Opinion ID: 780311
Heading Depth: 3
Heading Rank: 2

Heading: 1994-1996 Overpayments Applied to 1990 Liability

Text: 34 The government also argues that the district court lacked the authority to order a refund of the 1994 through 1996 overpayments that were applied by the IRS to the unpaid 1990 tax liability. The government's argument is twofold: (1) the Kaffenbergers' failure to file an administrative claim related to 1990 precludes the district court from exercising jurisdiction related to subsequent credits applied to the 1990 tax liability; and (2) the Kaffenbergers' failure to pay the full assessment for the 1990 tax liability precludes them from bringing suit in district court for a refund of subsequent credits applied to the 1990 liability. We agree with the IRS's second position and therefore need not address the first. 35 Once the IRS applied the overpayments from 1994 through 1996 to the 1990 tax assessment, as the IRS had the discretion to do, see I.R.C. § 6402(a), those funds became credits against the 1990 tax liability. See I.R.C. § 7422(d) (The credit of an overpayment of any tax [i.e., 1994-1996] in satisfaction of any tax liability [i.e., 1990] shall, for the purpose of any suit for refund of such tax liability [i.e., 1990] so satisfied, be deemed to be a payment in respect of such tax liability [i.e., 1990] at the time such credit is allowed); Donahue v. United States, 33 Fed.Cl. 600, 605 (1995) (holding that application of an overpayment from 1988 to a tax liability for 1985 was deemed a payment against the 1985 liability on the date the IRS applied the 1988 overpayment to the 1985 liability for purposes of § 6511(a)); Republic Petroleum Corp. v. United States, 613 F.2d 518, 525 n. 19 (5th Cir.1980) ([T]axpayer's 1960 and 1962 credits are treated like any cash payment made by taxpayer to satisfy his deficiency for 1959, and he can recover a refund of them to the extent he overpaid his 1959 tax.  (emphasis added)). The Kaffenbergers' claim related to the 1994 through 1996 overpayments is based solely on their assertion that there is no 1990 liability against which to apply the overpayments. In other words, what they are seeking is an adjudication of their 1990 tax liability. As we have just held, the Kaffenbergers' failure to pay the full 1990 assessment prior to bringing this suit deprived the district court of jurisdiction over claims related to the 1990 assessment. Because the overpayments became credits against the 1990 tax liability when the IRS so applied them, we hold that the district court lacked jurisdiction to order a refund of the overpayments from 1994 through 1996 that were credited against the 1990 liability. 36 Having so held, we disagree with the district court's characterization of the $17,778 as a refund of the 1994 through 1996 overpayments. Upon closer examination, we believe that that amount reflects an order to refund the $26,700 overpayment from 1989. As made clear by the detailed calculations submitted by the Kaffenbergers, the $17,778 figure is the result of refunding the 1989 overpayment after taking into consideration the 1990 liability as assessed by the IRS and the payments applied to that liability by the IRS. The district court's inability to adjudicate the Kaffenbergers' 1990 liability and to declare the parties' rights related to that liability does not render the court incapable of recognizing the payments already applied by the IRS against the Kaffenbergers' 1990 liability. As noted, the government does not appeal the calculation netting the $26,700 overpayment from 1989 against the 1990 liability or the accuracy of the $17,778 amount. Faced with the parties' disparate calculations for judgment, we believe that the district court's ultimate conclusion was correct that the Kaffenbergers were entitled to a refund of $17,778 to carry into effect the jury's special verdict. 37 To be clear, we do not pass on any other disputes that the IRS and the Kaffenbergers might have regarding the 1990 liability. Rather, we affirm the district court's judgment to the extent that it ordered the refund of the $26,700 overpayment from 1989 and calculated that this amount, when considered with the other payments applied to the 1990 liability by the IRS, resulted in an overpayment by the Kaffenbergers of $17,778. D. Attorney's Fees 38 The district court ordered the government to pay the Kaffenbergers' costs and attorney's fees, although the fee rate was reduced from the rate requested by the Kaffenbergers. The Internal Revenue Code authorizes an award of reasonable litigation costs to the prevailing party in a suit by or against the United States in connection with a tax refund. I.R.C. § 7430(a). A taxpayer is not considered a prevailing party, and is not entitled to litigation costs, if the government's position was substantially justified. § 7430(c)(4)(B). The position of the United States is substantially justified if it has a reasonable basis in both law and fact, a determination made on a case by case basis. The taxpayer bears the burden of proving that the government's litigation position was not substantially justified. United States v. Bisbee, 245 F.3d 1001, 1007 (8th Cir.2001) (internal citations omitted). We will reverse the district court's grant of costs and fees under I.R.C. § 7430 only if the district court abused its discretion. Id. 39 The district court found the government's position not substantially justified for the same reasons it had previously denied the government's motion for summary judgment and because the jury ultimately found in favor of the Kaffenbergers. (Appellant's Add. at 9-10.) Although a jury's verdict is relevant to whether the government's position is substantially justified, it is not determinative, especially where the jury's finding is based on the preponderance of the evidence, as in this case. See Wilfong v. United States, 991 F.2d 359, 367 (7th Cir.1993) (reversing an award of fees where the district court's only valid explanation of its award was the jury's verdict). Similarly, fact disputes that preclude summary judgment do not establish that the moving party's position is not substantially justified. 40 The Kaffenbergers assert that the IRS acted in bad faith by not accepting their factual claim that they made a valid informal refund claim, and that the IRS tried to keep them from going to trial. The IRS was not required to acquiesce in the taxpayers' claim that they made a valid informal claim. Our judicial system allows all litigants, including the IRS, to litigate their differences through trial if the parties cannot settle them. That does not make the IRS's position not substantially justified. The Kaffenbergers' equitable arguments do not address whether the IRS's position was substantially justified, which the Kaffenbergers must prove if they are to be awarded litigation costs. 41 Reviewing the record, we believe that the IRS's position was substantially justified and the district court abused its discretion in awarding litigation costs to the Kaffenbergers. Given the state in which the issue of the informal claim reached us on appeal, we reviewed the issue for plain error. The fact intensive nature of the informal claim doctrine led us to conclude that the jury's findings are supported under that standard of review. Factually, we believe that this was a close case and may border on the outer reaches of the informal claim doctrine. It was by no means clear that the Kaffenbergers made an informal claim sufficient to toll the statute of limitations until their formal claim was filed. See Comm'l Nat'l Bank, 874 F.2d at 1170 (characterizing the adequacy or sufficiency of an informal refund claim as primarily a question of fact). As such, we must conclude that the IRS's position that the Kaffenbergers had not made an informal claim for a refund was substantially justified. We reverse the district court's award of costs and fees to the Kaffenbergers.