MANUEL L. REAL, United States District Judge
This federal income tax refund and wrongful collection action brought by plaintiffs against defendant came on for trial before United States District Court for the Central District of California on December 5, 2000, the Honorable Manuel L. Real presiding. The parties were present and represented by the respective counsel of record. Appearances were by Charles H. Magnuson, on behalf of the plaintiffs, and Darwin Thomas, Assistant United States Attorney, on behalf of the defendant. Based upon pleadings, the testimony of plaintiff, Thomas T. Johnson, the evidence presented during trial, and all other matters of record, the Court finds the following facts and makes the following conclusions of law.
FINDINGS OF FACT
1. Plaintiffs, Thomas T. and Marianne Johnson, reside within the County of Los Angeles, California, and within the Central District of California for United States District Court.
2. Defendant is the United States of America.
3. This is an action arising under Sections 7422, 7432, and 7433 of the Internal Revenue Code, Title 26, United States Code, and Section 1340 of Title 28, United States Code. Plaintiffs seek a refund Federal income taxes paid by them for the taxable year 1984. Plaintiffs also allege entitlement to civil damages for the failure to release a federal assessment tax lien and arising from unauthorized collection actions.
4. Their complaint and action relates to federal individual joint income tax deficiency liabilities erroneously and illegally assessed and then collected and demanded for payment by the Internal Revenue Service.
5. Jurisdiction is conferred upon the Court by the Internal Revenue Laws of the United States, Title 26, United States Code, Sections 7422, 7432 and 7433, and Title 28, United States Code, Sections 1340. Venue pursuant to Section 1391(e), Title 28, U.S.C. rests with the United States District Court for the Central District of California.
6. The issues arising in this case relate to plaintiffs' contributions to the Owl Foundation reported on their 1984 federal income tax return as well as to an individual federal income tax deficiency assessment made by the Internal Revenue Service.
7. Plaintiffs timely filed their 1984 individual federal Form 1040 income tax return with the Fresno, California, Service Center. (Pretrial Order ¶ 5(a)) The timely filed return is deemed to have been filed as of April 15, 1985. (PTO ¶ 5(u))
8. Their 1984 contributions to the Owl Foundation was in the total amount of $11,000.00. (PTO ¶ 5(a)), (Exhibit No 206)
9. The Owl Foundation, formed as a corporation on December 12, 1977, was recognized by the Internal Revenue Service as a charitable organization to which contributions were deductible under the Internal Revenue Code. (PTO ¶ 5(h)),
10. The Owl Foundation had submitted its application for exempt status to the Internal Revenue Service on March 15, 1978. On March 15, 1979, the Owl Foundation received a tax-exempt determination letter from the IRS stating that it was exempt from tax under Internal Revenue Code § 501(c)(3). The Owl Foundation was then listed as an exempt organization in IRS Publication 78, a Cumulative List of Organizations, described in Code Section 170(c). The Internal Revenue Service also determined that the Foundation was an organization described in Code Section 509(a)(2), and was not considered a private foundation within the meaning of Code Section 509(a). (PTO ¶ 5(h))
11. Plaintiff, Thomas T. Johnson, understood that the Owl Foundation had a connection with the University of Southern California Law School with respect to legal education. (Thomas T. Johnson Narrative ¶ 5) In making their contributions, plaintiffs did not believe they would be making tuition payments. (Thomas T. Johnson Narrative ¶ 6).
12. Plaintiffs were told the amount wanted for a contribution. They do not recall any discussion concerning percentage amounts. If the Internal Revenue Service had not certified the Owl Foundation they do not believe they would have been involved with the Foundation. (Thomas T. Johnson Narrative ¶ 8)
13. Plaintiffs never signed a waiver of the three year statute of limitations for making an assessment of taxes by the Internal Revenue Service for the taxable year for 1984. (Thomas T. Johnson Narrative ¶ 9)
14. At least ten years after plaintiffs had made contributions to the Owl Foundation and had filed an individual income tax return, they received a copy of a "Questionnaire" dated March 15, 1996, from the Internal Revenue Service. The questionnaire sought specific responses about events occurring more than ten years earlier. At the time, Plaintiffs did not recall specific events and so indicated on the return of the questionnaire. The content of the questionnaire also requested a return of Owl Foundation documents and copies of certain tax returns but at the time Plaintiffs had no such documents. Other than those that were recently produced by the Internal Revenue Service, plaintiffs still have no such documents. Plaintiffs did explain that it was their general recollection that the Owl Foundation was involved with scholarships and the payment of other student expenses. (PTO ¶ 5(c)), Exhibit 210, Thomas T. Johnson Narrative ¶ 11)
15. The questionnaire, which demanded a response within 21 days, neither referred to a particular tax period nor stated the purpose of the inquiry. (Exhibit 201)
16. A November 21, 1997 Internal Revenue Service federal income tax deficiency notice issued to plaintiffs stated that itemized 1984 contribution deductions in the amount of $11,000 were not to be allowed. The document stated as well there was a disallowance because plaintiffs had not established that any of the amount was paid to a qualified charitable organization as defined in Internal Revenue Code Section 170. The document also referred to all of the underpayment of tax required to be shown on the filed return as being due to fraud. No reason or specified explanation was offered on this point. (Thomas T. Johnson Narrative ¶ 18) (Exhibit No. 104), The total deficiency amount included an income tax amount of $4,620, a fraud penalty of $2,310 and penalty interest plus interest on the total thereof. (Exhibit No. 207)
17. Plaintiffs contributed to the Owl Foundation in good faith and did so on the basis of the Internal Revenue Service determination that the Owl Foundation was a Code Section 501(c)(3) tax exempt organization
18. The Internal Revenue Service then proceeded to untimely assess a federal income tax amount plus additions and interest for the 1984 federal tax year. The federal income tax amount was $4,620.00. Additions included a fraud penalty amount. Due to the assertion of the fraud penalty the defendant claims that the limitation period for making an assessment had not closed. The Court finds that status as a member of the judiciary is not grounds for inferring fraud. Moreover, a substantiation issue due to the untimeliness of the assessment is not in the absence of fraud before the Court
19. On May 10, 1999, the Internal Revenue Service mailed to the plaintiffs a payment notice requesting the payment of assessed income taxes for the taxable year 1984. The asserted federal tax liability with additions was in an amount of $20,835.71. The assessment date was April 5, 1999. No late filing penalty was asserted due to the timely filing for the return. (Thomas T. Johnson Narrative ¶ 20, PTO ¶ 5(t)(w), Exhibit No. 107)
20. Plaintiffs then received a June 14, 1999 Internal Revenue Service Intent to Levy Notice (Exhibit 109) which states a total federal tax liability of $20,996.14. The deficiency income tax amount for the year 1984 was $4,620.00.
21. On December 18, 1998 plaintiffs paid the $4,620 deficiency amount to the Internal Revenue Service. May 24, 1999 plaintiffs had duly filed their timely claim for refund of the $4,620 with respect to the federal income tax deficiency amount paid by them for the year 1984.
22. Plaintiffs exhausted their administrative remedies and then proceeded to timely file their complaint and action. In response, defendant's answer includes an affirmative defense by alleging fraud.
23. Defendant failed to produce evidence of fraud.
24. The Court rejects the allegation by defendant at trial that plaintiff, Thomas T. Johnson, had lied to the Internal Revenue Service in responding to the unexplained questionnaire.
CONCLUSIONS OF LAW
1. Internal Revenue Code Section 7422 (Title 26 U.S.C. § 7422) provides that a suit for the recovery of any federal tax alleged to have been erroneously or illegally assessed or collected, or of any sum alleged to have been excessive or in any manner wrongfully collected, is to be based upon a claim for refund. Code Section 6611 allows that interest shall be paid on any overpayment at a rate established by Section 6621.
2. Having duly filed their refund claim, the plaintiffs proceeded to timely bring this action within the filing period allowed for by Code Section 6532(a)(1) with respect to a Section 7422 refund suit.
3. Code Section 6212 provides that a taxpayer may be given a notice of deficiency but to be valid the notice must be timely mailed within the tree year period allowed by Section 6501(a). In this case, the document described by the Internal Revenue Service to be a deficiency notice was not mailed to the plaintiffs until well after the three year period allowed for the making of an assessment. In doing so, the IRS made no determination as to the existence of a legal waiver or any other factor that provided grounds for refusing to abide by the statutory limitation time period established by the Internal Revenue Code for the making of an assessment.
4. Defendant failed to provide a legal basis for not having made an assessment within the allowable statutory three year period for doing so.
5. Section 170 of the Internal Revenue Code ( 26 U.S.C. § 170 provides for the allowance of a deduction for a charitable contribution to an organization exempt from taxation by operation of Code Section 501(c)(3). Treasury Regulation § 1.501(a)(3) (CAR § 1.501(a)(3)) provides procedures as to how an organization claiming tax exemption is to make application to the Internal Revenue Service. The IRS Application Form is Numbered 1023 and is included within an IRS Package 1023 (Exhibit No. 125).
6. The application must include information required by the Internal Revenue Service for the granting of exempt status. As stipulated (PTO ¶ 5(h)), the Owl Foundation submitted its application in March of 1978 and was determined to be an Exempt organization by the IRS on March 15, of the following year.
7. Internal Revenue Code Section 6501 requires that in the absence of fraud the amount of any assessed income tax shall be done within three years after a return was filed. While Code Section 6212 allows for the mailing of a notice of deficiency and Code Section 6503 allows for a suspension of the running of the limitation period for making an assessment, once the three year period has passed there is no limitation of time that can be suspended.
8. No deficiency notice or Section 6501(c)(4) waiver agreement occurred before the three year limitation period, therefore the 1999 deficiency assessment was untimely.
9. While subsection 6501(c) permits that in the case of a false or fraudulent return with intent to evade tax the tax may be assessed or, by a court proceeding, collected without assessment, at any time, an issue as to whether there is an element of fraud places the burden of proof upon defendant.
10. Defendant is simply unable to assert an adequate affirmative defense that sufficiently counters the time allowed by the Internal Revenue Code for the making of a timely assessment.
11. Fraud is the actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing. Mere negligence does not establish either. Furthermore, a failure on the part of the taxpayer to overcome a deficiency does not create a presumption of fraud. See Carter v. Campbell, 264 F.d 930 (5th Cir. 1959),
12. In Graves v. Commissioner, (68 T.C.M.(CCH) 1445, T.C.M. (P-H) 94,616 (1994)) "badges of fraud" are stated to include (1) understatement of income; (2) inadequate records; (3) failure to file tax returns; (4) implausible or inconsistent explanations of behavior; (5) concealment of assets; and (6) failure to cooperate with tax authorities. At page 10, the Graves ruling states as well that fraud is to be demonstrated by clear and convincing evidence.
13. In this case defendant has failed to offer proof of fraud. As a consequence, an absence of fraud prevents invocation of the provisions of subsection 6501(c).
14. It follows that the Internal Revenue Service erroneously and illegally assessed and collected federal from plaintiffs a 1984 income tax amount of $4,620.00.
15. Even so, Plaintiffs failed to prove an entitlement to damages under the provisions of Internal Revenue Code Sections 7432 and 7433.
16. Plaintiffs are entitled to a federal income tax refund in amount of $4,620.00 from the deficiency tax payment made by them for the year 1984, plus interest, or other amounts thereon, as is provided by law. It follows that plaintiffs are entitled to a complete abatement of the entirety of the unfounded and untimely assessed amounts for the taxable year 1984.
17. Judgment for plaintiffs shall forthwith be entered in their favor.
JUDGMENT FOR PLAINTIFFS
Upon trial of this federal income tax refund and wrongful tax collection action brought by plaintiffs against defendant and presented to the United States District Court for the Central District of California on December 5, 2000, and with the parties being present and represented through their respective counsel of record, and having heard the testimony of the Plaintiff Thomas T. Johnson, heard argument and based upon pleadings and all other matters of record, and the Court being fully advised about this matter and having entered its Findings of Fact and Conclusions of Law herein,
IT IS HEREBY ORDERED, ADJUDGED AND DECREED:
1. That the subject federal income tax deficiency assessed against plaintiffs as to the taxable year ended December 31, 1984 was untimely;
2. That plaintiffs did not commit fraud in the filing of their 1984 income tax return as averred by the defendant;
3. The taxable year 1985 assessment was erroneous and illegal and the amount of $4,620.00 was wrongfully collected from plaintiffs.
4. That damage claims sought by plaintiffs against defendant under the provisions of Sections 7432 and 7433 of the Internal Revenue Code ( 26 U.S.C. § 7432 and 7433) are denied.
5. That plaintiffs is entitled to recovery and shall recover from defendant a refund of all federal income tax deficiency amounts paid to the Internal Revenue Service with respect to the federal income tax year ended December 31, 1984;
6. That recovery against the defendant and in favor of plaintiffs shall be in the amount of $4,620.00 plus interest or other additions thereon as is provided by law; and
7. That such recovery shall forthwith be paid to plaintiffs by defendant.