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March 12, 1998


The opinion of the court was delivered by: GLEESON


 JOHN GLEESON, United States District Judge:

 In October 1984, the Internal Revenue Service ("IRS") mistakenly sent Mildred Cotler two refund checks totaling $ 172,717.94. In 1990, three years after Mildred Cotler died, the IRS filed a claim in state court against the Estate of Mildred Cotler ("the Estate") for return of the mistaken payments. The Estate paid the claim, then filed the instant action against the government to recover what it considers an "illegally collected" payment.

 Before trial, the plaintiffs moved for summary judgment. I denied that motion on March 31, 1997. On May 22, 1997, a trial was held to resolve the single issue of disputed fact. The following constitute my findings of fact and conclusions of law. Because I believe the plaintiffs are not entitled to the money the IRS erroneously refunded to Mildred Cotler, the Clerk of the Court is respectfully directed to enter judgment for the defendant.


 A. The Undisputed Facts

 The pertinent facts are largely undisputed. Irving and Mildred Cotler ("the Cotlers") filed joint income tax returns for the taxable years 1972 through 1979. In March 1982, the IRS commenced an audit of the Cotlers' returns for those years. The following month, the IRS sent the Cotlers a form showing proposed adjustments to their liability. The proposed adjustments were based on the IRS's finding that Irving Cotler had failed to report income for the taxable years 1972 through 1979. Specifically, the Cotlers had not reported income from illegal payments he took from corrupt union officials. Irving Cotler was indicted and ultimately convicted for violating labor racketeering statutes.

 The IRS's April 1982 proposed adjustment form indicated that the Cotlers owed $ 107,570 in taxes. In June 1982, the Cotlers made an advance payment of that amount to the IRS. In January 1983, the IRS sent the Cotlers an "Examination Report" proposing a liability of $ 150,526 (which reflected $ 99,006 in underpayment of taxes and $ 51,520 in penalties). Shortly after receiving the report, Irving Cotler requested an appeal of the findings.

 In October 1983, Irving Cotler died. In December 1983, the IRS sent a Statutory Notice of Deficiency to the Estate of Irving Cotler and Mildred Cotler, Surviving Wife, indicating amounts due of $ 99,022 in tax liability, and $ 51,527 in penalties. *fn1" In May 1984, pursuant to an agreement between Mildred Cotler and the IRS, a decision was entered by the Tax Court determining the amount of tax owed by Cotler *fn2" as follows: $ 99,022 in tax liability and $ 25,764 in penalties. (Interest was not included). In June 1984, Cotler paid $ 25,764 to the IRS to cover the penalty portion of the assessment. As noted above, the Cotlers had in June 1982 prepaid $ 107,570.

 On September 4, 1984, the IRS formally assessed the Cotlers' liability as agreed in the settlement. The assessment was for $ 99,022 in liability plus $ 43,186.71 in interest. However, this assessment was not immediately "posted" in the IRS computer until the week beginning October 21, 1984; i.e., the IRS computer records did not reflect the assessment until seven weeks after it was made. So long as this assessment was not posted, the Cotlers' IRS account showed a substantial credit in the form of the payments in 1982 and 1984 totaling approximately $ 133,334, not including interest.

 On October 1, 1984 -- before the liability was posted -- the "hold code" which had been placed on the Cotlers' IRS account during settlement negotiations with the IRS was removed. A hold code holds all credits in a taxpayer's account. Once the hold code was removed, the IRS paid out the amount shown as a credit in the Cotlers' account. The payments, totaling $ 172,717.94, were made in checks sent to Mildred Cotler on October 1 and October 15, 1984. Cotler cashed the checks.

 Thus, by the time the assessment was finally posted to Cotlers' account during the week of October 21, 1984, the money which had been pre-paid by the Cotlers had already been refunded to Mildred Cotler. Since the pre-paid money was gone, as soon as the assessment was posted, the account reflected a deficit equal to the amount of the assessment. On November 16, 1984, the IRS sent a Final Notice to Mildred Cotler requesting payment of $ 157,676.23 in tax liability. *fn3" Cotler apparently did not respond to this notice. *fn4" On April 3, 1985, the IRS informed Mildred Cotler, through her attorney, that it erroneously had refunded the pre-payments in October 1984.

 For the next several years, the IRS apparently took no action to recover the money it had erroneously paid Cotler. For her part, Mildred Cotler -- who indisputably was aware that the refund was an error and had been so notified in writing in April 1985 -- kept the money and initiated no further correspondence with the IRS regarding the $ 172,717.94 she mistakenly had received.

 Mildred Cotler died in August 1987. On July 2, 1990, the IRS filed a Proof of Claims against her estate in the Surrogate's Court for New York County. The Proof of Claims demanded payment of taxes, penalties and interest totaling $ 229,314.57. In November 1991, the estate paid the amount in full and filed this action for return of the money.

 B. The Disputed Fact

 The only material factual dispute in this case involved the cause of the erroneous refunds. The government asserted that the refunds resulted from a computer error. Specifically, the government contended that the refund was generated because the IRS failed to enter into its computer a "hold code" that would have held all credits in the Cotlers' account until the newly agreed-upon assessment was posted to the account. The failure to enter the "hold code" led the computer to mistakenly conclude that the account had a substantial credit. Ever vigilant at returning money, the IRS computer quickly generated a refund check before the new assessment -- which reflected Cotler's actual liability -- was posted to the account. The government thus contends that the erroneous refunds were due to computer error, and did not result from a redetermination of the Cotler's tax liability.

 The plaintiffs, for their part, asserted that "the evidence presented is perfectly consistent with the Government determining, albeit in error, that the tax owed was less than the tax paid." Pls.' Proposed Findings of Fact and Conclusions of Law at 8. In other words, the plaintiffs suggested that it is possible that the refunds resulted from a redetermination of Cotler's liability, not computer error.

 Having tried the issue, I find that the refunds were made because someone at the IRS accidentally failed to enter a hold code on the Cotlers' account in October 1984. I credit in its entirety the testimony of the sole witness at trial, Holly Pendrell, an official at the IRS. The erroneous refund resulted because the computer mistakenly concluded that the Cotlers had a substantial credit in their account. The refund was in no way the result of a redetermination of Mildred Cotler's liability.


 The convoluted series of events in this case obscures the relative straightforwardness of the relevant facts: In 1984, due to a computer error, the IRS accidentally paid Mildred Cotler and her husband's estate about $ 170,000. Mrs. Cotler knew immediately that the payments were mistaken. Although the IRS formally notified Cotler of the error a few months later, it did not pursue formal collection procedures until 1990 -- almost six years after the erroneous refunds. Despite her awareness of the obvious error and the formal written notice of her error, Mrs. Cotler kept the money.

 The legal question presented is what kind of collection procedures the IRS can use to get the money back. The plaintiffs argue that it must use collection procedures which are governed by a two-year statute of limitations or must conduct a new assessment of the taxpayer's liability. The government maintains that the ...

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