Source: https://law.justia.com/cases/federal/appellate-courts/F2/931/554/422872/
Timestamp: 2019-11-12 14:08:39
Document Index: 411527443

Matched Legal Cases: ['§ 7430', '§ 6204', '§ 6502', '§ 6532', 'art 2', '§ 7430', '§ 6651', '§ 7405']

Brookhurst, Inc., As Successor by Merger with Commercialuniform Company, Plaintiff-appellant, v. United States of America, Defendant-appellee.brookhurst, Inc., As Successor by Merger with Commercialuniform Company, Plaintiff-appellee, v. United States of America, Defendant-appellant, 931 F.2d 554 (9th Cir. 1991) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Ninth Circuit › 1991 › Brookhurst, Inc., As Successor by Merger with Commercialuniform Company, Plaintiff-appellant, v. Uni...
Brookhurst, Inc., As Successor by Merger with Commercialuniform Company, Plaintiff-appellant, v. United States of America, Defendant-appellee.brookhurst, Inc., As Successor by Merger with Commercialuniform Company, Plaintiff-appellee, v. United States of America, Defendant-appellant, 931 F.2d 554 (9th Cir. 1991)
US Court of Appeals for the Ninth Circuit - 931 F.2d 554 (9th Cir. 1991) Argued and Submitted March 5, 1991. Decided April 24, 1991
Avram Salkin, Hockman, Salkin & DeRoy, Beverly Hills, Cal., for plaintiff-appellant-cross-appellee.
David English Carmack, Tax Div., U.S. Dept. of Justice, Washington, D.C., for defendant-appellee-cross-appellant.
Before CANBY and RYMER, Circuit Judges, and LEVI,* District Judge.
Brookhurst initiated this action against the IRS to recover the $274,508.44.1 The district court held that the government could properly collect the erroneous refund through levies, but that it lacked statutory authority to assess interest or failure-to-pay penalties on the erroneous refund. The district court also denied Brookhurst's request for attorneys' fees and costs.
Brookhurst appeals the district court's decision that the government properly collected the erroneous refund. The government cross-appeals the district court's determination that it lacked statutory authority to assess interest on the refunded monies.2 Additionally, Brookhurst requests attorneys' fees and costs pursuant to section 26 U.S.C. § 7430. We affirm on Brookhurst's appeal and reverse on the government's cross-appeal.
The government relied on Internal Revenue Code sections 6204(a) and 6502(a) (1) in reassessing Brookhurst's tax liability and collecting the reassessed taxes by levy. These sections provide:
26 U.S.C. § 6204(a) (1988).
(1) within 6 years after the assessment of the tax....
26 U.S.C. § 6502(a) (1) (1988).
Brookhurst contends that the government wrongfully collected the refunded monies by levy. Brookhurst asserts that the government could only recover the monies by commencing a civil action pursuant to section 7405(a) of the Code.3 Such an action must be commenced within two years of the refund. 26 U.S.C. § 6532(b). Because the limitations period has expired, Brookhurst asserts that the government is not entitled to collect the refunded monies.
Brookhurst concedes, as it must, that the government may utilize any procedure authorized by the Internal Revenue Code to collect taxes owed. The courts uniformly have upheld the government's employment of summary collection procedures. See Beer v. Commissioner, 733 F.2d 435 (6th Cir.), cert. denied, 469 U.S. 857, 105 S. Ct. 185, 83 L. Ed. 2d 119 (1984); Ideal Realty Co. v. United States, 561 F.2d 1123 (4th Cir. 1977); Warner v. Commissioner, 526 F.2d 1, 2 (9th Cir. 1975); C & R Investments, Inc. v. United States, 444 F.2d 765 (10th Cir. 1971). Brookhurst argues that the tax collection procedures authorized by the Code and discussed in the previously cited decisions are not applicable to the present case because Brookhurst owes no taxes; Brookhurst contends that it satisfied its 1983 fourth quarter tax liability by paying the full amount of taxes owed in February 1984. According to Brookhurst, a tax once paid cannot be revived by a subsequent refund. Brookhurst relies on United States v. Young, 79-2 U.S. Tax Cas. (CCH) p 9609 (1979) and Kelley v. United States, 30 F.2d 193 (9th Cir. 1929).
In United States v. Young, 79-2 U.S.T.C. (CCH) p 9609 (1979), the IRS assessed a penalty against Young for failure to pay his employee withholding tax. In February 1971, the taxpayer paid the penalty in full, but the IRS mistakenly credited the payment to Young's sole proprietorship account instead of his individual account. Because this account was current, the IRS refunded to the taxpayer the penalty payment and interest. Over five years later, the IRS brought an action to recover the erroneous refund plus interest. The taxpayer moved for summary judgment on the ground that the action was barred by the two-year statute of limitations for commencing such an action. The government countered that the six-year limitations period for collection of overdue assessments governed the action. Noting that the government had conceded that the original assessment was paid in full, the court concluded that the suit was designed to recover an erroneous refund and was therefore subject to the two-year limitations period.
In Kelley v. United States, 30 F.2d 193 (9th Cir. 1929), the IRS accepted an executrix's application for a refund of half of the previously paid estate taxes. The IRS later brought an action in equity to recover the refund, claiming that it had been improperly granted because of an erroneous interpretation of the law. The court held that the government failed to state a cause of action in equity. The court reasoned: "When once paid, a tax is gone, and a refund of the money does not restore it." Id. at 193. Nonetheless, the court noted that the complaint did state a cause of action at law.
We find neither Young nor Kelley controlling. Neither case addresses the issue before this court: whether the government may reassess a taxpayer's tax liability, thus creating a new tax obligation. In Young, the statutory period for reassessment had expired. In Kelley, the government could not have reassessed the taxpayer's liability because the original assessment was neither imperfect nor incomplete.
S.Rep. No. 960, 70th Cong., 1st Sess. 42 (1928), reprinted in 1939-1 C.B. (Part 2) 409, 438; see Black Prince Distillery, Inc. v. United States, 586 F. Supp. 1169, 1173 (D.N.J. 1984). Accordingly, we affirm the district court's holding that the government properly recovered the erroneously refunded monies.4
We reject Brookhurst's suggestion that it is unfair for it to be charged interest when it promptly notified the government of the error. Interest is not a penalty. The government paid interest to Brookhurst along with the refund when it believed that it had improperly enjoyed the use of Brookhurst's money. Similarly, Brookhurst must now pay interest on "the theory that for the period during which the taxes were owed but unpaid taxpayer 'had use of funds which rightfully should have been in the possession of the United States' and should be charged for such use as an ordinary debtor." United States v. Northwestern Mutual Ins. Co., 315 F.2d 723, 726 (9th Cir. 1963) (citation omitted).
Because Brookhurst presents no further challenges to the government's ability to collect interest on the monies, we need only determine whether the government correctly calculated the amount of interest owing. This requires us to decide whether interest should be assessed from the date the return was due or from the date on which the government refunded the monies. In United States v. Northwestern Mutual Ins. Co., 315 F.2d 723 (9th Cir. 1963), we held that section 6601 authorizes the government to assess interest from the date the tax return must be filed, "even if identification of the actual amount of tax liability requires reference to later redetermination by the Commissioner caused by changed circumstances or disagreement with the return." Id. at 725. Under this rule, a taxpayer who initially failed to satisfy his tax liability is obligated to pay interest on the taxes due from the date the tax return should have been filed, regardless of whether the failure to pay resulted from the taxpayer's miscalculation or the government's redetermination of the tax liability.
This rule is not applicable in the present case. Here Brookhurst correctly assessed its tax liability and timely paid its taxes. These taxes remained paid until the government erroneously refunded the monies on May 10, 1984. In a similar situation, the Second Circuit concluded that interest begins to accumulate "when a tax becomes both due and unpaid." Avon Products, Inc. v. United States, 588 F.2d 342, 344 (1978). The purpose of section 6601 is best served by this interpretation of the rule. A taxpayer who timely pays his taxes is not penalized when the government erroneously refunds those monies. Rather, the taxpayer is charged interest only for the time he had the use of funds which rightfully belonged to the United States.
As a result of our decision, we reject Brookhurst's request for attorneys' fees and costs. 26 U.S.C. § 7430.
Brookhurst first exhausted its administrative remedies by filing an administrative claim for a refund. The IRS denied the claim in April 1987
The government does not challenge the district court's determination that it lacked authority to impose failure-to-pay penalties pursuant to 26 U.S.C. § 6651(a)
Section 7405(a), entitled "Action for recovery of erroneous refunds," provides:
Refunds after limitation period.--Any portion of a tax imposed by this title, refund of which is erroneously made within the meaning of section 6514, may be recovered by civil action brought in the name of the United States.
26 U.S.C. § 7405(a) (1988).
The reassessed taxes properly included the $1,907.52 in interest that the government paid to Brookhurst in the erroneous refund of May 8, 1984. See Treas.Reg. Sec. 301.6201-1(a); Ideal Realty Co., 561 F.2d at 1124-25