Judgment summary
The petitioner, Hough Beck & Baird, Inc., timely filed its Form 941 for the first quarter of 2021 and reported and paid employment tax of $121,003. The Commissioner mistakenly treated the petitioner as entitled to a credit, assessed the liability as zero, and refunded $121,003 plus $89 in interest.
Two years later the Commissioner reversed the credit, made a supplemental assessment under I.R.C. section 6204, and issued a Notice of Intent to Levy. The IRS Independent Office of Appeals sustained the proposed levy after a collection due process hearing.
The parties filed cross-motions for summary judgment on whether the supplemental assessment was proper. The Court held that because the Commissioner incorrectly calculated the liability as zero, the original assessment was imperfect in a material respect, and the timely supplemental assessment under section 6204 was proper.
The Court granted the Commissioner's motion, denied the petitioner's motion, and sustained the proposed levy.
Background
Petitioner is a landscape architecture firm based in Seattle, Washington, and its principal place of business was in Washington State at the time of filing the Petition. Appeal would lie to the U.S. Court of Appeals for the Ninth Circuit.
Petitioner timely filed its Form 941 as a paper return for the tax period ending March 31, 2021, properly reporting a tax liability of $121,003 and reporting a corresponding amount paid in three deposits. The parties agree that petitioner correctly reported and timely paid its federal employment tax for the first quarter of 2021 and did not claim a credit.
On June 21, 2021, respondent assessed petitioner's employment tax liability for the first quarter of 2021 as zero by treating petitioner as entitled to a credit. Because petitioner had made deposits equal to $121,003, respondent treated petitioner as having made an overpayment and refunded $121,003 along with $89 in interest.
After learning of the refund, petitioner's accountant, Richard Miller, called the IRS. An IRS representative told Mr. Miller that petitioner was entitled to the refund as a result of COVID Employee Retention Credits.
In May 2023, respondent issued Letter 6552, stating that petitioner might have received a refund to which it was not entitled and proposing an adjustment. Petitioner neither responded nor paid the balance due.
On July 17, 2023, respondent reversed the credit and made a supplemental assessment of $121,003, plus an interest charge for late payment of $12,582. Respondent issued a notice of balance due, which petitioner did not pay.
On April 2, 2024, respondent issued Letter 1058, Final Notice, Notice of Intent to Levy and Notice of Your Rights to a Hearing. On April 15, 2024, petitioner filed Form 12153, requesting a collection due process hearing and selecting that it was not liable for the tax.
On July 9, 2024, petitioner had its CDP hearing with Appeals Officer Patricia Williams. In November 2024, Appeals issued a Notice of Determination sustaining the proposed levy. In December 2024, petitioner filed the Petition, and on September 15, 2025, the parties filed their respective motions.
Core dispute
The dispute concerned whether respondent's supplemental assessment under I.R.C. section 6204 was proper. Under section 6204(a), the Commissioner may make a supplemental assessment whenever any assessment is imperfect or incomplete in any material respect.
Petitioner argued that the original assessment was perfect and complete in all material respects, so respondent could recover the amount incorrectly returned only through a civil erroneous refund action under I.R.C. section 7405. Because respondent did not initiate such a suit, petitioner argued respondent was barred from collecting any amount under the proposed levy.
Court findings
The Court noted that the parties agreed on the material facts, and that the proper interpretation of section 6204(a) is a question of law appropriate for summary adjudication. On a legal question the standard of review made no difference.
The Court observed that neither the Code nor the regulations define "imperfect" or "incomplete" as used in section 6204(a). It referred to Estate of Wilbanks v. Commissioner, and to three Courts of Appeals decisions, Brookhurst, Inc. v. United States (Ninth Circuit), Johnson v. United States (Second Circuit) and United States v. Frontone (Seventh Circuit), all of which upheld supplemental assessments made to remedy the Commissioner's error.
The Court found that the original assessment was imperfect in a material respect. Respondent rejected the amount petitioner reported by mistakenly applying a credit to bring the liability to zero, which misstated petitioner's liability by the entire amount of the employment tax liability.
The Court found the facts strikingly similar to Frontone and Brookhurst, and especially Brookhurst, which it found almost directly on point and highly persuasive.
The Court distinguished O'Bryant, in which the Commissioner double posted a payment, holding that unlike O'Bryant there was no fundamental difference in character between the money petitioner received through the mistaken assessment and the money petitioner originally owed. Petitioner's employment tax liability had not been extinguished and remained outstanding.
The Court held that because the original assessment was imperfect in a material respect, respondent had the authority to make a timely supplemental assessment under section 6204 supporting his collection efforts.
Outcome
The Court held that because the original assessment of petitioner's employment tax liability was imperfect in a material respect, respondent's supplemental assessment was proper. The Court granted respondent's motion for summary judgment, denied petitioner's motion, and sustained the proposed levy. An appropriate order and decision will be entered.
Major issues / areas of contention
- Whether the original assessment of employment tax liability as zero was imperfect or incomplete in a material respect under I.R.C. section 6204(a).
- Whether respondent could make a timely supplemental assessment under I.R.C. section 6204 to remedy the mistaken calculation.
- Whether respondent was instead limited to recovering the refunded amount only through a civil erroneous refund action under I.R.C. section 7405.
- Whether the proposed levy could be sustained following the collection due process hearing.