By: A.J. Cook


Leroy P. Stanley lived every taxpayer's dream: He got a $600,000 refund from the Internal Revenue Service.

But the IRS said it was a computer blunder.

The court was asked if Stanley could keep the money, or should he be punished for not returning it?

In most erroneous refund cases, the courts rule for the IRS:

• Brenda Reagan said she didn't remember cashing the government check. Besides, she said, it was the IRS's fault for giving its money to a notorious spendthrift. Even with that good excuse, she had to repay.
  
• Brookhurst, Inc. wrote the IRS saying the refund wasn't due the company. When the IRS didn't respond, Brookhurst deposited the check. Two years later the IRS, realizing its mistake, demanded the refund. By then, the company was in no mood to repay. The judge, however, told the company to return the money and added interest saying it had use of the money.
  
• Prisoner Joseph H. Hale got $359,000 and immediately deposited it. He sought the help of his ex-wife, Ann McRee, in squirreling away the money. To avoid a paper trail and the money laundering laws, she withdrew cash in amounts under $10,000 and put them in various banks in different states--spending some along the way. The majority of a three judge panel sentenced Hale and McRee to three years in jail. The third judge, in his dissent, warned that this case could set a precedent that government employees, even judges, who keep an erroneous salary overpayment could go to jail.
  

Now back to the original case. Stanley, already embroiled in several tax issues, was accustomed to dealing with the IRS over large sums of money. This case involved convoluted factual history and arcane rules that only a tax lawyer could love.

After Stanley received the refund, the IRS sent him a "Reminder of Unpaid Taxes" nudging him to "please pay it today." It said he owed $515,878 in taxes.

But Stanley didn't owe any taxes; he had paid all his taxes. The obligation he did have was to return the refund check.

The court said this case illustrates the rule that tax law usually doesn't bear any relationship to common sense. It let Stanley keep the $600,000 refund and gave these reasons:

• The statute of limitations ran before the IRS filed suit against Stanley.
  
• Stanley didn't necessarily know the refund was an error. While most taxpayers would realize something was amiss, substantial sums of money flowed between Stanley and the government, thanks to a series of complex business and tax transactions.
  
• The notice from the IRS was not a "demand" for payment of the erroneous refund but just a polite reminder that he owed taxes.
  
  

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers.  Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

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This information is not intended for use without professional advise.
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Released 4-19-99