Opinion ID: 1088711
Heading Depth: 2
Heading Rank: 2

Heading: Whether a Taxing Authority Has the Right to Assess and Collect Taxes on the Basis of an Intentional Misrepresentation by the Taxpayer

Text: HealthSouth also argues that even though it intentionally misrepresented assets on its personal-property tax returns, because those assets did not actually exist, the taxing authorities did not have the right to assess and collect personal-property taxes on the assets listed on the tax returns. As to this issue, we affirm the judgment of the Court of Civil Appeals for the reasons set forth in Part II of its opinion of October 27, 2006. The Court of Civil Appeals stated: In essence, HealthSouth requested the probate court to invoke its equity jurisdiction to grant the refund petitions. A party seeking equitable relief, however, must have acted with equity and must come into court with clean hands. Levine v. Levine, 262 Ala. 491, 494, 80 So.2d 235, 237 (1955). In J & M Bail Bonding Co. v. Hayes, 748 So.2d 198 (Ala.1999), the Alabama Supreme Court stated: `The purpose of the clean hands doctrine is to prevent a party from asserting his, her, or its rights under the law when that party's own wrongful conduct renders the assertion of such legal rights contrary to equity and good conscience. Draughon v. General Fin. Credit Corp., 362 So.2d 880, 884 (Ala.1978). The application of the clean hands doctrine is a matter within the sound discretion of the trial court. Lowe v. Lowe, 466 So.2d 969 (Ala.Civ.App.1985).' 748 So.2d at 199. HealthSouth cannot be permitted to take advantage of its own wrong by receiving a refund based on its own inequitable conduct. There is no equity in allowing HealthSouth to obtain relief from its own fraudulent scheme. 978 So.2d at 745. Justice Parker's dissent states: Such refunds [for overpayment of taxes] are appropriate regardless of the malfeasance of the person seeking the refund. This was noted by Craig M. Boise in Playing with `Monopoly Money': Phony Profits, Fraud Penalties and Equity, 90 Minn. L.Rev. 144, 147-48 (2005), which examines recent incidents of falsely inflated income of major U.S. corporations. 978 So.2d at 758. The law review article cited by Justice Parker in fact supports the completely opposite view that equitable defenses should be available in actions seeking a tax refund after the taxpayer's fraud in overstating its tax liability has been exposed. The article states: Recognizing that companies that inflate their taxable income make the IRS `an unwitting accomplice to . . . fraud,' the Senate, in May 2003, approved a measure that would have increased the penalty for tax fraud to an amount equal to the overpayment of tax attributable to the fraud. The effect of this provision would have been to disallow any refunds of taxes paid on fraudulently inflated income. Unfortunately, the measure was dropped in the conference committee and did not become part of the American Jobs Creation Act of 2004 ultimately signed by President George W. Bush in October 2004. However, this Article suggests that the IRS may be able to achieve the results intended by the omitted Senate provision through the rules of equity. Moreover, equity may well furnish a more sound approach to penalizing offenders in such cases than would a legislative enactment. Central to the thesis of this Article is the fact that tax-refund suits are in essence claims in equity, a proposition that has two important implications. First, the taxpayer filing a tax-refund suit is asking the court to impose a fair, just, and equitable `remedy'  namely, the refund of taxes paid in excess of what was due. As an equity claimant, the taxpayer is not in a position to demand that the refund be granted. Second, the fact that refund suits are actions in equity means that claimants are subject to well-established equitable defenses like the doctrine of unclean hands. Based on these twin propositions, this Article asserts that the IRS not only may, but should, assert equitable defenses to deny refunds of taxes paid on fraudulently inflated earnings. 90 Minn. L.Rev. at 150-51 (emphasis added) (footnotes omitted). The dissenting opinion also relies on the views of three staff reporters of The Wall Street Journal. The dissent states: A Wall Street Journal article noted the same principle: `[f]raud or not, the current tax code makes no distinctions. It is a basic tenet of tax law  both for individuals and corporations  that those who overpay are entitled to a refund.' Rebecca Blumenstein, Dennis K. Berman, and Evan Perez, After Inflating Their Income, Companies Want IRS Refunds, The Wall Street Journal, May 3, 2003, at A1. 978 So.2d at 758. We are more impressed with the holding in Stone v. White, 301 U.S. 532, 535, 57 S.Ct. 851, 81 L.Ed. 1265 (1937): The statutes authorizing tax refunds and suits for their recovery are predicated upon the same equitable principles that underlie an action in assumpsit for money had and received. United States v. Jefferson Electric [Mfg.] Co., 291 U.S. 386, 402 [(1934)]. Since, in this type of action, the plaintiff must recover by virtue of a right measured by equitable standards, it follows that it is open to the defendant to show any state of facts which, according to those standards, would deny the right, Moses v. Macferlan, supra, [2 Burr. 1005] at 1010 [(K.B. 1750)]; Myers v. Hurley Motor Co., 273 U.S. 18, 24, 50 A.L.R. 1181 [(1927)]; cf. Winchester v. Hackley, 2 Cranch 342[(1805)], even without resort to the modern statutory authority for pleading equitable defenses in actions which are more strictly legal, Jud.Code, § 274b, 28 U.S.C. § 398.