1 United States Court of Appeals,

Fifth Circuit.

No. 95-20785.

In the Matter of Stephen Edward BUGGE, Debtor,

Stephen Edward BUGGE, Appellant,

v.

UNITED STATES of America, Appellee.

Nov. 15, 1996.

Appeal from the United States District Court for the Southern

District of Texas.

Before POLITZ, Chief Ju dge, and JOLLY and BARKSDALE, Circuit

Judges.

E. GRADY JOLLY, Circuit Judge:

Stephen Edward Bugge, a debtor in Chapter 7 bankruptcy

proceedings and the former president of Coa stal Crude Trucking,

Inc. ("Coastal"), appeals from the district court's affirmance of

the bankruptcy court's posttrial ruling that Bugge is liable for a

$327,379.82 w indfall profit tax penalty. He argues that the

erroneous abatement of the IR S assessment—the assessment that is

the basis for this tax penalty—should not have been reinstated

because the statute of limitations had expired. Bugge also

challenges the denial of his request for attorneys' fees. We

affirm.

I

Because of severe corporate cash flow problems in the summer

of 1983, Bugge, who had authority to approve all payments made from

any Coastal corporate account, decided that Coastal would not pay1 At th at time, the tax laws required the first purchaser of

crude oil to withhold a windfall profit tax and remit the amounts

withheld to the IRS. I.R.C. §§ 4995(a)(1), 4995(b)(2)(A)(I).

2 its windfall profit 1 taxes for the first and second quarters of

1983. He also chose not to pay certain payroll withholding taxes.

I n an affidavit, Bugge admitted that he had instructed Coastal's

vice president of office administration, La Verne Glosson, to write

checks to cover Coastal's most pressing debts and to wait until

July 1983 to pay the outstanding taxes. When Glosson printed a

check in mid-July for Coastal's tax liability, Bugge voided the

check and falsely told her that the taxes had been paid b y

Coastal's Houston office.

In March 1985, within the applicable statute of limitations

period for penalty assessments and pursuant to its authority under

I.R.C. § 6672, the IRS assessed a 100% penalty totaling $327,379.82

against Bugge for Coastal's failure to pay its windfall profit

taxes. An IRS employee manually documented the assessment on a

"unit ledger card." Because section 6672 penalty assessments could

not be fully entered into the "master file" a s it was then

configured on the IRS computer system, unit ledger cards were used

to document suc h accounts by hand. Nonetheless, some limited

information was recorded in the computerized master file, such as

the amount of the assessment and the dates of the rel evant tax

periods. Pursuant to IRS procedure, Bugge's assessments for the

two quarters were totaled and recorded as a single assessment of

$327,379.82 under the second quarter of 1983. This second quarter

a ssessment was noted on both the unit ledger card and in the3

computer's master file. Thereafter, an IRS employee inexplicably

crossed out the second quarter assessment on the unit ledger card

and wrote in its place "830 3," a code that refers to the first

quarter of 1983. No change was made to the computer records.

In the course of preparing the account for collection, another

IRS officer compared the information on the unit ledger card with

the information in the computer's master file. The IRS collections

officer discovered that Bugge's penalty assessment on the unit

ledger card was recorded under the first quarter of 1983 but that

the computer indicated an identical assessment for the second

quarter of 1983. Believing the first quarter assessment to be an

erroneous duplicate of the second quarter assessment, the

collections officer submitted a request for adjustment of the first

quarter asses sment. The request form expressly stated: "Please

abate the following [assessment], dated 03-12-85 in the amount of

$327,379.82, since this is a duplicate assessment that has already

been done using the correct [master file tax] and tax period." The

collections manager approved the request for adjustment, which was

sent to the regional service center for processing. Failing to

realize that there was in fact no duplicate assessment for the

first quarter, the regional service center adjusted Bugge's account

by abating the only assessment that appeared in the computer's

master file, whic h was the $327,379.82 assessment for the second

quarter of 1983. Instead of eliminating a duplicate assessment in

accordance with the written instructions in the request form,

Bugge's account was reduced to zero and erroneously cleared of all4

penalty assessments.

In addition to the section 6672 penalty assessed against

Bugge, the IRS made similar assessments against Glosson and

Coastal's co-owner, Benjamin Clifton. Glosson paid a portion of

the penalty and filed a refund action in the United States District

Court for the Southern District of Texas. At Glosson's request,

Bugge executed an affidavit in an effort to assist Glosson in the

refund litigation. In his affidavit, Bugge stated that he was

responsible for the approval of all payments made from any Coastal

c orporate account and confirmed that Glosson had no authority to

make tax payments. Bugge also admitted that he had lied to Glosson

regarding the payment of Coastal's taxes. Bugge now says that he

executed the affidavit under the assumption that there was no valid

tax assessment pending against him and that, in any event, the

statute of limitations for assessing such a penalty had expired.

In its litigation of Glosson's refund action, the government

filed third-party claims agai nst Bugge and Clifton for the

previously assessed section 6 672 tax penalties. While preparing

for the Glosson trial, the government discovered that the IRS had

erroneously abated the windfall profit tax assessment against

Bugge. Although the statute of limitations for the assessment of

such penalties had expired almost three and one-half years earlier,

the IRS reinstated the tax assessment against Bugge.

A jury trial in Glosson's refund action was set for September

1991. Prior to the trial, Bugge filed a Chapter 7 bankruptcy

petition in the United States Bankruptcy Court for the Southern2 Bugge has conceded liability for the payroll with holding

taxes and does not challenge that assessment on appeal.

3 In Crompton-Richmond, the IRS assessed a section 6672 penalty

against Crompton-Richmond Co., Inc. ("C rompton") for a corporate

debtor's failure to pay i ncome and employment withholding taxes.

Crompton paid the penal ty and sued the IRS for a refund. In

defending against Crompton's refund action, the IRS filed various

third-party claims, including one against Vincent De Sousa. While

5 District of Texas. Because the automatic stay of the Bankruptcy

Code threatened to prevent Glosson's tri al from proceeding, the

g overnment and Bugge entered into a pretrial stipulation. Among

other things, the parties agreed that Bugge's statute of

limitations defense to the tax penalty would be tried before the

bankruptcy court. In addition, Bugge stipulated to "all issues

against him involving liability in the District Court case, and

...

that he was a "responsible person' and that he acted "willfully'

within the meaning of Section 6672 of the Internal Revenue Code, as

to the issues involved in the District Court case." The district

court dismissed Bugge without prejudice as a party in the refund

litigation.

In the bankruptcy proceedings, Bugge moved for a determination

of his tax liability. He argued that the windfall profit tax

penalty was invalid because the IRS had reassessed the penalty

after the statute of limitations had expired. Following a trial,

the bankruptcy court ruled that Bugge was liable for windfall

profit and payroll withholdin g tax assessments in the respective

a mounts of $327,379.82 and $6808.35. 2 Adopting the reasoning of

the district court in Crompton-Richmond Co. v. United States, 311

F.Supp. 1 184 (S.D.N.Y.1970), 3 the bankruptcy court held that theCrompton's lawsuit was pending, an IRS district director requested

an adjustment to abate the assessment against De Sousa. The IRS's

regi onal service center rejected the director's initial request

because it was against IRS policy to grant an abatemen t while a

refund suit was pending. Before the district director received

notification of the initial rejection, he filed a second request to

aba te De Sousa's penalty. This second request, which was

authorized by the district director, mistakenly was granted. When

the IRS discovered the error, it immediately reversed its decision

to abate and reinstated the assessment against De Sousa. The

reinstatement occurred, however, after the statute of limitations

had expired.

In ruling upon De Sousa's motion for summ ary judgment,

the district court in Cro mpton-Richmond found that the

abatement of De Sousa's assessment represented "plain ordinary

clerical or bookkeeping errors arising out of the failure of

some IRS office personnel to appreciate that there was a

pending refund suit." C rompton-Richmond, 311 F.Supp. at 1185-

1186. The district court concluded that " "[w]henever an

abatement is issued because of a mistake of fact or bookkeeping error, the assessment can be reinstated, at least

so long as this does not prejudice the taxpayer .' " I d. at

1187 (quoting Kroyer v. United States, 73 Ct.Cl. 591, 55 F.2d

495, 499 (1932)).

6 assessment was properly reinstated under a judicially created

exception to the statute of limitatio ns. According to the

bankruptcy cou rt, this exception was applicable in Bugge's case

because (i) the abatement resulted from a clerical error, and not

from a substantive reevaluation of Bugge's tax liability; and (ii)

Bugge was not prejudiced by the reinstatement in view of the fact

that his tax liability for the windfall profit taxes remained the

same as it had been in 1985. The district court affirmed without

opinion. Bugge has timely appealed.

II

A bankruptcy court's findings of fact are subject to the

clearly erroneous standard of review. M atter of Sadkin, 36 F.3d

473, 475 (5th Cir.1994); C hiasson v. Bingler (In re Oxford7

Management Inc.), 4 F.3d 1329, 1333 (5th Cir.1993). When the

district court has affirmed the bankruptcy court's findings, as in

this appeal, we apply the standard strictly and will reverse only

when there is a firm conviction that error has been committed. I d.

Conclusions of law are reviewed de novo. Id.

III

We begin our consideration of this appeal with a review of the

relevant tax provisions in the Internal Revenue Code ("I.R.C." or

the "Code"). The IRS initially assessed the tax penalties against

Bugge in March 1985 pursuant to I.R.C. § 6672, which provides in

pertinent part:

Any person required to collect, truthfully account for, and

pay over any tax imposed by [the Code] who willfully fails to

collect such tax, or truthfully account for and pay over such

tax, or willfully attempts in any manner to evade or defeat

any such tax or the payment thereof, shall, in addition to

other penalties provided by law, be liable to penalty equal to

the total amount of the tax evaded, or not collected, or not

accounted for and paid over.

I.R.C. § 6672 (West Supp.1996).

We previously have examined section 6672 and explained that

under this sect ion the IRS has a duty to collect and retain from

certain corporate officers and employees those funds that their

corporation has unlawfully failed to turn over to the government.

USLIFE Title Ins. Co. Of Dallas on Behalf of Mathews v. Harbison,

784 F.2d 1238, 1239-40 (5th Cir.1986). In accordance with the

statute, the IRS will assess up to 100% of the penalty against each

of the persons that it determines to be responsible for the

corporation's delinquency. I d. To be held liable under section

6672, a person must be deemed "responsible" within the meaning of4 Section 6404(a) provides:

(a) General rule. —The Secretary is author ized to abate

the unpaid portion of the assessment of any tax or any liability in respect thereof, which—

(1) is excessive in amount, or

(2) is assessed after the expiration of the period

of limitations properly applicable thereto, or

(3) is erroneously or illegally assessed.

I.R.C. § 6404(a) (West 1989).

8 the statute, and must "willfully" fail to remit the amounts due to

the government. Id.

Also relevant to our consideration is section 6404 of the

Cod e, which empowers the IRS to abate the unpaid portion of an

assessment that is (1) excessive in amount; (2) assessed after the

expiration of the applicable period of limitations; or (3)

erroneously or illegally assessed. I.R.C. § 6404(a). 4 We

interpret the language of section 6404(a) to be permissive, not

mandatory. P oretto v. Usry, 295 F.2d 499, 501 (5th Cir.1961). In

other words, the statute provides the IRS with an option, but not

a duty, to abate an assessment. I d. As a general rule, an

abatement will "wipe out the assessment." C arney Coal Co. v.

Commissioner, 10 B.T.A. 1397, 1403, 1928 WL 1341 (1928). If the

IRS decides to reimpose a validly abated assessment, it should make

the new assessment within the relevant statutory limi tations

period. Id.; see also Crompton-Richmond, 311 F.Supp. at 1186 n.

2.

With respect to Bugge's assessment, the relevant limitations5 I.R.C. § 6501(a) provides in pertinent part:

(a) General rule. —Except as o therwise provided in this

section, the amount of any tax imposed by this title

sha ll be assessed within 3 years after the return was

filed (whether or not such return was filed on or after

the dat e prescribed), ... and no proceeding in court

without assessment for the collection of such tax shall

be begun after the expiration of such period.

I.R.C. § 6501(a) (West Supp.1996).

9 period is set forth in Code section 6501(a). 5 As our court has

explained before, "[t]he plain language of section 6501 establishes

a three-year period of limitations "for assessing any tax imposed

under the Code.' " G reen v. C.I.R., 963 F.2d 783, 787 (5th

Cir.1992). In essence, section 6501(a) requires the IRS to assess

taxes no later than three years after the las t day prescribed by

law for filing the subject tax return. Should the IRS fail to

assess a tax timely, section 6501(a) prohibits the IRS from

pursuing court enforcement proceedings after the three-year statute

of limitations has expired.

Despite the Code's recognition of certai n exceptions to the

three -year statute of limitations, s ee I.R.C. § 6501(c), none of

these is applicable in Bugge's case. Nonetheless, the government

argues, and t he bankruptcy court agreed, that the judicially

created exception articulated in Crompton-Richmond, 311 F.Supp. at

1186-87, permits the reinstatement of Bugge's abated a ssessment

after the three-year statute of limitations had expired.

IV

We decline ju dicially to engraft further exceptions to the

statute of limitations beyond those provided by Congress. Instead,10

we hold, that on the facts of this case, no effective tax abatement

under the Secretary's statuto ry authority in I.R.C. § 6404(a)(1)

ever occurred.

The collections manager in this case never intended or

approved an abatement of Bugge's entire tax liability. Instead,

the manager only approved an abatement of what appeared to be a

duplicate assessment in the amount o f $327,379.82. The record,

including relevant portions of the trial testimony, shows that the

IRS collections officer in charge of Bugge's ac count was merely

attempting to clarify what he perceived as an inconsistency between

IRS handwritten records and the computerized ma ster file. In

requesting the abatement, the co llections officer intended, and

received approval from his manager for, a reduction of Bugge's tax

liability from two assessments of $327,379.82 each (i.e., a total

liability of $654,759.64) to a single assessment of $327,379.82.

This request was in accord with the IRS's discretionary authority

under section 6404(a)(1) to abate an assessment that is "excessive

in amount." See supra note 4 for full text of statute. However,

when the regional service center processed the request and

inadvertently eliminated Bugge's entire tax liability, it failed to

act within the scope of the request that had been approved by the

collections manager. In addition, by abating Bugge's actual and

correct tax liability, it failed to act within the IRS's statutory

authority to abate an excessive assessment. I.R.C. § 6404(a)(1).

The only adjustment that the regional service center was authorized

to make was the elimination of an apparent dou ble-assessment in6 Bugge argues on appeal that the IRS errors in abating his

assessment in its entirety were not clerical in nature but resulted

from conscious decisions made by IRS personnel to abate his taxes.

"Clerical errors are by their nature not errors in judgment but

merely inadvertencies." N TN Bearing Corp. v. United States, 74

F.3d 1204, 1208 (Fed.Cir.1995). The erroneous abatement of Bugge's

entire tax liability resulted not from an error in judgment, but

from an accidental act that was perhaps attributable to a computer

system in transition. In any event, the record shows that IRS

personnel never made co nscious decisions to execute a 100%

abatement of Bugge's windfall profit tax liability.

7 A number of courts, including th e United States Supreme

Court, have recognized the authority of a government agency to

correct inadvertent, ministerial errors ( see, e.g., American

Trucking Ass'ns. v. Frisco Transportation Co., 358 U.S. 133, 144-

46, 79 S.Ct. 170, 177, 3 L.Ed.2d 172 (1 958); Z enith Electronics

Corp. v. United States, 884 F.2d 556, 560 (Fed.Cir.1989)). In no

way should this opinion, however, be interpreted as granting the

IRS a special shield from responsibility for its errors,

inadvertent or otherwise, that prejudice the taxpayer.

11 certain IRS records. Because of a purely accidental and unintended

processing error, 6 the regional servi ce center executed an

unintended abatement lacking any authorization.

Because the regional service center accidentally processed an

unapproved abatement, it follows that the abatement of Bugge's tax

assessment of $327,379.82 was never effective. Simply put, an

unauthorized and accidental abatement of an entire assessment in

contravention of section 6404(a)(1) is not effective. On the facts

of this case, it is our view that what Bugge characterizes as a

"reassessment after the period of limitations has expired" is more

accurately analyzed as the correction of an inadvertent error. 7

We therefore must conclude on this record that (1) Bugge's

section 6672 tax liability for windfall profits in the amount of

$327,379.82 was timely assessed within the limitations prescribed

by I.R.C. § 6501(a); (2) Bugge's total windfall profit tax12

liability of $327,379.82 was never abated or extinguished pursuant

to I.R.C. § 6404(a); and (3) Bugge remains liable for the

$ 327,379.82 assessment, plus statutory and accrued interest from

the date assessed. Having affirmed on liability, we also AFFIRM

the denial of Bugge's request for attorneys' fees.

Accordingly, the district court's judgment affirming the

bankruptcy court is

AFFIRMED.