Opinion
No. 87 B 6407 C
December 6, 1990
Taxes — Erroneous Refund — Return to IRS. — In this Chapter 7 case, the Internal Revenue Service was entitled to immediate full return of a tax refund it paid the debtor in error. An erroneous refund does not make the IRS a creditor of the estate under Section 101(13). Further, the Section 507(c) language regarding "an erroneous refund or credit for [a] tax[,]" entitling the taxing authority only to the same priority that the tax would have (here, general unsecured status), must be construed to distinguish between erroneous refunds and deficiencies. Finally, Section 502(i) does not apply to this situation since it is limited to the recapture of investment tax credits.
See Sec. 101(13) at ¶ 7013, Sec. 502(i) at ¶ 9013, and Sec. 507(c) at ¶ 9034.
This matter is before the Court on the Trustee's Motion to Dismiss Complaint Without Prejudice ("Motion to Dismiss") filed by Harvey Sender ("Trustee") and the United States of America's Response to Trustee's Motion to Dismiss ("US Response") in the above-captioned matter. The facts are not in dispute. Thus, this Court will treat the Motion to Dismiss as a motion for judgment on the pleadings.
On September 4, 1990, the United States of America ("United States") filed its Complaint to Recover Erroneous Refund ("Complaint"). The United States effected service on the Trustee and the Trustee, on September 23, 1990, filed his Motion to Dismiss.
The United States' Complaint seeks to recover an erroneous refund made to the Debtor who, thereafter, turned the funds over to the Trustee. The Trustee deposited those funds in his account. The Trustee currently holds $15,009.30 plus interest.
The undisputed facts are as follows:
1. The debtor, Robert O. Campbell, formerly was a corporate officer in Denver Investors, Inc., 909 Logan Street, Denver, Colorado 80203.
2. In early 1985, the Internal Revenue Service (IRS) commenced an examination of the corporate federal income tax liability of Denver Investors, Inc., for the taxable year ending in February of 1981.
3. As part of the examination it was determined that the debtor and two other former officers and shareholders were liable for the corporate income tax liability as transferees of assets of the now defunct Denver Investors, Inc. The total tax liability was $33,238.62.
4. On May 20, 1985, the debtor was assessed $33,238.62. On October 24, 1985, the debtor paid $11,079.54, or a one-third share of this liability. On or about the same date the remaining two shareholders each paid $11,079.54, thus discharging the corporate liability in full.
5. On October 24, 1985, the IRS incorrectly posted two payments to the debtor's account in the amounts of $11,079.54, when only one payment had been made.
6. On November 26, 1985, the IRS abated the full amount of the $33,238.62 corporate liability that had been assessed the debtor in response to full payment of the liability by the three corporate shareholders. Subsequent to this an erroenous credit balance in the amount of $22,159.08 remained on the debtors' account; such account should have had a zero balance at that time.
7. On September 10, 1986 after realizing its error, the IRS reversed one of the two payments of $11,079.54, leaving an erroneous credit balance in the amount of $11,079.54; such account should have a zero balance at that time.
8. On September 6, 1988, the IRS issued a refund in error to the debtor on the erroneous credit balance in the debtor's account. The refund was in the total amount of $15,009.30, which included the erroneous credit balance of $11,079.54 plus $3,929.76 in interest.
9. On receipt of the refund the debtor turned the check over to Harvey Sender, Chapter 7 Trustee, who cashed the check and now holds the funds in escrow.
10. The $11,079.54 plus interest of $3,929.76 was erroneously refunded to the Defendant, Robert O. Campbell.
The Trustee's Motion to Dismiss asserts, in essence, that 11 U.S.C. § 507(c) applies and that the IRS is not entitled to return of the entire amount but is only entitled to be paid as a claimant in the estate at the same priority as the tax claim upon which the erroneous refund was allegedly paid. Specifically, the Trustee asserts that the tax claim which the IRS asserts is for taxes due for the taxable year ending February 1981. The return for that period would have been due June 15, 1981 and, accordingly, they would be treated as a general unsecured creditor. The Trustee, in addition, argues that the last day for filing claims was August 6, 1988 and the IRS would be required to file a late claim.
The Trustee's Motion to Dismiss must fail for several reasons. First, the IRS is not a creditor of this estate. 11 U.S.C. § 101(9) defines creditors as an "entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor. . . ." The IRS at the time of the filing and currently has no claim against the Debtor for taxes that arose either before the commencement of the case or, for that matter, after the commencement of the case. The IRS paid the debtor its money in error. The tax claim for which the Debtor's account with the IRS was established had been paid.
The Trustee asserts that 11 U.S.C. § 507(c) applies. 11 U.S.C. § 507(c) states "a claim of a governmental unit arising from an erroneous refund or credit of a tax has the same priority as the claim for the tax to which such refund or credit relates." An erroneous refund is not defined in the Code and there are few cases interpreting the language. In addition, legislative history on the provision is sparse. One of the cases, however, which has confronted section 507(c) and the priorities accorded an erroneous refund, highlights an essential element. In that case the court stated:
The Court (and Congress) sees no difference between assessment of a tax deficiency in which it is determined the debtor owes the government money, and assessment of an ERRONEOUS REFUND in which it is determined the debtor received too much money, or prematurely received money and in either case owes the government money. In re Coleman American Moving Services, Inc., 20 B.R. 267 (Bankr. Kan. 1981) (emphasis added).
In this case the debtor did not owe the government money. The United States had no claim against the debtor. The money that it, for lack of a better term "refunded" to the debtor was its money.
The Court is not persuaded by the Trustee's argument that section 502(i) applies. Section 502(i) reads:
(i) A claim that does not arise until after the commencement of the case for a tax entitled to priority under section 507(a)(7) of this title shall be determined, and shall be allowed. . ., the same as if such claim had arisen before the date of the filing of the petition. 11 U.S.C. § 502(i).
The so-called erroenous refund does not fall within section 502(i) either. First, the legislative history regarding section 502(i) states that the subsection treats the recpature of an investment tax credit in connection with the transfer of property in a bankruptcy case as a prepetition claim even though the recapture may have occurred after the filing of the petition. This is very specific legislation and the refund at issue does not fall within its parameters. Secondly, the IRS does not hold a claim entitled to priority under section 507(a)(7) Accordingly, it is hereby
ORDERED, that the Trustee's Motion to Dismiss IS DENIED; and it is
FURTHER ORDERED, that judgment IS GRANTED on the pleadings in favor of the Plaintiff, the United States of America, and against the Defendant, Harvey Sender, Trustee, in the amount of $15,009.30 plus interest thereon as provided by law.