                  NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                             File Name: 05a0789n.06
                            Filed: September 12, 2005

                                           No. 04-3472

                            UNITED STATES COURT OF APPEALS
                                 FOR THE SIXTH CIRCUIT


UNITED STATES OF AMERICA,                                )
                                                         )
          Plaintiff-Appellee,                            )
                                                         )
v.                                                       )   ON APPEAL FROM THE
                                                         )   UNITED STATES DISTRICT
ANGUS N. MacPHAIL,                                       )   COURT FOR THE SOUTHERN
                                                         )   DISTRICT OF OHIO
          Defendant-Appellant;                           )
                                                         )
SARAH W. CRANE,                                          )
                                                         )
          Defendant-Cross-Appellee.                      )




Before:          BOGGS, Chief Judge; ROGERS, Circuit Judge; and SHADUR, District Judge.1

                 BOGGS, Chief Judge. This case concerns the allegedly erroneous repayment of a

tax refund by the IRS. Appellant Angus MacPhail appeals from a grant of summary judgment to

Appellee the United States on its claim that a tax refund MacPhail received properly belonged in

its entirety to his ex-wife Sarah Crane, and from denial of his own summary judgment motion on

his cross-claim against cross-Appellee Crane that she should reimburse him for any money he

had to repay to the IRS. We affirm the district court’s ruling that MacPhail had no right to the

tax refund from the IRS, but we vacate the court’s ruling that the refund was Crane’s sole


          1
          The Honorable Milton I. Shadur, United States District Judge for the Northern District
of Illinois, sitting by designation.
No. 04-3472
MacPhail v. United States

separate property, and we dismiss the cross-claim for lack of subject matter jurisdiction under

the domestic relations exception.

                                                 I

       Sarah Crane and Angus MacPhail were married in 1983. Wishing to end their marriage,

on April 9, 1997, they entered into a separation agreement. This agreement represented, in

theory, a complete settlement of all property rights between the parties, and each party released

the other from any interest in the other’s property. On July 1, 1997, the Licking County

Common Pleas Court, Division of Domestic Relations, issued a Judgment Entry Decree of

Dissolution incorporating the April separation agreement and dissolving the couple’s marriage.

       Until the dissolution of the marriage, the couple filed a joint Form 1040 United States

Individual Income Tax Return. As part of the dissolution agreement, they opted to file their

1996 income tax jointly, while future income tax returns would be filed separately. The

separation agreement made no provision for any refund arising from the 1996 return.

       The couple’s 1996 tax liability was determined by December 31, 1996. Most of the

income the couple declared on their tax return came from Crane’s family money. The district

court found that in 1996, 99% of the couple’s $1,853,533.00 in gross income came from Crane’s

family money; $87.00 was attributable to MacPhail alone; and the couple had a joint loss of

$45,014, due mostly to the operation of Columbus Alive!, a free local newspaper that the couple

published. Crane and MacPhail earned no wages from the newspaper.

       Between 1991 and 1996, Crane and MacPhail’s joint income taxes were paid in full by

Stanbery, Ltd., a general partnership set up by Crane and her siblings to disburse money earned

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No. 04-3472
MacPhail v. United States

from investments and from the family businesses. Crane had a one-quarter ownership interest in

Stanbery. MacPhail had no ownership interest, control, or participation in the partnership.

        Stanbery customarily paid the estimated taxes for Crane and MacPhail in quarterly

installments. Prior to the signing of the separation agreement, Stanbery had already paid

$384,563.32 in estimated taxes on the couple’s behalf. This represented $190,464 less than the

couple’s total 1996 tax liability. On April 15, 1997, Stanbery applied for a filing extension, and

at the same time sent in a check for $490,000, because it was Stanbery’s practice to make the

following year’s estimated first quarterly payment when filing for a due date extension. The

$490,000 check was drawn on Stanbery, Ltd., and the memo line read “Angus MacPhail [social

security number] Form 4868 1996 Ext.,” because the couple’s joint returns were indexed by the

IRS under MacPhail’s taxpayer number. Crane and MacPhail signed and filed their 1996 joint

income tax return on October 15, 1997. The return elected to have the overpayment of $299,536

applied to the filers’ estimated tax liability for 1997.

        In 1998, MacPhail filed his individual return, reflecting taxable income of $10,675 and a

tax liability of $1,275, which he paid in full upon filing. He claimed no part of the 1996

overpayment, nor did he request any portion of it as a refund. As usual, pursuant to a filing

extension, Crane did not file her 1997 returns until October 1998, and on her returns she listed

the entire 1996 overpayment as taxes she had paid. In the meantime, however, on June 8, 1998,

on its own initiative and without audit or examination, the IRS refunded the entire $299,536 to

MacPhail as an overpayment on his 1997 returns. Subsequently, upon receiving Crane’s 1997

returns, the IRS refused to credit the 1996 overpayment against her 1997 tax liability.

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No. 04-3472
MacPhail v. United States

       In 1999, the IRS twice refused Crane’s request to credit the overpayment to her, stating

that division of the refund was a civil matter between her and MacPhail. Eventually the IRS

changed its mind, and on February 22, 2000, the agency notified MacPhail that the refund had

been erroneous and gave him until March 29 to repay it without interest penalty. In late March

2000, the IRS credited the entire $299,536 to Crane’s 1997 tax account. MacPhail refused to

repay the refund and litigation followed.

       Initially, the IRS brought suit against MacPhail on May 31, 2000, pursuant to I.R.C. §§

7401 and 7405(b), (26 U.S.C.), alleging that the refund to MacPhail was erroneous and that the

overpayment was properly attributable to Crane. In August 2001, after the completion of

discovery, the United States was permitted to amend its complaint in order to join Crane as a

defendant, on the ground that MacPhail had raised sufficient material questions about the proper

allocation of the refund to make Crane a necessary party.

       Crane denied any liability as to the United States and cross-claimed against MacPhail to

recover from him any amount the United States might recover from her. In response, MacPhail

cross-claimed against Crane for any amount the United States might be awarded from him. In

October 2002, Crane moved for summary judgment on her cross-claim against MacPhail and on

the claims of the United States and MacPhail against her. MacPhail moved for summary

judgment on Crane’s cross-claim against him. In June 2003, the district court granted Crane’s

motion against the United States and denied MacPhail’s motion against her on the ground that

refunds are distributed in proportion to the amount the spouses paid in taxes, and the entire

$490,000 final payment, which the court found generated the overpayment, was made out of

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No. 04-3472
MacPhail v. United States

money controlled by Crane. The judge dismissed as moot Crane’s motion against MacPhail’s

cross-claim since it sought relief only to the extent that the United States prevailed against her.

       Relying on the grant of summary judgment in favor of Crane, the United States then

moved for summary judgment against MacPhail. In February 2004, the district court granted the

motion, directing judgment in favor of the United States in the amount of $299,536 plus interest.

MacPhail appeals the decisions against him. The United States does not appeal the grant of

summary judgment to Crane against the United States.

                                                 II

       The grant of summary judgment on behalf of the Government against MacPhail raises

questions that are different from and prerequisite to the dispute between MacPhail and Crane, so

we will begin with the question of the ownership of the 1996 overpayment from the perspective

of federal tax law and then turn to the cross-claims concerning the payment of indemnification

between the former spouses.

       The court reviews de novo a grant of summary judgment. DiCarlo v. Potter, 358 F.3d

408, 414 (6th Cir. 2004). Summary judgment is proper when the facts, viewed “in the light most

favorable to the nonmovant,” demonstrate no genuine issue of material fact and demonstrate that

the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); accord

Summers v. Leis, 368 F.3d 881, 885 (6th Cir. 2004).

       The district court held that Crane was entitled to the refund because, under the tax code,

overpayments by joint filers are apportioned in proportion to each filer’s contribution to the

overpayment, and Crane’s final payment of $490,000 generated the entire overpayment. While

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No. 04-3472
MacPhail v. United States

we agree with the district judge’s conclusion, we do not agree with his reasoning. According to

26 U.S.C. § 6513(b)(2), “[a]ny amount paid as estimated income tax for any taxable year shall be

deemed to have been paid on the last day prescribed for filling the return . . . for such taxable

year (determined without regard to any extension of time for filing such return).” In other

words, all of the money that Crane and MacPhail paid in estimated taxes in 1996 and as carry-

over from their 1995 taxes was deemed paid on April 15, 1997. Therefore, the final payment of

$490,000 did not itself create the overpayment. Furthermore, under 26 U.S.C. § 6407, an

overpayment credit does not exist until the IRS authorizes the refund or credit. The simple act of

sending in the check on April 15, 1997 did not call into existence a tax overpayment.

       As many courts have noted, 26 U.S.C. § 6402(a) permits the IRS to credit an

overpayment to “the person who made the overpayment . . . .” (Emphasis added.) The person

who made the payment does not have to be the person who incurred the liability. United States

v. Elam, 112 F.3d 1036, 1038 (9th Cir. 1997) (“Simply put, the person who overpaid is entitled

to claim the overpayment credit.”). In the case of joint filers, “a joint income tax return does not

create new property interests for the husband or the wife in each other’s income tax

overpayment. [T]he wife having paid the entire amount of the tax is entitled to the entire amount

of the overpayment. Accordingly, the Service may not credit the overpayment on the joint return

against the separate tax liability of the husband for a prior year.” Rev. Rul. 74-611, 1974-2 C.B.

399. Therefore, courts have consistently found that a refund should be disbursed in proportion to

the amount each spouse paid to the taxes owed. Ragan v. Comm’r, 135 F.3d 329, 333 (5th Cir.

1998) (“‘the source of an overpayment of income tax determines the character of the refund . . .

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No. 04-3472
MacPhail v. United States

.’ In re Bathrick, 1 B.R. 428, 430 (Bkrtcy. S.D. Tex. 1979)”); Elam, 112 F.3d at 1038; Conklin v.

Comm’r, 897 F.2d 1027, 1031 (10th Cir. 1990); Gordon v. United States, 757 F.2d 1157, 1160

(11th Cir. 1985).

        While Crane certainly benefitted from filing her 1996 taxes jointly because it enabled her

to take additional deductions, arising in particular from a large loss on Columbus Alive!, which

she would otherwise have had to split with MacPhail, the fact that MacPhail’s portion of the

deductions changed the total tax liability is irrelevant to the consideration of the proper

ownership of the overpayment. The IRS looks to the source of the payment, not to the person

who incurred the liability. Between 1991 and 1996, Stanbery, Ltd. paid all of the joint taxes of

Crane and MacPhail, including the credit from 1995 that was used to make the first quarter

estimated 1996 tax payment. Only Crane had any interest in Stanbery, therefore the money is

attributable only to her.2

        The Government seeks to recoup the refund from MacPhail under 26 U.S.C. § 7405(b),

which gives it the right to recover “[a]ny portion of a tax imposed by this title which has been

erroneously refunded . . . .” To obtain repayment for an allegedly erroneous refund under 26

U.S.C. § 7405(b), the Government must show that the money was erroneously paid and that the




        2
          MacPhail claims in a deposition and brief that he and his wife “loaned” money to Crane
Plastics in approximately 1991, and that therefore this gives him an interest in some of
Stanbery’s funds. Crane Plastics, a family-owned business, operated as a family bank for family
deposits. Stanbery, Ltd., however, was a general partnership independent of Crane Plastics,
which disbursed funds generated by investments and profits earned by the group of Crane-family
businesses. Furthermore, MacPhail did not substantiate his claims with any evidence other than
his own assertions.

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No. 04-3472
MacPhail v. United States

Government brought suit within the two-year statute of limitations. In some circuits, case law

has added a judicial gloss that it not be inequitable to require repayment. MacPhail argues that §

7405(b) does not apply because the refund was not erroneous and because the Government is

equitably estopped under a theory of unjust enrichment from recovering the money after it twice

ruled the refund was rightly his. We do not agree with MacPhail’s arguments.

        MacPhail contends that the refund was not erroneous because the IRS gave the refund

voluntarily, based on its own initial mistake of fact concerning ownership of the refund. Section

7405(b) does not explain what makes a refund “erroneous.” But nothing in the statute or in prior

judicial interpretation of § 7405(b) indicates that the voluntariness of the refund plays any role in

adjudicating the question of error. The obvious consequence of MacPhail’s claim would be that

the IRS could not demand repayment of refunds that were made knowingly and voluntarily, but

contrary to the tax code, and would very rarely be able to recover windfalls that taxpayers

received but did not legally deserve. Under the plain language of 26 U.S.C. § 7405, “[t]he

government is entitled to recoup the refund . . . . Equity has no power to change this wholly

legal result.” Valley Ice & Fuel Co. v. United States, 30 F.3d 635, 640 (5th Cir. 1994).

Moreover, MacPhail’s position also violates the long-standing policy that the Government

should not be harmed by the actions of its agents in incorrectly disbursing funds from the public

fisc when the error arose from a mistake of fact.3 Wisconsin Cent. R.R. v. United States, 164


       3
         MacPhail relies on an out-of-context passage from a district court case from 1927 to
argue that the Government is obligated by the voluntary payment “made by it through its duly
authorized representatives . . . .” United States v. Detroit Steel Prods. Co., 20 F.2d 675, 677
(E.D. Mich. 1927). In Detroit Steel, however, the issue was one of a change in the law. For

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No. 04-3472
MacPhail v. United States

U.S. 190, 212 (1896) (reaffirming “the principle that parties receiving moneys illegally paid by a

public officer are liable ex aequo et bono to refund them.”); United States v. Burchard, 125 U.S.

176, 180-81 (1888) (Government may recover monies paid out due to mistake of fact); see also

United States v. Wurts, 303 U.S. 414, 415 (1938) (“The Government by appropriate action can

recover funds which its agents have wrongfully, erroneously, or illegally paid.”).

       Nor is MacPhail entitled to keep the refund under the doctrine of unjust enrichment. He

argues that after the IRS gave him the money, it twice reaffirmed its distribution of the refund to

him as a matter of law, and therefore he reasonably believed the money was his, so the

Government is not entitled to restitution. However, we have been very clear in the past that a

mistake of law by a Government agent, acting without audit or examination, does not amount to

an act or interpretation upon which MacPhail could justifiably rely. United States v. Guy, 978

F.2d 934, 937 (6th Cir. 1992) (“‘[T]hose who deal with the government are expected to know the

law and may not rely on the conduct of government agents contrary to the law.’”) (quoting

Heckler v. Community Health Servs., 467 U.S. 51, 63 (1984)); Beer v. Comm’r of Internal

Revenue, 733 F.2d 435, 437 (6th Cir. 1984) (“The administrative refunds . . . did not amount to a

final determination of the tax that might ultimately be due; they were subject to final audit and

adjustments.”); Comm’r of Internal Revenue v. Mooneyhan, 404 F.2d 522, 528 (6th Cir. 1968)



several years Detroit Steel paid an excise tax on a product it manufactured. The IRS then issued
a ruling that the product was not subject to the tax. Detroit Steel applied for and was granted a
refund of its payments. The following year, the IRS reversed itself, deciding that the prior ruling
had been incorrect, and demanded that Detroit Steel pay the back taxes. The court found that
Detroit Steel had paid the taxes, that the IRS had decided the taxes were not owed, and that it
could not then later change its mind and penalize the taxpayer for not paying the tax.

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No. 04-3472
MacPhail v. United States

(“The doctrine of equitable estoppel . . . cannot prevent the Commissioner from correcting a

mistake of law no matter where respondent was led.”). See also Restatement (First) of

Restitution § 46 (1937) (“A person who has conferred a benefit upon another because of an

erroneous belief induced by a mistake of law that he is under a duty to do so, is entitled to

restitution as though the mistake were one of fact if: (a) the benefit was conferred by a State or

subdivision thereof . . . .”) In addition, the initial IRS letters did not affirmatively instruct

MacPhail that the refund was his. Instead, they indicated that the dispute “was a civil matter”

that “fall[s] under the jurisdiction of a state court,” so he was on notice that no final decision had

been made. Finally, the fact that MacPhail did not report the 1996 overpayment on his 1997

return indicates rather forcefully that he had no expectation that any of that money was his.

        Therefore, with regard to the IRS's involvement, we hold that the district court did not err

in granting the Government's motion for summary judgment and awarding the entire

overpayment to Crane.

                                                   III

        We now turn to the state law matter of the cross-claims for indemnification between the

former spouses. As a threshold matter, we must consider whether the district court properly took

supplemental jurisdiction over the cross-claims. While the cross-claims would appear to fall

under that court’s ancillary jurisdiction because they “aris[e] out of the transaction or occurrence

that is the subject matter of . . . the original action,” Fed. R. Civ. P. 13(g), whenever a claim

concerns marital matters, we must decide whether the family law character of the claim

precludes the exercise of supplemental jurisdiction. Ex parte Burrus, 136 U.S. 586, 593-94

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No. 04-3472
MacPhail v. United States

(1890) (“The whole subject of the domestic relations of husband and wife, parent and child,

belongs to the laws of the States and not to the laws of the United States.”); Mansell v. Mansell,

490 U.S. 581, 587 (1989) (“[D]omestic relations are preeminently matters of state law”); Moore

v. Sims, 442 U.S. 415, 435 (1979) (“Family relations are a traditional area of state concern”). In

general, this exception extends to questions of divorce, alimony, and child custody.

Ankenbrandt v. Richards, 504 U.S. 689, 703 (1992). “Thus, while rare instances arise in which

it is necessary to answer a substantial federal question that transcends or exists apart from the

family law issue . . . , in general it is appropriate for the federal courts to leave delicate issues of

domestic relations to the state courts.” Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, __,

124 S. Ct. 2301, 2309 (2004).

        The district court believed that it had jurisdiction because it characterized the

overpayment as arising solely from the $490,000 paid by Stanbery on April 15, 1997, several

days after the couple had signed the separation agreement. However, as explained above, the

district court erred in determining the source of the tax overpayment based solely on the origin of

the April 15 payment. Instead, the court was required to take into account the totality of the tax

payments made during the 1996 tax year. Thus, resolution of the indemnification cross-claims

requires allocation of the refund into some combination of separate or marital property. We

decline to hazard an opinion as to what that division will or should be because the determination

is solely resolved by Ohio domestic relations law.

        The division of property as either separate or marital raises exactly the kind of “delicate

issue[ ]” that is more “appropriate for the federal courts to leave . . . to the state courts.”

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No. 04-3472
MacPhail v. United States

Newdow, 124 S. Ct. at 2309; see also McLaughlin v. Cotner, 193 F.3d 410, 413-14 (6th Cir.

1999) (holding in case arising under diversity jurisdiction that federal court lacked jurisdiction in

case “arising out of conflict over a divorce decree”). Under these circumstances, we hold that

Ohio courts are the more appropriate forum for deciding how the money credited to Crane by the

IRS should be divided, if at all, between the former spouses. United States v. Confederate Acres

Sanitary Sewage & Draining Sys., Inc., 935 F.2d 796, 800 (6th Cir. 1991) (federal courts “should

avoid needless decisions of state law both as a matter of comity and to promote justice between

the parties by procuring for them a surer-footed reading of applicable law.”).



                                                 IV

       In light of the foregoing, we AFFIRM the grant of summary judgment on behalf of the

Government, but we VACATE the denial of MacPhail’s motion for summary judgment and

direct that the district court DISMISS MacPhail’s cross-claim.




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