
USCA1 Opinion

	




                            United States Court of Appeals                            United States Court of Appeals                                For the First Circuit                                For the First Circuit                                 ____________________        No. 95-1173                                 GRENVILLE CLARK III,                                 Plaintiff, Appellee,                                          v.                              UNITED STATES OF AMERICA,                              INTERNAL REVENUE SERVICE,                               Defendants, Appellants.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF NEW HAMPSHIRE                [Hon. Martin F. Loughlin, Senior U.S. District Judge]                                          __________________________                                 ____________________                                        Before                                Torruella, Chief Judge,                                           ___________                                Stahl, Circuit Judge,                                       _____________                           and Dominguez,* District Judge.                                           ______________                                 ____________________            Kent L. Jones, Tax  Assistant to the Solicitor General, with  whom            _____________        Loretta C.  Argrett, Assistant  Attorney General, and  Gary R.  Allen,        ___________________                                    ______________        David   English  Carmack,  and  Sally  J.  Schornstheimer,  Attorneys,        ________________________        _________________________        Department of Justice, Tax Division, were on brief for appellants.            Grenville Clark III pro se.             ___________________                                 ____________________                                   August 29, 1995                                 ____________________        _____________________        *Of the District of Puerto Rico, sitting by designation.                      STAHL, Circuit Judge.   In this federal  income tax                      STAHL, Circuit Judge.                             _____________            case,  the government appeals  the district court's  grant of            summary judgment to taxpayer Grenville Clark III in his  suit            to recover monies  collected by the Internal  Revenue Service            ("IRS") by levy.   Although we agree with  the district court            that  summary judgment for  the taxpayer was  appropriate, we            reduce the amount of the judgment because  the district court            erred in finding that  Clark had fully extinguished his  1985            tax liability.                                          I.                                          I.                                          __                                  Factual Background                                  Factual Background                                  __________________                      The material  facts are not in dispute.   On August            14,  1986, Clark and his then-spouse, Marguerite Clark, filed            their  1985 income  tax  return, which  the  IRS received  on            August 18, 1986.  The  return indicated a total tax liability            of  $13,648.00, and on  September 29, 1986,  the IRS assessed            the Clarks' 1985 tax liability  in that amount.1  Because the                                            ____________________            1.  Typically,  when  the  IRS  receives  a  tax  return,  it            evaluates the return for  accuracy.  If, as in  this case, it            finds  the return satisfactory,  it enters an  assessment for            the amount of  tax the taxpayer calculated to be  owing.  See                                                                      ___            26 U.S.C.    6201, 6203.  If it disagrees with the taxpayer's            determination of  the  tax liability,  the  IRS may  enter  a            different assessment, but  only after it  issues a notice  of            deficiency to the  taxpayer and gives him or  her ninety days            to challenge its calculations in the Tax Court.  26 U.S.C.               6201, 6212, 6213.   The IRS has  three years from the  date a            return  is filed  to make  an  assessment of  liability.   26            U.S.C.    6501.  If the IRS  discovers that an assessment "is            imperfect  or incomplete  in any  material  respect," it  may            correct the problem by making a supplemental assessment if it            does   so  within  the  three-year  time  period  for  making                                         -2-                                          2            Clarks did not pay the tax in full at the time of filing, the            IRS added penalties and  interest to the amount due.  The IRS            then placed a lien upon  their real and personal property and            demanded that they satisfy the outstanding tax.                      As  of  June  13,  1987,  Clark  had  made  several            payments on  his 1985 tax  liability.  He also  had an unpaid            tax liability  for  1986 in  the amount  of $13,415.00,  plus            interest and penalties.  On June 13, 1987, Clark sent the IRS            a check for $13,415.00, which he  indicated should be applied            to his 1986 liability by writing in the "memo" portion of the            check:   "1040 12/31/86 [Clark's  social security  number]."2                                            ____________________            assessments.  26 U.S.C.   6204.                      Once it  makes an  assessment of  a taxpayer's  tax            liability for a given year,  the IRS generally has sixty days            to issue a  notice and demand for payment to the taxpayer, 26            U.S.C.    6303(a),  and  ten years  to  collect the  assessed            amount, 26  U.S.C.    6502(a)(1).    Collection may  be  made            through administrative methods  (including federal liens  and            levies), see  26 U.S.C.     6321,  6331, or  judicial methods                     ___            (suits  to  foreclose  liens  or  to  reduce  assessments  to            judgment), see 26  U.S.C.    7403.   If it does  not make  an                       ___            assessment within three years of  the filing of a return, the            IRS may not  pursue collection activities after  the close of            the three-year  period.  26 U.S.C.    6501.  It can, however,            file suit for collection without  an assessment if it does so            during the three-year period.  Id.                                           ___            2.  In a  letter to the  IRS dated September 22,  1989, Clark            wrote:                      This  payment was  voluntarily made,  and                      the memo  on  the  check  itself  clearly                      indicates  that I  designated that  it be                      applied  to   my  1986   Form  1040   tax                      liability.   This memo conforms  with the                      instruction found at  line 67 of my  1986                      return which  asks that I write my social                      security number  and "1986 Form  1040" on                      it.                                         -3-                                          3            The IRS, however,  applied the $13,415.00 payment  to Clark's            outstanding  tax liability  for  1985,  which  paid  off  the            balance due3  and yielded an  overpayment for that year.   On            July  17, 1987,  the  IRS  issued Clark  a  refund check  for            $11,652.28.                      Clark  and  the  IRS  corresponded  over  the  next            several  years, both about  the refund and  about the balance            due on the 1986 account, which had not been credited with the            $13,415.00 payment.   In his  correspondence, Clark  insisted            that he  had made a  $13,415.00 payment towards his  1986 tax            liability, but  did not explicitly  mention that it  had been            misapplied to his  1985 account and  mostly refunded to  him.            Clark points out,  however, that the copies  of the cancelled            check  he repeatedly  sent  to the  IRS  showed code  numbers            imprinted  by the IRS that  indicated exactly how the payment            had been applied.                      Finally, in November 1990, the IRS realized that it            had  misapplied the  1986 payment  to  Clark's 1985  account.            Clark continued to insist, however, that as he had designated            that the  payment be applied  to his 1986 account,  he should            receive credit  for it there.   In response, the  IRS removed                                            ____________________            3.  According  to our calculations,  the balance due  on June            19, 1987, the date the IRS received the taxpayer's $13,415.00            payment, was $1,808.59.   We calculate this number  by adding            the  payments  Clark  had made  prior  to  the misapplication            ($14,140.72) and  subtracting  that number  from the  charges            reflected in his account ($15,949.31).                                         -4-                                          4            the $13,415.00 payment  from his 1985 account and  applied it            to his 1986  account,4 leaving his 1985 account  with, in the            IRS's view,  a balance due of $13,415.00,  plus penalties and            interest.   After  some  additional correspondence  about his            1985  taxes, the  IRS  collected  $24,546.34  from  Clark  by            levying upon his  bank accounts and seizing  and subsequently            selling his car.  Clark then filed a claim with the IRS for a            refund, but the claim was denied.                      On  January  3,  1994, Clark  brought  suit  in the            United   States  District  Court  for  the  District  of  New            Hampshire, seeking a refund of the $24,546.34, plus interest.            Both parties  moved for  summary  judgment.   In his  motion,            Clark  argued  that  the  IRS's  collection  activities  were            unlawful because they were not done pursuant to an assessment            as  required by 26 U.S.C.    6502(a)(1), since the assessment            that  the  IRS  had  entered  in  September   1986  had  been            extinguished.   The  government  responded  that  assessments            cannot be extinguished and that its crediting of Clark's 1986            account  resulted in  an underpayment  in  his 1985  account,            leaving the  IRS its statutory  rights to collect  the unpaid            1985 tax liability on the basis of the original assessment.                                            ____________________            4.  Because the  taxpayer  had  already  satisfied  his  1986            account  to avoid further penalties, the transfer resulted in            an  overpayment  on  the  1986  account.    Pursuant  to  the            taxpayer's  direction, the IRS applied the overpayment to his            tax liabilities for 1988 and 1989.                                         -5-                                          5                      The district  court relied  on the  Fifth Circuit's            decision in United States v.  Wilkes, 946 F.2d 1143 (5th Cir.                        _____________     ______            1991), to hold that a full payment extinguishes an assessment            and  that  subsequent  refunds  do  not  revive  extinguished            assessments.  The district court also found that Clark's 1985            assessment  had  been extinguished.    Although acknowledging            that Clark was getting "an undeserved windfall," the district            court  granted  Clark's  motion for  summary  judgment,  thus            rendering  moot  the government's  cross  motion  for summary            judgment.  The government appeals.                                         II.                                         II.                                         ___                                      Discussion                                      Discussion                                      __________            A.  Standard of Review            ______________________                      As  always, we review  a district court's  grant of            summary judgment de novo and, like the district court, review                             __ ____            the facts in the light most favorable to the nonmoving party.            See,  e.g., Udo  v.  Tomes, 54  F.3d 9,  12 (1st  Cir. 1995).            ___   ____  ___      _____            Summary  judgment   is  appropriate   when  "the   pleadings,            depositions,  answers to  interrogatories, and  admissions on            file, together with  the affidavits, if any,  show that there            is  no genuine  issue as  to any  material fact and  that the            moving party is entitled  to a judgment as a matter  of law."            Fed. R. Civ. P. 56(c).            B.  Analysis            ____________            1.  Can Assessments be Extinguished?                                         -6-                                          6                      The government argues that the district court erred            in  holding  that assessments  are  extinguished  by payment.            Under  the   government's  theory,   assessments  cannot   be            extinguished, so  if there is  an underpayment of  the amount            recorded in  the assessment at  any time during  the ten-year            period  for collection, then the IRS may institute procedures            to collect that amount.  The government  reasons that because            Clark's 1985 account reflected an underpayment of $13,415.00,            plus  interest and  penalties,  after  the  IRS  removed  the            misapplied  $13,415.00  payment,  and  because  the  ten-year            limitations period had  not expired, the IRS  was entitled to            implement  administrative  procedures to  collect  the amount            due.  The government's argument has essentially three prongs.                      First,  the  government   argues  that  assessments            cannot be extinguished because they are merely administrative            records of  a  taxpayer's tax  liability  for a  given  year.            According  to the government, assessments are not affected by            payment, but  remain as  permanent records  of tax  liability            regardless of whether  the taxpayer satisfies  that liability            or not.   As such, assessments are not  like promissory notes            or mortgages, which  create liability and are  cancelled when            the debt is satisfied.  In fact, the government contends that            assessments create no  liability at all, since  tax liability            is created by the Internal  Revenue Code and may be collected                                         -7-                                          7            even  without an  assessment if  the  IRS brings  suit within            three years of the filing of a return.                        Second,  the  government argues  that  the Internal            Revenue Code's  distinction between rebate  refunds and  non-            rebate  refunds5  supports  its  position  that   assessments            cannot be  extinguished.    This argument  is  based  on  the            government's contention that when the IRS erroneously refunds            an amount  to a taxpayer, it  can reclaim that amount  in two            ways:    (1) by  bringing an  erroneous-refund suit  under 26            U.S.C.     7405,  or  (2)  through administrative  collection            procedures.6   Under  the  government's view,  if assessments            can be extinguished, then the IRS would not be able to pursue                                            ____________________            5.  Rebate  refunds are generated when the IRS recalculates a            taxpayer's  tax  liability for  a  given year,  as  when, for            example,  a  taxpayer  submits  an  amended   return  showing            additional deductions.  According to the government, when the            IRS issues a rebate refund, the original assessment is abated            to  the  extent  of  the  refund  so  that  it  reflects  the            taxpayer's actual  tax liability  for the  year in  question.            Non-rebate  refunds, on  the  other  hand,  stem not  from  a            recalculation  of the  taxpayer's tax  liability,  but rather            from a  determination that  the taxpayer  paid more  than the            assessed  amount.   According to  the government,  non-rebate            refunds  do not affect the original assessment, which remains            intact as an accurate record of the taxpayer's tax liability.            6.  The government contends that the legislative history of              7405 shows that the section was not intended to  be the IRS's            exclusive  method for collecting  erroneous refunds.  Rather,            as  a Senate  Report  explaining the  predecessor  of    7405            states,  "the erroneous  refund may  [also]  be recovered  by            assessment in  the ordinary manner."   S. Rep. No.  960, 70th            Cong.,  1st Sess.  42  (1928); see  also Brookhurst,  Inc. v.                                           ___  ____ _________________            United States, 931 F.2d 554,  557 (9th Cir.) (IRS not limited            _____________            to    7405  because imperfect  assessment  may be  reassessed            within three  years from  date tax  return was  filed), cert.                                                                    _____            denied, 502 U.S. 907 (1991).            ______                                         -8-                                          8            administrative  collection procedures  to recover  non-rebate            refunds.  The government explains that if an erroneous refund            was  a rebate  refund,  then  before  the IRS  can  implement            administrative collection  procedures, it must  first enter a            supplemental assessment,  since the  original assessment  was            abated  to the extent of the  refund and does not reflect the            taxpayer's true tax liability; the  IRS has the authority  to            enter  a supplemental  assessment  under  26  U.S.C.     2604            because  erroneous  rebate  refunds  constitute  deficiencies            under  26 U.S.C.    6211.  The  government contends, however,            that if  the erroneous refund  was a non-rebate  refund, then            the original assessment  still reflects the  taxpayer's total            tax  liability and  so  provides  a  basis  for  implementing            administrative  collection   procedures  immediately.     The            government  argues that not only is there no need for the IRS            to  enter a  supplemental assessment,  but  that it  actually            could  not,  since  non-rebate  refunds  do   not  constitute            deficiencies under    6211 and since the  original assessment            still  exists and there  cannot be two  valid assessments for            the  same tax  liability.   The  government  reasons that  if            assessments could be extinguished, then the IRS would not  be            able  to  pursue   administrative  collection  procedures  to            recover erroneous non-rebate refunds.  Because the government            thinks that  administrative collection  procedures should  be                                         -9-                                          9            available for recovering non-rebate refunds, it contends that            assessments cannot be extinguished.                      Third,  the  government  cites   three  cases  that            support  its view  that  assessments cannot  be extinguished.            See Davenport v.  United States, 136 B.R. 125,  127 (W.D. Ky.            ___ _________     _____________            1991) (holding that "[a]  non-rebate erroneous refund  simply            gives back to the taxpayer  a part of the taxpayer's assessed            tax and the assessed balance due may be collected by ordinary            collection procedures");  Sanfellipo v.  United States,  90-2                                      __________     _____________            U.S.  Tax Cas.  (CCH)    50,567, at  85,943 (N.D.  Cal. 1990)            (taxpayer's payment  of assessments "did  not extinguish  the            liabilities or otherwise foreclose the IRS from attempting to            collect the erroneous refunds"); Groetzinger v. Commissioner,                                             ___________    ____________            69 T.C. 309, 315-16 (1977) (viewing all transactions together            to   determine  that   erroneous   refund   resulted  in   an            underpayment of tax).                      We decline to adopt the government's  position that            assessments cannot be  extinguished.  Instead, we  follow the            Fifth  and  Seventh  Circuits,  the  only  circuits  to  have            addressed  this  issue  thus  far, in  holding  that  when  a            taxpayer  tenders payment on  a tax assessment,  that payment            extinguishes the  assessment to  the extent  of the  payment.            O'Bryant v. United States, 49  F.3d 340, 346 (7th Cir. 1995);            ________    _____________            Wilkes, 946 F.2d at 1152; see also Karp v. United States, 868            ______                    ___ ____ ____    _____________            F. Supp. 235,  237 (N.D. Ill. 1994); United  States v. Brown,                                                 ______________    _____                                         -10-                                          10            782 F.  Supp.  321, 324-25  (N.D.  Tex. 1990);  Rodriguez  v.                                                            _________            United States, 629 F. Supp. 333, 344 (N.D. Ill. 1986); United            _____________                                          ______            States v. Young, 79-2 U.S.  Tax Cas. (CCH)   9609, at  88,221            ______    _____            (D. Del.  1979); LaFollette  v. United  States, 176  F. Supp.                             __________     ______________            192, 195 (S.D.  Cal. 1959).  We also agree  that an erroneous            refund  does  not  revive an  extinguished  assessment.   See                                                                      ___            O'Bryant, 49  F.3d at 346; Wilkes, 946 F.2d  at 1152.  As the            ________                   ______            Seventh Circuit  explained in O'Bryant, 49 F.3d at 346, there                                          ________            is a fundamental  difference between money taxpayers  possess            as   the  result  of  an  erroneous  refund  and  money  they            originally owed the IRS (their tax liability):  taxpayers who            receive erroneous refunds owe the IRS "because they have been            unjustly enriched by it, not because they have not paid their            taxes."  Thus,                      [w]hen a  taxpayer mails the IRS  a check                      in  the full  amount of his  assessed tax                      liability,  and the  IRS  cashes it,  the                      taxpayer's  liability  is  satisfied, and                      unless a new assessment is made later on,                      any  erroneous,  unsolicited  refund that                      the IRS happens to send the taxpayer must                      be handled  on its  own terms,  not under                      the rubric of the assessed liability.            Id. at 347.            ___                      As our discussion indicates,  we are unpersuaded by            the  government's  assertion   that  assessments  are  merely            bookkeeping devices that  cannot be extinguished by  payment.            Like  the Seventh Circuit, we  think this argument misses the            point.                                           -11-                                          11                      Regardless of whether the assessment is a                      record of the taxpayer's tax liability or                      is  the liability  itself, the  liability                      has already been  satisfied and cannot be                      sued on to collect a refund  that results                      not   from   that    liability   or   any                      reevaluation  thereof but  from a  simple                      mistake.            Id. at 346.            ___                      We  are   also  unpersuaded  by   the  government's            argument that  the difference between  rebate and  non-rebate            refunds  shows that assessments  cannot be extinguished.   In            our  view,   once  an  assessment   has  been  paid,   it  is            extinguished.   If  the IRS  thereafter  issues an  erroneous            refund,  it may  recover that  refund under    7405  or under            administrative   collection    procedures   if    those   are            available.7  As the Seventh Circuit  observed in O'Bryant, 49                                                             ________            F.3d at 347,                                            ____________________            7.  The cases relied on by the government for the proposition            that after issuing an  erroneous refund, the IRS may  collect            the   money  either   under      7405   or  by   implementing            administrative  collection  procedures   all  involve  rebate            refunds, and thus do not hold either that  assessments cannot            be extinguished or  that non-rebate refunds may  be collected            on the basis of the original assessment.  See Brookhurst, 931                                                      ___ __________            F.2d  at 555;  Ideal Realty  Co. v.  United States,  561 F.2d                           _________________     _____________            1123,  1124-25  (4th  Cir.  1977)  (per  curiam);  Warner  v.                                                               ______            Commissioner,  526 F.2d  1, 2 (9th  Cir. 1975);  Black Prince            ____________                                     ____________            Distillery, Inc. v. United States, 586 F. Supp. 1169, 1170-71            ________________    _____________            (D.N.J.  1984) (erroneous refund given on basis of taxpayer's            refund   claim  that   incorrectly  reported   operating-loss            deductions).  In United States v. C & R Invs., Inc., 404 F.2d                             _____________    _________________            314, 315-16  (10th Cir.  1968), which  involved a  non-rebate            refund,  the Tenth Circuit remanded  the case to the district            court  to   determine  whether  deficiency   procedures  were            available.                                          -12-                                          12                      it is an unjustified leap of logic to say                      that because nonrebate  refunds cannot be                      recovered by  reassessment, they  must be                      collectible  by  resort to  the  original                      assessment.   There is  no indication  in                      the Code  that Congress  intended such  a                      result  and   we  refuse  to   reach  it,                      especially when doing so would require us                      to mischaracterize an erroneous refund as                      tax liability.                      Finally,  because  their   holdings  are  logically            excluded by ours, we disagree with Davenport, Sanfellipo, and                                               _________  __________            Groetzinger.            ___________            2.  Was Clark's 1985 Assessment Extinguished?                      Although  not invited to do  so by either party, we            nonetheless find it necessary to consider whether Clark fully            satisfied  the assessment  for his  1985 tax liability.   The            district court held that the 1985 assessment was extinguished            no  later  than July  20,  1987, the  date  on which  the IRS            misapplied Clark's $13,415.00  payment to his  1985 account.8            That  misapplication, however,  had  two  results:    (1)  it            satisfied  Clark's $1,808.59  outstanding tax  liability, and                                            ____________________            8.  Given the thrust of the government's brief on appeal, and            because  the  IRS  removed the  $13,415.00  payment  from the            taxpayer's 1985 account and moved  it to his 1986 account, we            assume for  the  purposes of  this  case that  taxpayers  may            direct how the IRS must apply their payments.  Cf. Rodriguez,                                                           ___ _________            629 F. Supp. at  344 (checks tendered to satisfy  outstanding            tax  liability for three years extinguished liability for all            three years,  even though the  IRS applied too much  money to            one account and too little  to another and therefore issued a            refund);  Young, 79-2 U.S. Tax Cas. (CCH) at    88,220-88,221                      _____            (payment made towards  individual tax liability  extinguished            assessment, even though  the IRS credited the  payment to the            taxpayer's sole proprietorship tax account and refunded it).                                         -13-                                          13            (2)  it generated a large overpayment, which the IRS refunded            to Clark.                      This situation is similar to that considered by the            Fifth Circuit in Wilkes, which  involved income taxes paid by                             ______            an  estate.  Because the estate  had miscalculated the amount            of tax due, it paid $218.11 less than the  actual amount due.            The   IRS,  however,   erroneously   credited  an   unrelated            taxpayer's payment  to the  estate's account,  which had  two            results:  (1)  it satisfied the outstanding  $218.11 balance,            and (2)  it generated in  a large overpayment, which  the IRS            refunded  to  the  estate.   Several  years  later,  the  IRS            realized  its mistake  and  sued  the  estate to  reduce  the            assessment  to judgment, hoping thereby to collect the entire            tax   liability  again   on  the   basis   of  the   original            assessment.9    The Fifth  Circuit  held  that  the  IRS  was            entitled  to recover only  $218.11, the  only portion  of the            assessment  remaining  that  had  not  been  extinguished  by            payment.  Wilkes,  946 F.2d at 1152.   Accordingly, the Fifth                      ______            Circuit entered  judgment against  the estate,  but only  for            $218.11,  that   portion  of  the  assessment  that  remained            unextinguished.  Id.                             ___                                            ____________________            9.  There  was some question  in that case  about whether the            IRS  had  ever actually  entered  an assessment.    The Fifth            Circuit, however, assumed arguendo that  it had.  Wilkes, 946                                      ________                ______            F.2d at 1148.                                         -14-                                          14                      We  follow   the  Fifth   Circuit  and   hold  that            assessments may only  be extinguished by payment  tendered by                                                              ________            the  taxpayer,  and  not  by an  IRS  error.    Prior  to the            misapplication,  Clark  had  paid all  but  $1,808.59  of the            amount due under his 1985 assessment.  Accordingly,  prior to            the misapplication,  Clark had  extinguished the  assessment,            except  for the $1,808.59  still outstanding.   It has always            been Clark's position  that he never tendered  the $13,415.00            towards the 1985  assessment; rather, that amount  was always            to  be applied  to his  1986  liability.   Thus, Clark  never            tendered  the  $1,808.59  due  under  the  1985   assessment.            Because he never tendered the $1,808.59, Clark still remained            liable for  it.   The IRS was  therefore entitled  to collect            that amount under the original assessment.                                         III.                                         III.                                         ____                                      Conclusion                                      Conclusion                                      __________                      For the foregoing  reasons, we affirm the  grant of            summary  judgment  to Clark,  but reduce  the amount  of that            judgment by $1,808.59,  plus interest due, which the  IRS was            entitled to  collect.   This case is  remanded for  action in            accordance with this opinion.                                         -15-                                          15
