Bilzerian v. United States

Citations: 86 F.3d 1067; 1996 U.S. App. LEXIS 15728Docket: 95-2744

Court: Court of Appeals for the Eleventh Circuit; July 1, 1996; Federal Appellate Court

Original Court Document: View Document

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Terri Steffen appeals the Eleventh Circuit's ruling that upheld the IRS's summary judgment regarding her claim for damages under 26 U.S.C. § 7432 for failing to release a tax lien. Steffen and her husband filed a joint tax return for 1985, received a notice of deficiency in 1989, and paid an assessed amount of $160,729.44 in 1990, which satisfied their 1985 tax liabilities. They subsequently filed for a refund of $59,392 and an additional claim for interest and penalties totaling $101,337.44. The IRS erroneously refunded $125,545.35, which it later sought to recover through a suit under 26 U.S.C. § 7405. A tax lien was filed against Steffen's property in April 1994. The district court dismissed Steffen's request to release the lien and granted summary judgment for the IRS, concluding that the IRS's lien was valid due to the notice given for the erroneous refund suit. On appeal, Steffen contends that the IRS must either win the erroneous refund suit or follow deficiency procedures before filing a lien. The IRS acknowledged that merely filing the suit is insufficient to validate the lien, necessitating a judgment in its favor. The court agrees that the IRS must obtain a judgment to impose a lien, but the case is remanded to determine any damages owed to Steffen for the IRS's failure to release the lien.

The IRS disputes the district court's finding that Steffen's payment of $160,729.44 eliminated her 1985 tax liability, asserting that a subsequent erroneous refund means the liability persists. The IRS distinguishes between rebate refunds, which occur when tax liability is officially reduced, and non-rebate refunds, which arise from errors not affecting the original assessment. They contend that while a rebate refund requires a supplemental assessment to collect the liability, a non-rebate refund does not revive the tax liability and can be collected using standard procedures. The IRS claims Steffen's refund was a non-rebate refund due to a computer error and therefore argues the district court erred in its conclusion.

While the district court found the refund to be a non-rebate refund, it rejected the IRS's argument that such a refund revives a previously extinguished liability. The majority of relevant case law supports the position that once a tax liability is paid, it cannot be revived by an erroneous refund, regardless of the type. Consequently, the district court's conclusion that the tax liability was extinguished was correct, as was the assertion that the IRS must pursue a suit under section 7405 or a new assessment to collect an erroneous refund.

However, the district court erred in determining that the IRS's filing of a section 7405 refund suit adequately notified Steffen for lien validation purposes. The ruling grants summary judgment in favor of the IRS, which is reversed, and the case is remanded to assess potential damages under 26 U.S.C. § 7432. The IRS must show that a lien was not released due to negligence or knowledge of the satisfied requirements under 26 U.S.C. § 6325, while Steffen must demonstrate that the IRS employee knew or should have known the lien should have been released.