Appeal from the United States District Court for the District of Delaware; (D.C. Civil Action No. 83-00823).
Becker and Hutchinson, Circuit Judges, and Smith, District Judge.*fn* Becker, Circuit Judge, dissenting.
HUTCHINSON, Circuit Judge
Philadelphia & Reading Corporation (taxpayer) appeals from a final order of the United States District Court for the District of Delaware granting summary judgment in favor of the United States (government) in the taxpayer's action for a tax refund totalling more than $10,000,000.00. The claimed refund is for taxes paid under assessments*fn1 that both the taxpayer and the government recognize were illegal. However, the district court accepted the government's argument that equitable considerations required the rejection of the taxpayer's refund claim.
The court held it would be inequitable to grant the taxpayer's refund claim for three reasons. First, the statute of limitations on assessment of taxes against the taxpayer had run on all the taxable years in question. Second, the record showed that the taxpayer would not have contested the government's computations showing it owed net tax deficiencies of about $4,060,000.00 for the years in question. Third, the record also showed that the taxpayer would have eventually been willing to pay that net amount if the government had not mistakenly assessed taxes totaling approximately $10,000,000.00, excluding interest, without mailing the taxpayer the mandatory pre-assessment notice of deficiency. See 26 U.S.C.A. § 6213(a) (West Supp. 1991). The amount assessed represented the sum of the amounts the record shows the taxpayer was prepared to concede was due for years in which it had underpaid its taxes, but did not include any credit for taxes paid in years for which the government was prepared to concede overpayments totaling about $6,000,000.00.
When the illegal assessments were made, formal recognition of the credit had been forestalled by ongoing proceedings for approval of the overpayments before Congress's Joint Committee on Taxation in accord with 26 U.S.C.A. § 6405(a) (West 1989). The taxpayer had, at that time, agreed to extend the statute of limitations on assessment but, as the record also shows, was unwilling to waive unconditionally the required notice of deficiency and the restrictions on assessment and collection. See id. § 6213(a). The restrictions include a stay of collection for ninety days and give a taxpayer unable or unwilling to pay the Internal Revenue Service's (IRS's) claims at once a chance to seek relief in the United States Tax Court.
Though Congress's approval of the credits taxpayer wanted was obtained shortly before the agreed extension of the statute of limitations on assessment expired, the IRS nevertheless attempted to collect the full amount of the illegal assessments without credit for the overpayments in other years that the parties recognized the taxpayer had made.
Had assessments been properly made for the years in which deficiencies existed and credits been properly allowed for years in which there were overpayments, IRS would have been entitled to about $4,000,000.00 from the taxpayer. The IRS's attempt to collect the full amount failed because the taxpayer obtained judicial relief that precluded the IRS from collecting more than the net taxes due after allowance of the agreed credits for the taxpayer's overpayments. Thus, the IRS succeeded in forcing payment of the net due, about $4,000,000.00. The IRS is now threatened with the loss of that amount and the additional $6,000,000.00 or so that the taxpayer had overpaid in other years but would have let the government keep as a credit against the $10,000,000.00 or so the taxpayer was willing to concede it owed for the years in which it had underpaid.
For the reasons set forth below, we hold that the district court erred in entering summary judgment in favor of the government and in denying the taxpayer's cross-motion for summary judgment. As we shall explain, the applicable statutory and case law does not permit us to rely upon the sort of equitable considerations that were essential to the government's victory in the district court. Thus, we are left with the fact that the taxpayer paid over $10,000,000.00 as the result of illegal assessments. We will therefore reverse the entry of summary judgment in favor of the government and remand this matter to the district court with directions to grant the taxpayer's cross-motion and enter summary judgment in the taxpayer's favor.
In the years 1970-72, the Internal Revenue Service audited the taxpayer's returns for the years 1964 through 1967 and for the first four and one-half months of 1968. For the calendar year 1964, the IRS calculated that the taxpayer had overpaid its taxes in the amount of $231,991.00. For the calendar year 1965, the IRS calculated that the taxpayer had underpaid its taxes in the amount of $19,485.00. For the calendar year 1966, the IRS calculated that the taxpayer had underpaid its taxes in the amount of $9,336,231.00. For the calendar year 1967, the IRS calculated that the taxpayer had overpaid its taxes in the amount of $6,237,660.00.*fn2 Finally, for the first four and one-half months of 1968, the IRS calculated that the taxpayer had underpaid its taxes in the amount of $1,174,119.00. Thus, the taxpayer owed the government $10,529,835.00 as the result of underpayments, and the government owed the taxpayer $6,469,651.00 as the result of overpayments.
The taxpayer's net deficiency*fn3 over these years was $4,060,184.00. Under the relevant tax laws, however, the IRS is not empowered to arrive at a net deficiency or overpayment and send the taxpayer a bill or refund for the net amount. Instead, the IRS must separately assess each year's deficiency and separately refund each year's overpayment. However, there is an exception to this rule: the taxpayer and the IRS can reach an agreement that permits the IRS to pay out or recover only the net overpayment or deficiency.
In the absence of such an agreement, federal law requires the IRS to mail the taxpayer a notice of deficiency for each year's underpayment. See 26 U.S.C.A. § 6213(a). Section 6213(a) also provides the taxpayer with a ninety-day period following mailing of the notice within which to seek a redetermination of the deficiency in Tax Court. Until expiration of the ninety-day period or the conclusion of any judicial proceedings, whichever is later, § 6213(a) prevents the IRS from assessing or collecting any tax due. See Holof v. Commissioner, 872 F.2d 50, 53 (3d Cir. 1989); Flynn v. United States ex rel. Eggers, 786 F.2d 586, 589 (3d Cir. 1986).
Furthermore, in the absence of such an agreement, the taxpayer would be entitled to full refunds with respect to the amounts it overpaid in 1964 and 1967. At the time relevant to this suit, however, the statute required IRS to submit for approval to Congress's Joint Committee on Taxation, see 26 U.S.C.A. §§ 8001-8005 (West 1989), any proposed refunds in excess of $100,000.00. See id. § 6405(a) note (West 1989).*fn4 If the Committee takes no timely action to bar the refund, the IRS can schedule the overpayments as overassessments and then pay or credit the taxpayer with a refund. See id. §§ 6405, 6407 (West 1989).
The taxpayer in the appeal now before us sought to enter into an agreement with the IRS that would permit the taxpayer's overpayments in 1964 and 1967 to be applied against the amount it still owed to the government for the years 1965 and 1966 and for the first part of 1968. On December 13, 1972, the taxpayer executed a modified version of IRS Form 870. Form 870, in its usual printed form, is entitled "Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment." See Appendix (App.) at 881. At the top of the Form 870 that the taxpayer executed, the following standard pre-printed message was prominently displayed:
Pursuant to section 6213(a) of the Internal Revenue Code of 1954 or corresponding provisions of prior internal revenue laws, the restrictions provided in section 6213(a) or corresponding provisions of prior internal revenue laws are hereby waived and consent is given to the assessments and collection of the following deficiencies, together with interest on the tax as provided by law; and the following overassessments are accepted as correct: . . . .
The standard printed text merely explains that execution of Form 870 waives the taxpayer's right to receive the statutorily required notice of deficiency for each underpayment and the taxpayer's right to seek redetermination of the amount of the deficiencies asserted in the Tax Court. Instead, a properly executed Form 870 permits the IRS to assess and collect tax due without sending the taxpayer a notice of deficiency. See 26 U.S.C.A. § 6213(d) (West Supp. 1991). Thus, a taxpayer who signs the standard Form 870 must be prepared to pay the balance due the IRS on demand or suffer the exigencies of the collection process.
Upon the Form 870 that this taxpayer signed, it added a condition to its waiver of the ninety-day notice that § 6213(a) requires before the IRS may assess or collect any deficiency. The condition stated:
This document shall be effective as a waiver of restrictions on assessment and collection with respect to taxable years ending December 31, 1965 and December 31, 1966 and the taxable period ending April 18, 1968, on the date the schedule of overassessments with respect to the taxable years ending December 31, 1964 and December 31, 1967 is signed by an authorized representative of the Internal Revenue Service.
App. at 881. The parties agree that the IRS assessed the taxes at issue in this refund action against the taxpayer before fulfilling the express condition that the Form 870 qualified waiver contained and without giving the statutorily required notice.
In its brief, the government explains that IRS Form 870 confers a benefit upon a taxpayer that does not wish to petition the Tax Court for redetermination of any deficiencies owed. A taxpayer that seeks review in the Tax Court faces the possibility of owing interest on the full amount of any deficiency the Tax Court finds due; however, a taxpayer that forgoes review in Tax Court can, by executing a binding Form 870, suspend interest on tax due from the thirtieth day following the filing of the waiver through the time that the IRS issues a notice and demand for payment. See 26 U.S.C.A. § 6601(a), (c) (West Supp. 1991). As noted, execution of a binding Form 870 can have negative consequences as well, since the waiver permits the IRS to demand that the taxpayer immediately pay the deficiencies listed upon the form. The government and the taxpayer agree, however, that execution of Form 870 does not waive the taxpayer's right to seek a refund in district court or in the United States Claims Court following payment of the amount listed on Form 870. The form itself says as much.
While execution of a non-conditional Form 870 would permit the IRS to require immediate payment of deficiencies, the timetable upon which the taxpayer could expect to receive refunds for the years 1964 and 1967 was uncertain. Before a refund request could come before Congress's Joint Committee on Taxation, IRS field personnel were required to draft a report. Then, the IRS's national office would review the report before sending it to the Joint Committee. Thereafter, the Joint Committee, under § 6405(a), has thirty days to review the proposed refund. If the Joint Committee does not reject the refund within the thirty-day period, the IRS must then process the refund.
The condition that the taxpayer included in its Form 870 waiver was meant to require the IRS to wait until the overpayments were available before assessing the deficiencies. The taxpayer did not wish to pay "out of pocket" anything more than the net deficiency it owed to the IRS. In exchange for that offer, the taxpayer offered to waive its right to litigate the amounts of the deficiencies in Tax Court.
In January of 1973, the IRS sent information relevant to the taxpayer's overpayments to the Joint Committee. At the same time, other wheels within the IRS began to churn. The IRS's Chicago District Office, which had conducted the audit of the taxpayer's accounts that resulted in the deficiencies and overpayments contained on the modified Form 870, forwarded information concerning the tax deficiencies it asserted to the IRS's Kansas City Service Center, which processes returns.
An IRS employee by the name of Ida Ballard (Ballard) was assigned to the taxpayer's particular file at the Kansas City Service Center. Operating under IRS internal procedures that require the immediate assessment of deficiencies in excess of $50,000.00, Ballard initiated assessment procedures in February of 1973. Gerald Nordstrom (Nordstrom), the taxpayer's tax attorney, contacted Ballard following the taxpayer's receipt of the assessments that, with interest, totaled more than $13,000,000.00. Nordstrom informed Ballard that he had signed a qualified Form 870 waiver but that the form's condition had yet to be met. Upon learning that the taxpayer anticipated refunds and wished to apply those refunds against its deficiencies, Ballard abated the assessments. Ballard was aware following her first conversation with Nordstrom that the extended statute of limitations applicable to the assessments against the taxpayer would not expire until June 30, 1973.*fn5
By early June of 1973, the Joint Committee had yet to complete its review of the taxpayer's refund. As a result, the IRS asked for a further extension of the statute of limitations until September 30, 1973. The taxpayer agreed. The IRS never informed Ballard of the extension. On June 19, 1973, the Joint Committee indicated that it had no objection to taxpayer's refund. Ballard was not informed of the Committee's approval. Still, three days later, on June 22, 1973, Ballard once again made the entry that constituted assessments against the taxpayer and mailed tax bills demanding payment of the full deficiencies plus interest, totalling over $13,000,000.00, without accompanying credit for the overpayments relating to other taxable years. The tax bills arrived at the taxpayer's offices on June 25, 1973. Nordstrom was then on vacation, but when he returned on June 28 he called Ballard and informed her that the conditions contained on the Form 870 had not yet been satisfied and thus the assessments were premature. He also informed her that the statute of limitations had been extended until the end of September, 1973. Also on June 28, Nordstrom received a letter that the Joint Committee allowed the taxpayer's refunds.
This time, Ballard failed to abate the assessments she made on June 22, 1973. Neither party disputes that when Ballard made these assessments the condition contained on the qualified Form 870 had yet to be met: the taxpayer's overassessments had yet to be scheduled. In fact, schedules of the taxpayer's 1967 overassessments were not signed until August of 1973, while schedules of the taxpayer's 1964 overassessments were not signed until October of 1973. On September 30, 1973, the extended statute of limitations for assessments related to the taxpayer's 1965, 1966 and 1968 taxable periods expired. Neither party disputes that the assessments Ballard made on June 22, 1973 were not preceded by the notices of deficiency that are required under federal law unless the taxpayer has waived the notice. Because the express ...