Federal Taxation - Timothy J. Peaden, Ben E. Muraskin, and James A. Lawton
| Publication year | 1996 |
Federal Taxationby Timothy J. Peaden* Ben E. Muraskin** and James A. Lawton***
During 1995, as in past years, the Eleventh Circuit considered several procedural issues. The procedural issues decided in 1995 involved refund claims, tax liens, and litigation fees. As to substantive tax issues, the court affirmed the taxpayer-favorable Tax Court decision in Estate of Hubert v. Commissioner.1 The estate tax issue involved, however, is a controversial one, and the Sixth and Federal Circuit Courts of Appeals have previously reached a contrary conclusion.
I. Procedural Issues
A. Refund Claims
The Eleventh Circuit decided three "refund claim" cases during 1995. The cases involve the sufficiency of a refund claim, amendments to a refund claim, and set-offs to refund claims.
In United States v. Ryan,2 the Eleventh Circuit determined that the taxpayers' written request to have an overpayment applied to a particular year's unpaid tax liability constituted a refund claim. In a letter attached to their 1990 federal income tax return, the Ryans directed the Internal Revenue Service ("IRS") to apply a 1990 overpayment to their unpaid 1989 tax liability.3 The IRS refused and, instead, applied the overpayment to the Ryans' unpaid 1986 tax liability.4 After filing for bankruptcy and receiving a discharge as to their earlier years' tax liability, which included the year 1986 but not 1989, the taxpayers brought an action in the bankruptcy court contending that the IRS should have followed their instructions and applied the overpayment to 1989.5 The bankruptcy court agreed with the Ryans.6
On appeal, the IRS contended that the bankruptcy court lacked jurisdiction because the Ryans' action was a suit for a tax refund and the required claim for refund had not been filed.7 The Eleventh Circuit rejected the government's contention and found that the letter attached to the Ryans' 1990 return constituted a claim for a refund because it stated the source and amount of the overpayment to be credited.8 On the merits of the refund claim, however, the court held that pursuant to section 6402(a)9 the government could properly refuse to follow the taxpayers' directions regarding the application of the overpayment to a particular tax liability.10
The only issue presented in Mutual Assurance, Inc. v. United States11 was whether Mutual Assurance could amend the original refund claim to increase the amount of an overpayment after the refund claim was paid in full and after the expiration of the statute of limitations.12 In Mutual Assurance, the taxpayer filed a timely claim for refund for an overpayment resulting from changes in the permitted discount factors applicable in the computation of the taxpayer's unpaid insurance loss reserves. After the IRS paid the full amount of the claim and after the statute of limitations for filing a refund claim had run, an audit revealed that the correct amount of the overpayment was larger than the amount requested in the taxpayer's refund claim.13 The district court allowed the taxpayer to amend its refund claim, and the government appealed.14
During oral argument, the government conceded that the timely original claim for refund provided it with a sufficient basis for accurately computing the correct amount of the overpayment.15 The court held that, according to the IRS' own published ruling16 and a United States Supreme Court decision,17 the IRS was required to compute the correct amount of the overpayment.18 Thus, the IRS' payment in full of the timely filed, original refund claim did not extinguish the claim.19 Further, because the taxpayer's amended claim did not set forth any new grounds for relief,20 the court allowed the original claim to be amended and required the government to fully refund the amount set forth therein.21
Whether the government can assess new penalties as a set off to a refund claim after the statute of limitations has lapsed was answered affirmatively in Allen v. United States.22 An increase in tax liability {e.g., due to denial of a previously allowed deduction) determined after the statute of limitations has run is properly set off against a refund claim,23 and the Internal Revenue Code provides that '"penalties . . . shall be assessed, collected, and paid in the same manner as taxes . . . [and that any] reference ... to 'tax' imposed . . . shall be deemed also to refer to . . . penalties.'"24 Accordingly, the court was unpersuaded by the taxpayer's argument that a set off attributable to penalties is distinguishable from a set off attributable to an increase in tax liability, and the court held in favor of the government.25
B. Tax Liens
Griswold v. United States26 set forth the requirements the IRS must abide by when releasing a federal tax lien under section 6325.27 In Griswold, the IRS assessed responsible person penalties against Griswold which resulted in liens against his property.28 The IRS filed a total of seven original or refiled notices of federal tax liens in three counties.29 Pursuant to a settlement agreement, Griswold satisfied the assessments.30 The IRS promptly filed certificates of release.31 However, one of the certificates of release could not be matched with the corresponding tax lien or notices filed. Over a period of eighteen months, Griswold repeatedly requested the IRS to issue a certificate of release corresponding to this notice.32 After exhausting administrative remedies for the damages incurred as a result of the IRS' failure to properly issue the certificate, Griswold filed suit against the government.33
Prior to evaluating the sufficiency of the certificates of release in this case, the Eleventh Circuit outlined the requirements the IRS must abide by in releasing a federal tax lien.34 First, the certificate of release must sufficiently identify the underlying tax obligation and lien.35 Second, the certificate of release must sufficiently identify any corresponding notices of a federal tax lien to allow a person searching title to the property to match the documents and discover whether a lien currently exists.36 Third, unless the lien is self-releasing,37 the IRS must either deliver the certificate of release to the recording office in which the corresponding notice of federal tax lien was filed or deliver it to the taxpayer.38
As to the fairly detailed facts before it, the court found that none of the filed certificates of release adequately identified one of the liens against Griswold's property or the corresponding notices.39 As a result, the court held that the IRS failed to release this lien.40
In determining whether the IRS was liable for civil damages, the court rejected the district court's holding that the law surrounding the issues contained in this case was sufficiently uncertain that the IRS personnel could not have acted knowingly or negligently in their failure to release the lien.41 Instead, the court explained that "[t]he provisions requiring the IRS to act responsibly in identifying and releasing the liens are part of its own regulations and internal procedures."42 This issue was remanded to the trial court to determine whether such actions were either knowing or negligent.43
C. Litigation Fees
In Cooper v. United States,44 * Cooper was a passive investor in a financially-troubled business that failed to pay its federal employment taxes.45 Despite evidence that Cooper had no involvement in the day-to-day operation or management of the business, the IRS assessed penalty taxes on Cooper as a "responsible person" under section 6672.46 Cooper paid the assessment, and, after exhausting administrative remedies, he filed a claim in district court for a refund of the penalty and interest paid and a claim for costs and attorney fees incurred in the collection of the refund.47 Three days after Cooper filed suit, the IRS refunded the entire amount of the penalty plus interest.48
As to the claim for costs and attorney fees, the district court held that Cooper failed to prove that the IRS' position was "not substantially justified"49 and denied his claim. The Eleventh Circuit reversed.50 It reasoned that the willfulness requirement of section 667251 demands that a person have some knowledge of the failure or of the risk of failure to remit the employment taxes.52 Based on evidence that Cooper lacked such knowledge, the Court held that Cooper's action could not have been willful as required under section 6672.53 Finding that Cooper had exhausted all administrative remedies, the court remanded the case to the district court for a determination of the reasonable costs and fees to which Cooper was entitled.54
II. Estate Taxes
During 1995, the Eleventh Circuit decided two estate tax cases, both in favor of the taxpayers. One involved marital and charitable deductions under sections 205555 and 2056,56 and the other involved the deductibility of a settlement payment under section 2053.57
In Estate of Hubert v. Commissioner,58 a will contest led to a settlement agreement providing for the division of the decedent's residuary estate.59 According to the settlement, the decedent's wife was beneficiary of a part of the residue in two trusts.60 A charity received the remainder of the residue outright.61 The dispositions as provided in the settlement qualified for the marital and charitable deductions.
The executors of the estate had the power to charge any administrative expenses against income or principal or apportion the same.62 During the period of administration, the estate generated substantial income and incurred substantial administration expenses.63 Under applicable state law and the will of the decedent, the executors allocated certain administrative expenses to the principal of the estate. The executors paid the remainder of the administrative expenses out of post death income and deducted them on the estate's income tax return.64
The government argued that the amount of the marital and charitable deductions65 must be reduced by...
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