As the IRS acknowledges, however, (IRS Brief at 15), a suit to recover an erroneous refund is essentially an action for restitution and thus must be governed by principles of equity. United States v. Reagan, 651 F. Supp. 387, 389 (D.Mass. 1987). As Judge Friendly wrote:
The United States has the burden of proving both that an erroneous refund was made and the amount of that refund. United States v. Reagan, 651 F. Supp. 387, 388 (D. Mass. 1987). It has met that burden here. First, it is clear that the refund was issued erroneously. It is undisputed that defendant filed an individual tax return for the year 2000 after she and her husband had already filed a joint tax return for that same year. (Warfield Dep. at 29-30).
The fact that a taxpayer has spent the money is insufficient to preclude recovery by the government; rather the circumstances must be such that it would be unfair and unjust to allow recovery. United States v. Reagan, 651 F. Supp. 387, 389 (D. Mass. 1987); see also Russell Mfg. Co., 349 F.2d at 16. Defendant MacPhail cites one such case, United States v. Bell, in support of his argument that equitable considerations must be considered and that these considerations present questions of fact that preclude summary judgment in his case.
Several decisions it cites do not discuss § 507(c) at all. See, e.g. , Clark v. United States , 63 F.3d 83 (1st Cir. 1995) (not a bankruptcy case, thereby rendering the Code, and specifically § 507(c), inapplicable); United States v. Reagan , 651 F. Supp. 387 (D. Mass. 1987) (same); United States v. Bell , 818 F. Supp. 444 (D. Mass. 1993) (same); United States v. McRee , 7 F.3d 976 (11th Cir. 1993) (same); Winters v. Shulman (In re Winters) , 485 B.R. 375 (Bankr. M.D. Tenn.) (bankruptcy case decided without reference to § 507(c) ), rev'd and remanded on other grounds , 503 B.R. 434 (6th Cir. BAP 2013) ; Brown v. Lindsey (In re Lindsey) , Ch. 7 Case No. 05-96622, Adv. No. 07-1332, 2009 WL 1608526 (Bankr. N.D. Ohio Jan. 28, 2009) (same).
Id. at 346 (emphasis added); see also United States v. Russell Mfg. Co., 349 F.2d 13, 16 (2nd Cir. 1965) ("An action to recover a tax refund is an action for restitution. . . ."); United States v. Reagan, 651 F.Supp. 387, 389 (D.Mass. 1987) ("An action to recover a tax refund is essentially an action for restitution, which is governed by principles of equity." (citing Russell Mfg., 349 F.2d at 16; Equilease Corp. v. Hentz, 634 F.2d 850, 853 (5th Cir. 1981)).
Prejudice to the payee does not occur when the payee has used the money to cover ordinary living expenses or to pay preexisting debt. See United States v. Reagan, 651 F. Supp. 387, 389 (D.Mass. 1987) (neither incapacity alone nor the mere fact that the taxpayer spent the erroneously paid tax refund to repay previous debts was sufficient to prevent United States' action for restitution). See Ohio Co. v. Rosemeier, 32 Ohio App.2d 116, 61 O.O.2d 105, 288 N.E.2d 326, 329 (1972) (purchase of new car with insurer's overpayment held not sufficient change of position barring restitution); Restatement of Restitution, § 142, comment b (1937).