered against her and in 

favor of the United States on her claims for refunds of income 

taxes the Internal Revenue Service ("IRS")1 collected for 1978, 

1979, and 1980.2 During each of these three tax years, Freck and 

a man named William Cameron ("Cameron") signed and filed joint 

income tax returns. When Freck signed these returns, she thought 

that she was Cameron's common law wife but neither New York nor 

New Jersey, the only two states in which Freck and Cameron 

cohabitated, recognize common law marriage. Freck seeks refund 

of a payment of $32,500.00 that a lawyer remitted to IRS out of a 

settlement fund due her and her current husband, Stephen Freck, 

without instruction as to its application. The fund arose from 

 

1. The caption to this case lists Internal Revenue Service as 

appellee. Neither the Commissioner of the IRS nor the IRS is 

necessarily the proper party to a suit. See Brennan v. 

Commissioner, 581 F. Supp. 28, 29 (E.D. Mich.) (amending caption 

to read United States), aff'd, 752 F.2d 187 (6th Cir. 1984); 

Krouse v. United States Gov't Treasury Dep't, 380 F. Supp. 219 

(C.D. Cal. 1974). 

2. The district court entered judgment against Freck on the 

merits of her 1978 refund claim and dismissed Freck's claims for 

refunds for years 1979 and 1980 for lack of subject matter 

jurisdiction. Freck v. I.R.S., 810 F. Supp. 597, 601-02 (M.D. 

Pa. 1992). 
an unrelated state lawsuit settled in 1988. IRS contends it was 

entitled to the settlement funds by virtue of tax liens arising 

out of taxes assessed against Cameron and Freck on income 

attributable to Cameron for tax years 1978, 1979 and 1980 and, in 

the absence of instructions, that it was entitled to credit the 

payment first to interest and principal for the earliest years or 

in the manner most advantageous to the government. The district 

court concluded that Freck could not qualify for relief from the 

assessment under 26 U.S.C.A. § 6013(e)(1) (West Supp. 1994) as an 

innocent spouse because she was never married to Cameron. It 

then accepted IRS's argument that she was equitably estopped from 

asserting she was not liable for taxes on Cameron's income 

because of IRS's reliance on her innocent misrepresentation that 

Freck was Cameron's wife in giving him the benefit of the lower 

joint rates he was not entitled to as a single person during 

taxable years now closed. 

 Freck contends the settlement funds were paid to IRS by 

her adversary's counsel without her knowledge and that she had no 

opportunity to tell IRS how to apply them. She also argues that 

if she is barred from claiming an "innocent spouse" exemption 

under 26 U.S.C.A. § 6013(e)(1)3 because her common law marriage 

 

3. This exemption provides: 

 (e) Spouse relieved of liability in certain 

cases.-- 

 (1) In general.--Under regulations 

prescribed by the Secretary, if-- 
is not recognized by New York or New Jersey, she should be 

allowed to amend her returns to reflect her status as a single 

taxpayer for her own 1978, 1979 and 1980 tax years, all of which 

do remain open.4

(..continued) 

 (A) a joint return has been made 

under this section for a taxable 

year, 

 (B) on such return there is a 

substantial understatement of tax 

attributable to grossly erroneous 

items of one spouse, 

 (C) the other spouse establishes 

that in signing the return he or 

she did not know, and had no 

reasons to know, that there was 

such substantial understatement, 

and 

 (D) taking into account all the 

facts and circumstances, it is 

inequitable to hold the other 

spouse liable for the deficiency in 

tax for such taxable year 

attributable to such substantial 

understatement, 

 then the other spouse shall be relieved of 

liability for tax (including interest, 

penalties, and other amounts) for such 

taxable year to the extent such liability is 

attributable to such substantial 

understatement. 

26 U.S.C.A. § 6013(e)(1). 

4. A tax year may be closed by virtue of the statute of 

limitations or res judicata. Generally, the amount of any tax 

imposed must be assessed within three years after the return was 

filed, unless there has been a substantial omission from gross 

income in which case the tax may be assessed within six years 

after the return was filed. See 26 U.S.C.A. §§ 6501(a), 

6501(e)(1)(A) (West Supp. 1994). After these statutory periods 

of limitations have run, the tax year is closed for purposes of 
 The district court found the payment made on Freck's 

behalf was voluntary but failed to make any finding as to whether 

Freck had an opportunity to exercise her right to direct the 

application of that payment. We believe a taxpayer who 

volunteers a payment should be given an opportunity to tell IRS 

how to allocate her payment against any unsatisfied assessments 

against her. Therefore, we will remand the case for further 

proceedings so the district court can make a finding on whether 

Freck had that opportunity. Because of IRS's strict insistence 

(..continued) 

tax assessment unless certain stringent requirements, not 

applicable to this case, are met under 26 U.S.C.A. §§ 1311-14 

(West 1988) (allowing government to correct error made in prior 

closed tax year). 

 A claim for credit or refund of an overpayment of any tax for 

which the taxpayer is required to file a return must be filed 

within three years from the time the return was filed or two 

years from the time the tax was paid, whichever is later. If no 

return was filed by the taxpayer, the claim for a refund must be 

filed within two years from the time the tax was paid. See id.

§ 6511(a). 

 Freck's 1978, 1979 and 1980 tax years are open because IRS 

assessed the tax within six years after the returns were filed, 

and Freck sought a refund within two years after paying the 

assessment. However, it was not until after the statute of 

limitations had run on the prior years that IRS discovered Freck 

and Cameron were not married. Therefore IRS is time-barred from 

recalculating the taxes Cameron would have owed under the higher 

rate IRS contends should have been applied. Brief for Appellee 

at 33. IRS produced no evidence showing how much it lost by 

relying on Freck's innocent misrepresentation of her status as 

Cameron's spouse. Freck testified it was about $6,250.00. IRS's 

allocation of the payment left Freck with taxes of about 

$15,000.00 still due instead of about $2,500.00 that would still 

be due if the payments had been allocated as she wished. It also 

left her with a liability for $32,000.00 in interest that IRS 

continues to accrue on the $15,000.00 balance of tax that it 

claims. See infra notes 6 & 9 for original deficiencies and 

balances due after IRS allocation. 
on its legal right to allocate the payment made on Freck's behalf 

in the manner most advantageous to the government and so leave 

Freck with a large and ever-growing liability for an assessment 

of tax and interest on income that was not hers, we also believe 

the district court should not have accepted IRS's equitable 

estoppel argument without considering whether IRS's appeal to 

equity was foreclosed by the equitable maxim that he who desires 

equity must be willing to do equity. 

I. 

 Freck and Cameron lived together in New Jersey and New 

York for about ten years, from 1972 until 1982. Neither state 

recognizes common law marriages, and Freck and Cameron never took 

steps to legitimize their relationship through any type of formal 

ceremony. They did have three children. Cameron was the sole 

breadwinner for all five members of his family. He started his 

business career as a "runner" on the New York Commodity Exchange. 

In 1980, he incorporated the "L and B" Trading Corporation ("L 

and B") to conduct business as a commodities trader. He was "L 

and B's" sole stockholder. 

 IRS has been unable to produce the filed original of 

Freck's and Cameron's returns for any of the years in question. 

At trial, it offered what appears to be a copy of the 1978 tax 

return on which Freck's signature appears as Lucy Cameron. The 

district court admitted the copy. IRS does not have either 

originals or copies of Freck's or Cameron's returns for 1979 and 
1980, but records it also offered and admitted at trial indicate 

that joint returns were filed for these years. 

 Freck could not recall signing the tax returns but 

testified at trial she would probably have done so if Cameron had 

asked her to. Freck took no part in managing the family's 

finances beyond handling the basic household expenses out of an 

allowance Cameron provided her. Freck also said that if she did 

sign the joint returns for 1978, 1979, and 1980, she would have 

accepted the figures Cameron presented to her without any reason 

to believe they were false. 

 In October of 1979, Freck and Cameron purchased a home 

at 9 Euclid Avenue, Ridgefield Park, New Jersey. They made a 

$7,000.00 down payment and financed the $50,000.00 balance with a 

mortgage. Freck testified that she became aware that Cameron was 

experiencing financial difficulties as a result of his trading on 

the commodities exchange sometime during that year. By 1981, 

Cameron was in arrears on periodic payments due on the mortgage 

and delinquent on the real estate taxes assessed against the 

home. 

 On their 1978 tax return, Cameron reported a gross 

income of $13,200.00 and, improperly using the joint rates, 

claimed a refund of $703.00. In 1979, Freck and Cameron received 

a refund of $89.00, again with the improper benefit of the joint 

rates. In 1980, they reported a tax liability of $15,125.00 but 

failed to pay it. The district court found Freck acted 

innocently without any intent to mislead IRS. 
 In 1982, Freck and Cameron separated. Freck continued 

to reside at the 9 Euclid Avenue address; Cameron moved to 173 

Martin Avenue, Staten Island, New York. On February 23, 1983, 

Freck and Cameron sold a two-thirds interest in the residence at 

9 Euclid Avenue to Freck's brother and sister-in-law and a onethird interest to Freck's brother Thomas, for a total of 

$62,500.00. Freck and her three children continued to reside at 

9 Euclid Avenue, and Thomas later transferred his one-third 

interest in the property back to Freck. 

 Cameron's abandonment of his family forced Freck and 

her children to go on welfare in April 1983. They remained on 

the welfare rolls until January 1986, but Freck attended college 

during this time, and in 1986 she obtained full time employment 

as a secretary. In April 1987, Freck married Stephen Freck. The 

Frecks took up residence at 9 Euclid Avenue. 

 In 1983 IRS performed an audit and recalculated Freck 

and Cameron's tax liabilities, using the rates applicable to 

joint returns, as follows: 

1978 corrected taxable income $32,510.00 

 tax deficiency $ 7,118.005

1979 corrected taxable income $61,255.00 

 tax deficiency $19,778.00 

 

5. The IRS also assessed a fraud penalty of $3,559.00 against 

Cameron for the 1978 tax year. No fraud penalty was assessed 

against Freck. 
1980 corrected taxable income $36,158.00 

 tax deficiency $ 8,274.00

 Total Deficiencies $35,170.006

See Appendix ("App.") at 35, 38. 

 On December 9, 1983, IRS sent Freck and Cameron a 

statutory notice of deficiency by certified mail addressed to 173 

Martin Avenue and sent a copy of the notice to 9 Euclid Avenue, 

also by certified mail. The notice mailed to 173 Martin Avenue, 

Cameron's last known address, was returned to IRS marked "return 

to sender, moved left no address." Freck admits that she resided 

at 9 Euclid Avenue in December 1983 but denies receiving the 

notice of deficiency. When neither Cameron nor Freck paid the 

deficiencies or filed a timely petition for review by the Tax 

Court, see 26 U.S.C.A. §§ 6213-14, 7442 (West 1989), IRS assessed 

the deficiencies pursuant to section 6213(c) and, in June 1987, 

filed a notice of federal tax lien against 9 Euclid Avenue 

pursuant to 26 U.S.C.A. §§ 6321, 6323(f) (West 1989 & Supp. 

1994). 

 That same year, Freck became involved in a dispute with 

the brother and sister-in-law who had jointly acquired record 

title to a two-thirds undivided interest in the 9 Euclid Avenue 

property as a result of the 1983 sale. They filed an action in 

state court against the Frecks and her other brother Thomas. The 

parties agreed to settle this case in September 1988. Under the 

 

6. IRS's allocation of the $32,500.00 payment left Freck still 

owing about $15,000.00 in taxes. See supra note 4 and infra

note 9. 
settlement, the Frecks were to receive $40,000.00 in exchange for 

whatever interest they had in the 9 Euclid Avenue property.7 

 On September 27, 1988, Mark Winkler, Esquire of the law 

firm of Woodcock & Kingman mailed IRS a check for $32,500.00 from 

the settlement fund in exchange for a release of the tax lien 

against the property. The letter stated: 

 Pursuant to our conversation [today] 

enclosed please find a certified check in the 

amount of $32,500 concerning Lucy Freck and a 

copy of the closing statement. 

 As we discussed, upon receipt of the 

check you will release the discharge of 9 

Euclid Avenue, Ridgefield Park, New Jersey as 

recorded in Federal Lien Book 166 at page 

130, and the lien will be cancelled of record 

as to this property. 

App. at 47. The record contains a copy of a check dated 

September 27, 1988 made out to IRS in the amount of $32,500.00 

drawn on a bank account held by Woodcock & Kingman. The closing 

statement is not part of the record before us, and neither the 

letter nor the check reveal who Woodcock & Kingman represented. 

 Nevertheless, the district court found that Freck 

voluntarily made the payment to IRS through counsel. It noted 

 

7. Freck alleges that $20,000.00 of this sum was to be paid to 

her and the remaining $20,000.00 was to be paid to Stephen Freck. 

Stephen Freck is not a party to the action. Freck does not 

explain why her brother Thomas was not entitled to a share of the 

$40,000.00, and the record does not explain the means by which 

Thomas's interest passed to the Frecks. The district court, 

however, states that in Freck's brief she explained that "at some 

point, Thomas [] transferred his one-third interest in the Euclid 

Avenue property to Lucy Freck." Freck, 810 F. Supp. at 600; see

also Brief of Appellant at 3. 
that the issue of whether Freck had been given an opportunity to 

tell IRS how to allocate the payment had been raised during the 

bench trial but the court did not consider either the legal 

effect of any lack of opportunity to allocate a voluntary payment 

or make any finding of fact as to whether Freck had any such 

opportunity. In any event, Winkler gave no specific directions 

to IRS about how this amount was to be applied in his letter 

forwarding the Woodcock & Kingman certified check. 

 The IRS applied $19,435.19 of the $32,500.00 against 

penalties and interest it had accrued on the 1978 tax assessment 

and the principal assessed for that year, fully discharging 

Freck's liabilities for that year. The remaining $13,064.81 was 

then applied to Freck's 1979 tax assessment. IRS's records 

indicate that this left a balance for 1979 of about $39,000.00 

still outstanding against Freck as of December 31, 1991, made up 

of approximately $7,000.00 in taxes plus approximately $32,000.00 

in penalties and interest for that year.8 None of the $32,500.00 

 

8. On appeal, IRS's brief notes that as of January 16, 1992, 

Freck owed $39,782.12 for 1979 and $31,477.54 for 1980. Brief 

for Appellee at 15 note 2. It is not possible to determine 

independently from the record on appeal the amount and nature of 

the individual penalties involved. Presumably the 1979 and 1980 

liabilities continue to grow as interest accrues on the reduced 

balance. Assessments are generally presumed valid and establish 

a prima facie case of liability against a taxpayer, see United 

States v. Janis, 428 U.S. 433, 440-41 (1976); Welch v. Helvering, 

290 U.S. 111, 115 (1933); Psaty v. United States, 442 F.2d 1154, 

1158-61 (3d Cir. 1971). A taxpayer in a refund action has the 

burden of showing they are incorrect, id., but we are not certain 

how an inability or failure on IRS's part to balance its figures 

or explain why it cannot do so affects the assessments' 

presumptive validity. 
was left to apply to Freck's 1980 tax assessment of $7,827.00 or 

penalties and accrued interest on the 1980 deficiency.9

 Following Winkler's remittance of the $32,500.00 

payment to IRS, Freck's counsel, Robert Fee, filed amended 

returns seeking a refund on Freck's behalf for the years 1978, 

1979, and 1980. On these returns, Freck contended that her 

correct filing status was single and that she herself had no 

taxable income during any of these years. She therefore sought a 

$32,500.00 refund for the tax year 1978, $50.00 for 1979 and 

$50.00 for 1980.10 Freck also asserted that she was not aware 

that any tax deficiency had been asserted against her until July 

1990 when an IRS auditor in Allentown, Pennsylvania reviewed her 

1978 refund claim for $32,500.00 and denied it. 

 After IRS denied Freck's refund claims, she filed this 

action in district court pursuant to 28 U.S.C.A. § 1346(a)(1) 

(West 1993) to recover the $32,500.00 Attorney Winkler had sent 

IRS. The court granted Freck permission to proceed in forma

pauperis on January 25, 1991. IRS filed its answer on May 3, 

1991 and, on February 10, 1992, moved to dismiss Freck's action. 

 

9. Thus, after Freck had paid $32,500.00 against taxes of about 

$35,000.00 on income attributable to the man who deserted her, 

IRS asserts, on the basis of an equitable doctrine, that its 

reliance on an incorrect misstatement, on which the evidence on 

the record shows it lost approximately $5,200.00, justifies it in 

collecting from Freck about $47,000.00 more in principal and 

interest as of December 31, 1991 with simple interest on a 

$15,000.00 balance of principal continuing to accrue. See also

supra notes 4 & 6. 

10. Freck remitted the additional $50.00 for 1979 and $50.00 for 

1980 when she filed the amended returns. 
In its answer, it also alleged that it was unable to locate 

Cameron. Freck opposed IRS's motion to dismiss. On June 26, 

1992, the court issued an order denying IRS's motion to dismiss. 

 A bench trial began on August 6, 1992, and on 

December 3, 1992, the court entered judgment against Freck and in 

favor of the United States. In an accompanying memorandum 

opinion, the court concluded that it lacked jurisdiction over 

Freck's 1979 and 1980 refund claims because Freck was only 

entitled to bring a refund action in district court for the years 

in which she had fully paid the tax assessed against her. Freck, 

810 F. Supp. at 601-02 (citing Flora v. United States, 362 U.S. 

145 (1960)). Therefore, the court limited its merits analysis to 

Freck's refund claim for tax year 1978. Id. It found that Freck 

had innocently signed the joint returns Cameron presented to her, 

but concluded she was not eligible for relief under section 

6013(e)(1) as an innocent spouse because she was not married to 

Cameron under applicable state law. Id. at 602-03. On 

principles of equitable estoppel, the court then upheld IRS's 

argument that Freck's innocent misrepresentation of her joint 

filing status with Cameron prevented her from amending her 

returns to reflect her single status because the innocent 

misrepresentation induced IRS to accept less tax from Cameron 

than he would have owed filing singly. Id. at 603-04. Finally, 

the district court found that IRS had met the requirements of 

section 6212 of the Tax Code by sending a statutory notice of 

deficiency to Freck by certified mail. Freck's failure to 
receive it became immaterial under the statute because the notice 

was mailed to her last known address. Id. at 604. 

 Freck filed a timely notice of appeal. The district 

court's subject matter jurisdiction is dependent on 28 U.S.C.A. 

§ 1346(a)(1). We have appellate jurisdiction over the district 

court's final order pursuant to 28 U.S.C.A. § 1291 (West 1994). 

II. 

 On appeal, Freck argues that the district court erred 

when it concluded that it only had jurisdiction for the tax year 

1978. She contends that if she had been given an opportunity to 

tell IRS how to allocate the $32,500.00 payment, she would have 

told it to apply the payment to the tax owed for the years 1978, 

1979 and 1980 exclusive of penalties and interest. She asserts 

the $32,500.00 payment would have covered all the tax owed for 

1978 and 1979 plus part of the tax owed for 1980 and the district 

court would therefore have had jurisdiction over her refund claim 

for 1979 as well as her claim for 1978.11 We have plenary review 

over the district court's ruling that it lacked subject matter 

jurisdiction. Bumberger v. Insurance Co. of North Am., 952 F.2d 

764, 766 (3d Cir. 1991).12

 

11. Freck appears to argue that such an application could also 

have covered her 1980 tax deficiency, but the record indicates 

that the $32,500.00 payment would not have covered the principal 

amounts assessed against her for all three years. See also supra

notes 6 & 9. 

12. We note that our preliminary inquiry into jurisdiction also 

tends to require some preliminary inquiry into the merits of 

Freck's argument on allocation of the $32,500.00 payment. 
III. 

 Section 1346(a)(1) provides: 

 (a) The district courts shall have 

original jurisdiction . . . of: 

 (1) Any civil action against the 

United States for the recovery of any 

internal-revenue tax alleged to have 

been erroneously or illegally assessed 

or collected, or any penalty claimed to 

have been collected without authority or 

any sum alleged to have been excessive 

or in any manner wrongfully collected 

under the internal-revenue laws[.] 

28 U.S.C.A. § 1346(a)(1) (in relevant part). In Flora, the 

United States Supreme Court held that section 1346(a)(1) requires 

a tax assessment to be paid in full for the year for which a 

refund is claimed before a district court can gain subject matter 

jurisdiction over the refund claim for that year.13 Flora, 362 

U.S. at 150, 163; see also Psaty v. United States, 442 F.2d 1154, 

1158 (3d Cir. 1971). Because IRS decided to apply the $32,500.00 

payment first to interest, penalties and tax for the earliest 

year, 1978, the 1979 assessment against Freck has not been fully 

 

13. If a party does not make full payment of a particular tax 

assessment, he or she can only challenge the assessment in the 

Tax Court. To do so, however, the taxpayer must file her Tax 

Court petition within ninety days of the date IRS sent its 

statutory notice of deficiency. See 26 U.S.C.A. § 6213(a) (West 

Supp. 1994). The taxpayer's failure to receive a notice properly 

mailed to the taxpayer's last known address does not extend or 

toll the ninety days. See Tadros v. Commissioner, 763 F.2d 89, 

91-92 (2d Cir. 1985). Here, the ninety days is long past, and 

thus Freck has no remedy absent full payment of the assessed tax. 
discharged and no credit at all has been given against the 1980 

assessment. 

 Freck contends that she should have had an opportunity 

to tell IRS how to allocate the $32,500.00 pursuant to Revenue 

Ruling 73-305.14 She claims that Woodcock & Kingman, the law 

firm which made the payment to IRS, did not represent her and did 

not give her an opportunity to tell IRS how to allocate her 

voluntary payment to the deficiencies for the years in question. 

She also contends that IRS intentionally took the money directly 

from Woodcock & Kingman so that Freck would not have a chance to 

allocate the payment.15 She argues that if she had the chance, 

she would have told IRS to apply the payment solely to the tax 

assessed against her instead of interest and penalties and that 

 

14. Revenue Ruling 73-305 states, in pertinent part: 

 A partial payment of assessed tax, penalty, 

and interest made by a cash method taxpayer 

with directions as to its application will be 

so applied. A partial payment on assessed 

deficiencies . . . received without 

instructions for its application will be 

applied to tax, penalty, and interest in that 

order, starting with the earliest 

period. . . . 

Rev. Rul. 73-305, 1973-2 C.B. 43. IRS seems to have followed 

this ruling in allocating the payment on Freck's behalf, even 

though it now seems to contend allocation should be governed by 

Revenue Ruling 79-284, 1979-2 C.B. 83, which IRS argues gives it 

discretion to allocate partial payments in whatever manner best 

serves the government. 

15. Freck also states IRS itself did not know what her 

deficiencies for 1979 and 1980 were at that time, nor did it tell 

her so that she could have made an informed allocation of the 

payment if she had been given the opportunity. 
her tax liabilities for both 1978 and 1979 would have been 

extinguished. According to Freck, only the principal amount of 

any annual income tax assessment, and not penalties or interest 

thereon, need be paid in full in order to give a district court 

subject matter jurisdiction over a refund claim for any 

particular year pursuant to 28 U.S.C.A. § 1346(a)(1). Brief for 

Appellant at 12-13 (citing Kell-Strom Tool Co. v. United States, 

205 F. Supp. 190, 193-94 (D. Conn. 1962) (Flora does not require 

payment of interest, only payment of tax assessed)).16 Thus, if 

Freck had been given a chance to allocate the payment the 

district court found voluntary, as she now says she would, IRS 

would have had to apply the $32,500.00 to principal for all three 

years instead of first to the interest, penalties and principal 

that had accrued for 1978. The district court would then have 

had jurisdiction over Freck's 1979 refund claim as well as the 

1978 claim.17

 

16. The IRS does not specifically argue to the contrary on 

appeal, and the cases it cites hold only that a taxpayer must pay 

the full amount of a tax assessment before the taxpayer may seek 

a refund of the tax in district court. See, e.g., Rocovich v. 

United States, 933 F.2d 991, 993 (Fed. Cir. 1993) (district court 

had no jurisdiction over estate's refund action where estate had 

only paid part of assessed estate tax before bringing action, 

absent limited exceptions not available here); Curry v. United 

States, 774 F.2d 852, 854 (7th Cir. 1985) (district court had no 

jurisdiction over taxpayer's refund action where taxpayer had 

failed to pay assessed tax in full before bringing action); 

Ardalan v. United States, 748 F.3d 1411, 1413 (10th Cir. 1984) 

(same); Psaty v. United States, 442 F.2d 1154, 1158-59 (3d Cir. 

1971) (holding taxpayer must pay full amount of indivisible tax 

assessment or penalty before taxpayer can challenge its validity 

in district court). 

17. Freck's argument on allocation would not affect the 1980 

assessment. Accordingly, the district court could still lack 
 IRS, relying on various revenue rulings, contends it 

has an absolute right to decide how any partial payment shall be 

applied as against interest, penalties or principal unless the 

taxpayer specifically directs the manner in which a voluntary 

partial payment is to be applied. When a taxpayer, for whatever 

reason, fails to specify how a payment should be applied, IRS 

says it has discretion to allocate the payments "to tax, penalty, 

and interest in a manner serving the best interest of the 

Service." Rev. Rul. 79-284, 1979-2 C.B. 83. Conceding a 

taxpayer's right to tell it how to allocate a voluntary partial 

payment, IRS goes on to assert that the taxpayer must specify the 

allocation she desires at the time the payment is made to IRS. 

 The cases IRS cites do not deal with the argument Freck 

advances; namely, whether a taxpayer whom IRS has deprived of a 

contemporaneous opportunity to specify how a voluntary payment 

should be allocated at the time it is made may later require IRS 

to reallocate the payment. These cases do not hold that the 

failure to specify the allocation desired at the time the payment 

is forwarded is invariably fatal; rather, they hold that a 

taxpayer who makes a payment without telling IRS how to allocate 

(..continued) 

jurisdiction over that claim. Nevertheless, if Freck were 

successful in her argument that she is not equitably estopped 

from refiling as a single person for 1978, issue preclusion could 

come into play because that holding could preclude IRS from 

challenging Freck's status in suits over the other years. 

Accordingly, if Freck is not equitably estopped from claiming 

single filer status in 1978, her right to a refund for that year 

invalidates the 1978 assessment, leaving the $32,500.00 fully 

available against the 1979 and 1980 assessments, which could also 

be invalidated under principles of issue preclusion. 
it may not later require IRS to reallocate the payment in a 

manner more favorable to the taxpayer. Our research has not 

uncovered any cases addressing the narrow issue of whether a 

failure to specify an allocation contemporaneously with the 

payment automatically destroys the right to allocate when IRS has 

obtained funds from a third party without giving the taxpayer an 

opportunity to tell that third party how the payment should be 

applied. 

 Although the district court found that Freck's payment 

was voluntarily made and that she did not designate how the 

payment was to be allocated, it did not determine whether Freck 

had an opportunity to tell IRS how to allocate the payment 

pursuant to Revenue Ruling 73-305, even though it acknowledged 

this issue was raised by the parties during the bench trial. 

Freck, 810 F. Supp. at 602 n.8. If Freck made the payment 

voluntarily, we think she should have been given some opportunity 

to allocate it as she wished under either Revenue Ruling 73-305 

or 79-284. See United States v. Pepperman, 976 F.2d 123, 127 (3d 

Cir. 1992) (recognizing longstanding IRS policy allowing taxpayer 

to allocate voluntary payments but not involuntary payments). 

 There is no evidence in the record to support the 

district court's finding that Winkler was Freck's attorney. The 

only evidence concerning who Winkler represented was Freck's 

testimony that he represented her brother and sister-in-law and 

that her counsel was John Analin. In light of Freck's testimony 

and the district court's silence on the issue of Freck's 

opportunity to specify the allocation of the payment, we believe 
this case should be remanded to the district court so that it can 

determine in the first instance whether Freck had an opportunity 

to direct IRS on the allocation of her voluntary payment. 

 In the event the district court decides that Freck had 

an opportunity to tell IRS how to allocate the $32,500.00 payment 

but simply failed to do so or chose not to, it may also become 

necessary for it to reconsider the equitable estoppel issue this 

case raises. All of the parties to this case as well as the 

court itself agree that Freck's misrepresentation was "innocent" 

because she did not know she was misrepresenting her marital 

status when she signed the joint returns and she did not know the 

returns were materially incorrect.18 The determination of 

 

18. Because Freck was acting innocently and in good faith in 

signing the tax returns, we have trouble understanding the basis 

for the award of penalties against her, another matter on which 

the record is unclear. We recognize that the penalties were not 

imposed for filing a fraudulent or false return, or for 

improperly signing the return as a joint return. Moreover, 

because Freck signed the return jointly, she is presumably 

jointly responsible for paying the tax deficiency that IRS 

assessed for the 1978-1980 tax years. IRS mailed Freck a notice 

of deficiency and thus, an addition to the tax, a penalty may 

have been imposed because she did not pay the deficiency assessed 

within ten days of the date of notice and demand. See 26 

U.S.C.A. § 6651(a)(3) (West Supp. 1994). Such penalties 

decrease, however, as payments of the deficiency are made because 

section 6651(b)(3) requires that the tax due, the amount upon 

which the penalty is imposed, should be reduced from month to 

month as part payments of the tax are made. See id. Under the 

Internal Revenue Code applicable to this case, the IRS could also 

have imposed a 5% penalty if Freck had negligently filed her tax 

return, see 26 U.S.C.A. § 6653(a) (1989) (since amended), or a 

75% penalty if Freck had filed the return with fraudulent intent. 

See 26 U.S.C.A. § 6653(b) (1989). It might also have advanced a 

right to impose a 25% liability if Freck's return substantially 

understated income tax. See 26 U.S.C.A. § 6661 (1989). These 

penalty provisions were revised in 1989. Act of Dec. 19, 1989, 

Pub. L. No. 101-329, 103 Stat. 2395 (codified as amended at 26 

U.S.C.A. §§ 6651-6665 (West Supp. 1994)). Presently the IRS may 
whether Freck was a "spouse" entitled to innocent spouse relief 

is governed by the laws of the state of the marital domicile of 

the parties. See generally Boyer v. Commissioner, 732 F.2d 191, 

194 (D.C. Cir. 1984), cert. denied, 469 U.S. 1114 (1985); Estate 

of Buckley v. Commissioner, 37 T.C. 664, 672 (1962). Thus, IRS 

is legally correct in its contention that Freck is not entitled 

to claim the "innocent spouse" exemption because her common law 

marriage is not recognized under the laws of the states of New 

York and New Jersey. See N.J. Stat. Ann. § 37:1-10 (West 1968) 

(common law marriages invalid after 1939); Parkinson v. J&S Tool 

Co., 313 A.2d 609 (N.J. 1974); N.Y. Dom. Rel. Law § 11 (McKinney 

1994); Ram v. Ramharack, 571 N.Y.S.2d 190, 191 (N.Y. Sup. Ct. 

1991). 

 IRS, after relying on strict legal arguments concerning 

its right to allocate the partial payment made on Freck's behalf, 

resorts to equitable principles of estoppel to prevent Freck from 

denying she was a "spouse" and to preclude her from amending her 

tax returns to reflect her own corrected legal status as a single 

taxpayer. If Freck did have an opportunity to instruct IRS how 

to apply the payment Winkler made, IRS would be legally correct 

in insisting on its right to allocate that payment strictly in 

the government's best interest without regard to the effect on 

Freck, but in that case it seems to us that IRS's dual argument 

(..continued) 

impose a 20% penalty for inaccurate returns resulting from 

negligence, a disregard of rules or regulations or a substantial 

understatement of income tax. 26 U.S.C.A. § 6662 (West Supp. 

1994). 
that Freck then is estopped from denying she was Cameron's 

spouse, even though she cannot claim innocent spouse status, is 

not only unfairly inconsistent but fundamentally inequitable.19 

Based on a loss of $5,200.00, it seeks to invoke an equitable 

estoppel against Freck that will cost her not only the $32,500.00 

already paid but will leave her still owing $47,000.00 as of 

December 31, 1991 with interest on a balance of about $15,000.00 

in principal continuing to accrue.20

 Under these circumstances, before accepting IRS's 

argument on behalf of the sovereign federal government, it seems 

appropriate for the district court to consider the old equitable 

maxims, "He who seeks equity must do equity," which the 

chancellors used to apply when they sat as the conscience of a 

sovereign king. We realize, of course, that equitable principles 

do not generally preclude IRS from collecting taxes that are 

legally owed. See Office of Personnel Management v. Richmond, 

110 S. Ct. 2465, 2469 (1990); Bokum v. Commissioner, 992 F.2d 

1136, 1141 (11th Cir. 1993) (citing Heckler v. Community Health 

Serv., 467 U.S. 51, 60 (1984)); Keado v. United States, 853 F.2d 

1209, 1271-18 (5th Cir. 1988). We think, however, that these 

cases are distinguishable from Freck's case because here IRS 

itself relies on equitable principles to collect taxes from Freck 

that are not attributable to her income. 

 

19. The parties have not raised the doctrine of judicial 

estoppel. Therefore, we have no occasion to consider its 

application to IRS's seemingly inconsistent arguments. 

20. See supra notes 4, 6 & 9. 
 If the district court concludes Freck did have an 

opportunity to allocate the $32,500.00 payment and that it is 

nevertheless appropriate to estop Freck from claiming she was not 

married to Cameron, it may also wish to consider whether IRS 

should be limited to recovering the difference between Cameron's 

tax liability as a single filer and the liability it incorrectly 

assessed against him because Freck innocently misrepresented the 

couple's right to a joint filing status. Cf. Restatement 

(Second) of Contracts § 90 cmt. d; Bechtel v. Robinson, 886 F.2d 

644, 647 (3d Cir. 1989). Freck claims these differences total 

only $1,159.00 for tax year 1978 and $5,194.00 for the full three 

years. IRS has not itself pointed to any other evidence in this 

record that would show what amounts Cameron would have owed for 

closed years if IRS were limited to reliance damages. 

IV. 

 We will vacate the district court's order entering 

judgment against Freck and in favor of the United States and 

remand for further proceedings consistent with this opinion. 

 

TO THE CLERK: 

 Please file the foregoing opinion. 

 

 Circuit Judge 
 October 5, 1994 

TO: P. Douglas Sisk, Clerk 

FROM: Judge Hutchinson 

RE: Freck v. IRS

 No. 93-7007 

Dear Doug: 

 I enclose the opinion in the above captioned matter for 

filing. The signed original is being forwarded to your office 

today by mail. 

 Sincerely, 

 William D. Hutchinson 

WDH:jam 

Enclosure 

cc. Judge Stapleton (letter only) 

 Judge Roth (letter only) 

 Patricia McCafferty, Asst. Systems Manager (letter only)