Opinion ID: 449561
Heading Depth: 2
Heading Rank: 1

Heading: The Propriety of I.R.S.'s Deficiency Procedures

Text: 6 The Government asserts that I.R.S. acted properly in asserting a deficiency against Gordon. While the Government does not dispute that the deficiency occurred as a result of I.R.S.'s action in first crediting Elkinton with a refund and then determining that the amount of the refund was excessive, it nevertheless argues that I.R.S. followed proper statutory procedures in assessing the deficiency. We agree. 7 In allowing a pre-audit refund, subject to repayment in the event of a determination that the refund was excessive, I.R.S. followed proper procedures. 26 C.F.R. Sec. 301.6402-4; Warner v. Commissioner of Internal Revenue, 526 F.2d 1, 2 (9th Cir.1975). I.R.S. also followed correct procedure in applying the refund to an existing tax liability. 26 U.S.C. Sec. 6402(a) states, in pertinent part, 8 In the case of any overpayment, the Secretary [of the Treasury] ... may credit the amount of such overpayment ... against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall refund any balance to such person. 9 Where spouses claim a refund under a joint return, the refund is divided between the spouses, with each receiving a percentage of the refund equivalent to his or her proportion of the withheld tax payments. See, e.g., Rosen v. United States, 397 F.Supp. 342 (E.D.Pa.1975); United States v. Mooney, 400 F.Supp. 98 (N.D.Tex.1975). The bulk of the tax withheld on which a refund was claimed had been paid to Elkinton; I.R.S., however, applied the entire amount of the refund to reducing Elkinton's outstanding liability. The Government now concedes that it was error to apply Gordon's portion of the repayment, which amounted to $143.44, to Elkinton's liability. Under the statute, however, it plainly was proper for I.R.S. to credit Elkinton's portion of the refund--$4,971.67--to his liability. 10 Gordon argues that it is wrong to allow I.R.S. to assert a deficiency against taxpayer when such a deficiency would not have existed if I.R.S. had not erroneously allowed a refund. This is precisely the argument made by taxpayers in Warner v. Commissioner, supra. The Warner court rejected this argument, and so must we. As the Warner court observed, [T]he Commissioner, confronted by millions of returns and an economy which repeatedly must be nourished by quick refunds, must first pay and then look. This necessity cannot serve as the basis of an 'estoppel.'  Warner, supra, at 2. We believe that the reasoning of the Warner court was sound. A policy which would require the Commissioner to delay refunds until after audits were made would be economically burdensome, and is certainly not required by statute. 11 It is not disputed that Elkinton's and Gordon's joint tax returns understated the amount of their tax liability for 1972 and 1973. A deficiency, as defined by 26 U.S.C. Sec. 6211(a), is determined by comparing the amount of tax due with the amount of taxes paid and the amount of rebates paid to taxpayers. As defined by 26 U.S.C. Sec. 6211(b), the term rebate includes refunds made. I.R.S. applied this standard in determining that a deficiency existed with respect to Elkinton's and Gordon's joint tax payments for 1972 and 1973. 26 U.S.C. Sec. 6212(a) authorizes the Secretary of the Treasury to send notices of any deficiencies to taxpayers and 26 U.S.C. Sec. 6212(b) requires that parties who filed a joint return but are no longer living at the same address each receive notice of such a deficiency. Elkinton and Gordon, who were divorced as of the time of the deficiency determination, each received notice. 12 As the foregoing discussion makes clear, I.R.S. scrupulously followed each step in the statutory mandate in its determination that a deficiency existed with respect to Elkinton's and Gordon's joint tax return. I.R.S. acted equally properly in the steps that led to the existence of the deficiency, namely, the grant of the refund, its application to Elkinton's existing tax liability (to the extent, at least, that the refund represented taxes withheld on Elkinton's income), and the subsequent determination that additional taxes were due. It follows, then, that I.R.S. cannot be faulted for the assessment of the deficiency.