Opinion ID: 609750
Heading Depth: 2
Heading Rank: 2

Heading: Application of the Overpayment.

Text: 35 Although ordinarily our decision reversing the Tax Court's determination that it lacked jurisdiction would require a remand, because the remaining issues on appeal depend on questions of pure statutory construction that are subject to de novo review, we will proceed to the merits. See In re Koreag, Controle et Revision S.A. (Koreag, Controle et Revision S.A. v. Refco F/X Assocs.), 961 F.2d 341, 351 (2d Cir.) (citing United States v. Borello, 766 F.2d 46, 60 n. 23 (2d Cir.1985)), cert. denied, --- U.S. ----, 113 S.Ct. 188, 121 L.Ed.2d 132 (1992). 36 When a taxpayer reports an overpayment on a federal tax return, § 6402(a) empowers the Commissioner to credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment. See Kalb v. United States, 505 F.2d 506, 509 (2d Cir.1974), cert. denied, 421 U.S. 979, 95 S.Ct. 1981, 44 L.Ed.2d 471 (1975). Section 6201(a) authorizes the Commissioner to assess taxes and assessable penalties. Liability for such tax or penalty arises upon its administrative assessment by the Commissioner. See Bull v. United States, 295 U.S. 247, 260, 55 S.Ct. 695, 699, 79 L.Ed. 1421 (1935) (The assessment is given the force of a judgment, and if the amount assessed is not paid when due, administrative officials may seize the debtor's property to satisfy the debt.); United States v. Whiting Pools, Inc., 674 F.2d 144, 159 (2d Cir.1982) (same) (quoting Bull, 295 U.S. at 259-60, 55 S.Ct. at 699), aff'd, 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983); see also § 6203 (The assessment shall be made by recording the liability of the taxpayer in the office of the Secretary [of the Treasury] in accordance with rules or regulations prescribed by the Secretary [emphasis added].). Consistently, § 6155 provides the general rule that taxes must be paid upon notice and demand by the IRS, and § 6321 imposes a tax lien on all of a taxpayer's property upon failure to pay any tax upon demand. Accordingly, applying general tax principles, it would appear clear that the Commissioner was authorized to apply Belloff's 1986 overpayment against his 1982 § 6700 penalties upon assessment of those penalties, notice of which was sent to Belloff on June 23, 1986. 37 Belloff nevertheless advances two arguments why § 6402(a) does not permit a setoff in this case. His first contention is that § 6703(c)(1) prohibits the Commissioner from engaging in any collection activity with respect to the penalties assessed against Belloff pursuant to § 6700. Section 6703(c)(1) provides that if a taxpayer timely pays fifteen percent of an asserted § 6700 liability and files a refund action in the appropriate district court, as Belloff has done here, no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until the final resolution of the district court action. 38 The principle support for Belloff's position is found in the opinion of the district court in Refund Litig. I, which endorsed Belloff's argument that § 6703(c)(1) prohibits setoff by the Commissioner of a taxpayer's overpayment against an assessed § 6700 liability. The district court relied upon legislative history in reaching this conclusion, stating: 39 The government argues that § 6703(c) is very explicit in only precluding levies and proceedings in court and that neither the setoffs nor notices of liens at issue here are levies or proceedings in court. However, the legislative history expressly provides that those assessed penalties for abusive tax shelters under § 6700 are entitled to the same procedural safeguards as income tax return preparers penalized under I.R.C. § 6694. While § 6694 uses the same language as § 6703 precluding only levies and proceedings in court, the legislative history explains that one who pays 15% may avoid any further IRS collection of the remaining 85% of the penalty and that the IRS may resume its collection activities only upon final resolution of the matter. H.R.Rep. No. 658, 94th Cong., 2d Sess. 280, reprinted in 1976 U.S.Code Cong. & Admin.News 2897, 3176 (emphasis added). Accord IRS Manual § (35)(18)(11) 3 Sub 4. 40 725 F.Supp. at 142 (emphasis added in Refund Litig. I ). Although the order premised upon this opinion was subsequently vacated following a jury determination in favor of the government, see Refund Litig. II, 915 F.2d at 59, Belloff urges us to adopt the reasoning of the district court's opinion. 41 An opposing view is expressed in Sage v. United States, 908 F.2d 18, 25-27 (5th Cir.1990), and Hankin v. United States, 891 F.2d 480, 482-83 (3d Cir.1990). Sage affirmed a district court's denial of a motion to enjoin the collection of a § 6700 penalty by setoff. 908 F.2d at 25-27. In doing so, Sage concluded that setoff was significantly distinct from levy, relying upon Supreme Court cases importing different meaning to the terms levy and setoff. Id. at 27 (comparing United States v. National Bank of Commerce, 472 U.S. 713, 720, 105 S.Ct. 2919, 2924, 86 L.Ed.2d 565 (1985) (levy is means by which IRS acquires possession of a taxpayer's property) with United States v. Munsey Trust Co., 332 U.S. 234, 239, 67 S.Ct. 1599, 1602, 91 L.Ed. 2022 (1947) (setoff is application of funds in government's possession against a taxpayer's outstanding tax liability)). 42 Hankin held that § 6703(c)(1) does not apply to a setoff, relying upon the separate and distinct meanings of levy and setoff as used in the Internal Revenue Code and Treasury regulations. 891 F.2d at 482-83. In particular, the court contrasted (id. at 483) the elaborate procedures that the IRS must follow in order to levy a taxpayer's property, see, e.g., § 6331(d)(2) (levy may take place only upon ten days written notice); § 6334(a) (exempting certain property from levy); 26 C.F.R. § 301.6331-1 (1992) (regulations pertaining to levy), with the broad power to apply overpayments to a taxpayer's unpaid assessments. See § 6402(a) (authorizing setoff of overpayments against any tax liability); 26 C.F.R. § 301.6402-1 (1992) (same). Moreover, Treasury regulations pertaining to wrongful levy expressly distinguish between levy and setoff. 26 C.F.R. § 301.7426-1(a)(1) (1992). 43 We agree with Sage and Hankin. Section 6703(c)(1) by its terms only applies to a levy or a proceeding in court. We believe that this language is sufficiently clear that resort to legislative history is unwarranted. See Connecticut Nat'l Bank v. Germain, --- U.S. ----, ----, 112 S.Ct. 1146, 1149, 117 L.Ed.2d 391 (1992). Under the tax laws, levy and setoff mean two different things. Congress did not see fit to include setoff in § 6703(c)(1), and there is no justification for our expanding the plain meaning of the statute. Accordingly, § 6703(c)(1) does not restrict the Commissioner's setoff power as granted in § 6402(a). 44 Belloff's second argument challenging the setoff is that § 6402(a) only permits application of an overpayment against any tax liability, but that § 6700 liability may only be determined by the district court. Thus, at the time of the setoff, Belloff contends, there was no § 6700 liability against which his overpayment could be set off. This argument is premised upon § 6703(c)(2), which describes a district court action regarding § 6700 penalties as a proceeding ... for the determination of [a taxpayer's] liability [emphasis added] for such penalties. 45 As is clear from our prior discussion, this position is countermanded by the scheme of assessment under the Internal Revenue Code, pursuant to which an assessment has the binding force of a judgment to establish an immediate liability against a taxpayer. See Bull, 295 U.S. at 260, 55 S.Ct. at 260; Whiting Pools, 674 F.2d at 159; § 6203. Thus, we believe that the use of the term liability in § 6703(c)(2) was not intended to set aside this firmly established statutory design with respect to § 6700 penalties, but rather simply to specify that (as in all other refund suits) the ultimate liability for such penalties is to be adjudicated in district courts. Accordingly, for the purposes of a § 6402(a) setoff, liability for a § 6700 penalty arises at the time the penalty is assessed, in accordance with familiar and settled principles. 46 This interpretation is buttressed by the consideration that if no liability for § 6700 penalties could arise and provide a basis for collection activity prior to a final district court determination of the question, the protective provisions of § 6703(c)(1) would be superfluous. Section 6402(a) authorizes a setoff against any liability. Similarly, the power to levy on a taxpayer's property arises when the taxpayer is liable to pay any tax. § 6331(a). If the use of the term liability in § 6703(c)(2) operated to preempt these provisions and thus preclude the operation of the Commissioner's levy power, the stay provision of § 6703(c)(1) would be redundant. We decline to read the statute in this way. See Hassan v. Fraccola, 851 F.2d 602, 604 (2d Cir.1988) (statute should be interpreted to avoid surplusage) (citing New York v. Shore Realty Corp., 759 F.2d 1032, 1044 (2d Cir.1985)). Rather, we believe that by incorporating into § 6703 a procedure for staying certain collection activities (and not others), the statute impliedly permits, in the absence of a stay, the assessment and collection of § 6700 penalties in accordance with the operation of the general provisions of the tax code. Although the ultimate determination of Belloff's § 6700 liability was properly made by the district court, the obligation to pay the § 6700 penalties arose at the time of assessment, and the Commissioner was authorized to credit Belloff's overpayment against that liability. 47 We note, finally, that our disposition of the merits of this issue, premised upon the general rule that a § 6402(a) assessment provides a proper basis for the application of a tax overpayment without regard to the ultimate determination of the validity of the IRS legal position underlying the assessment, precludes (at least as a general matter) conflict between the Tax Court and other courts resulting from our jurisdictional ruling in this case. The Tax Court will be required to determine only the straightforward question whether a valid assessment exists, see, e.g., Johnson v. United States, 990 F.2d 41, 43 (2d Cir.1993) (assessment made before Tax Court's decision became final invalid under § 6213(a)), and will not address the merits of the legal issues underlying the assessment. Indeed, § 6214(b), which provides that the Tax Court shall have no jurisdiction to determine whether or not the tax for any other year [than the one brought before it by a taxpayer's petition] ... has been overpaid or underpaid, precludes any broader inquiry. 48