Opinion ID: 767471
Heading Depth: 2
Heading Rank: 1

Heading: Recovery of Refunds Under Section 7405(b)

Text: 17 Before reaching the merits of the taxpayers' argument, we address the Farleys' contention that the Government cannot sue pursuant to 26 U.S.C. S 7405(b) to recover the Relevant Refunds. Section 7405(b) states in pertinent part that [a]ny portion of a tax imposed by this title which has been erroneously refunded... may be recovered by civil action brought in the name of the United States. 26 U.S.C. S 7405(b). Noting that [t]here has never been any assertion that [the Relevant Refunds] were mistakenly issued, the Farleys argue that the Relevant Refunds were not erroneously refunded within the meaning of the statute and that the Government therefore cannot sue to recover the Relevant Refunds pursuant to section 7405(b). Instead, the Farleys contend, the Government must proceed under 26 U.S.C. S 6212 to recover the Relevant Refunds. The Farleys argue that [t]he facts of this case are squarely on point with the facts of United States v. Russell Mfg. Co., 349 F.2d 13 (2d Cir. 1965), and as such the Government is precluded by the holding in Russell from suing to recover the Relevant Refunds pursuant to 26 U.S.C. S 7405(b). While the Farleys' argument is not entirely without merit, we conclude that the Government can bring suit pursuant to section 7405(b) to recover the Relevant Refunds. In addition, while we are obviously not bound by Second Circuit precedent, it is important to note that even if we were to adopt the reasoning of the Russell court, the Farleys' argument still fails because the facts of this case are not squarely on point with the facts of  Russell. 18 The controversy that gave rise to United States v. Russell Mfg. Co. began in 1945 when Russell Manufacturing Company took a $47,200 deduction for payments made to two separate trusts. Russell, 349 F.2d at 15. The Commissioner of Internal Revenue disallowed the deduction, concluding that: 19 [The] payments were not pursuant to a qualified plan under S 23(p)(1)(A), (B) and (C) of the 1939 Code... and that they did not meet the requirement of S 23(p)(1)(D) which permits deductions of payments under a non-qualified plan if the employees' rights to or derived from such employer's contribution or such compensation are nonforfeitable at the time the contribution or compensation is paid. 20 Id. Upon denial of the refund claim, Russell Manufacturing sued in the Court of Claims and ultimately prevailed. See Russell Mfg. Co. v. United States, 175 F. Supp. 159, 163 (Ct. Cl. 1959). 21 After prevailing in the Court of Claims, Russell Manufacturing continued to claim similar refunds for many years. The I.R.S. issued these refunds but decided in 1964 to bring suit in the District Court pursuant to section 7405(b) to recover the refunds, alleging that the refunds had been issued erroneously. See United States v. Russell Mfg. Co., 245 F. Supp. 159 (D. Conn. 1964). The District Court dismissed the Government's claim, concluding that the Government could not sue under section 7405(b) because the money claimed by the Government had not been erroneously refunded. See id. at 160. The Government promptly appealed the District Court's ruling, and the Second Circuit affirmed, concluding that the Government could not sue pursuant to section 7405(b). See Russell, 349 F.2d at 19. The facts of Russell, however, differ dramatically from the facts in this case. 22 Unlike this case, in Russell, the Government candidly admitted that [i]ts aim [was] to obtain a decision by [the Second Circuit Court of Appeals] conflicting with that of the Court of Claims, as to which Russell might well obtain certiorari under Supreme Court Rule 19, subd. 1(b), and thus to procure an authoritative construction, hopefully in the Government's favor. Russell, 349 F.2d at 16. In addition, unlike this case, the parties in Russell were the same in the Court of Claims as in the Court of Appeals. In arguing that the facts of this case are squarely on point with the facts of United States v. Russell Manufacturing Co., 349 F.2d 13 (2nd Cir. 1965), the Farleys analogize the earlier Court of Claims decision in Russell to the Tax Court's initial decision in Winn v. Commissioner. In Russell, the taxpayer in the Court of Claims and the Second Circuit Court of Appeals was the same--Russell Manufacturing Company. In contrast, the taxpayers in United States v. Farley (Third Circuit Court of Appeals) and Winn v. Commissioner (Tax Court) were clearly different. The final and perhaps most important point is that the court in Russell explicitly limited its holding to the facts of that case stating, [w]e limit our decision to the unusual facts here presented, where the Government deliberately made what it then considered an erroneous refund to a taxpayer prevailing in a court decision whose authority remains unimpaired. Russell, 349 F.2d at 17-18 (emphasis added). The Farleys' reliance on Russell is misplaced; Russell is inapposite because the Government in this case did not change its treatment of tax refunds in order to prompt litigation. 23 Indeed, this case is more appropriately analogized to United States v. Ellis, 154 F. Supp. 32 (S.D.N.Y. 1957), aff'd 264 F.2d 325 (2d Cir. 1959), United States v. Heilbroner, 22 F. Supp. 368 (S.D.N.Y. 1938) aff'd 100 F.2d 379 (2d Cir. 1938), or United States v. Tuthill Springs Co., 55 F.2d 415 (N.D. Ill. 1931) in which the I.R.S. changed its interpretation of the substantive law. However, unlike Russell, in Ellis, Heilbroner, and Tuthill, the court held that the Government could sue under the predecessor of section 7405(b) to recover refunds erroneously issued. As such, we conclude that the Government can bring this suit under section 7405(b) of the Internal Revenue Code in an effort to recover the Relevant Refunds. 24