NetJets Large Aircraft v US, a recent case out of the Southen District of Ohio, [free link not available], illustrates some of the nooks and crannies that taxpayers must navigate in refund suits. Being right on the merits is not enough. Filing a timely claim for refund is a jurisdictional requirement, even when the circumstances are clear that the government knows that a taxpayer wants its money back. Most of the times when there is a dispute about timeliness of a claim the issue revolves around a taxpayer filing a claim too late. Sometimes, as in this case, a claim for refund can also be too early.
IRS assessed NetJets and related entities air transportation excise taxes on a variety of fees that the fractional jet company collected from its customers. For a court to have jurisdiction over a refund suit, taxpayers must under the Flora rule fully pay the tax, file a refund claim, and if the Service denies the claim, file a refund suit in federal court. As a divisible tax, under Flora, NetJets only needed pay the amount of excise tax due on an individual transaction for each tax quarter at issue to gain standing to challenge the entirety of the assessment.
NetJets payed a representative amount of tax, and then filed a claim for refund on the amounts it paid.(As to whether an amount is considered representative to meet the Flora divisible payment exception see an earlier two-part guest post by Rachael Rubenstien here ). After the Service denied the claim, it filed a suit seeking 1) a refund of the amounts it paid and 2) an abatement of the unpaid amounts the IRS had assessed for other transactions that IRS felt were subject to the excise tax.
Here is where it got tricky for NetJets.
During the pendency of the suit, IRS applied overpayments from other periods to the unpaid assessments that were at issue in the refund suit. NetJets won on the merits in the refund suit and then filed a motion to make sure that the district court’s final judgment included an order that directed the Service to pay back the tax that were originally listed in the complaint as well as the overpayments that the IRS had applied during the pendency of the suit.
For support for its motion, NetJets relied in part on Fed R Civ Proc 54(c), which states that ‘[e]very . . . final judgment [other than a default judgment] should grant the relief to which each party is entitled, even if the party has not demanded that relief in its pleadings.'”
The Service disagreed, and in opposing the motion argued that the US had not waived sovereign immunity with respect to the overpayments it had applied to the unpaid assessments during the pendency of the refund suit. In particular, the government leaned on the jurisdictional requirement in Section 7422 that a tax refund suit cannot be brought until a claim has been filed and the rule in Section 6511(b)(2) that “no credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in [Section 6511(a)] for the filing of a claim for credit or refund, unless a claim for credit or refund is filed by the taxpayer within such period.”
While the government agreed that NetJets had filed a refund claim, it filed its claim before the Service had applied the later overpayments to the assessments that were at issue in the case. According to the government, its earlier claim was not a claim with respect to the later amounts. The evidence in the record did not indicate that NetJets filed a formal claim for those other applied amounts; nor did it amend its pleadings to specifically allege a return of those funds. While the government agreed to abate the unpaid assessments, it would not refund any of the amounts that were applied to the assessment after NetJets filed its original refund claim because there was no separate claim filed with respect to those latter amounts.
The district court agreed with the government, looking primarily to the statutory language in Section 6511(b)(2). To get around that statute’s rather clear language that tethers the government issuing a refund to a taxpayer filing a claim, NetJets argued that a plain language approach to the issue failed to effectuate legislative intent (preventing the litigation of stale claims) and produced an absurd result. The court disagreed, initially noting that Section 6511(b)(2) had no exception for divisible taxes and that the broad language of the statute suggested perhaps an intent that was not so clear to discern.
As to the absurdity of requiring a taxpayer to file a separate claim when litigation was already pending, the court disagreed with NetJets:
Plaintiffs point to the apparent absurdity of filing a new refund claim when the Court has already determined that the underlying tax assessment cannot be collected. The application of § 6511(b)(2) in this case is, admittedly, tedious. But it is hardly absurd. Where the IRS retains overpayments and applies them toward a divisible tax liability for which a claim has already been filed, the taxpayer, to comply with § 6511(b)(2), must take a simple action: file a new refund claim. And contrary to Plaintiffs assertion, a refund claim is not only a “challenge [to] the lawfulness of an underlying tax assessment.” More mundanely, and as relevant here, a refund claim is a formal request to the IRS for the return of a taxpayer’s money. See 26 C.F.R. 301.6402-2. Filing a refund claim does not become a superfluous task simply because the lawfulness of the underlying assessment has already been determined.
Conclusion
This is a harsh result for NetJets but the opinion suggests that all is not lost. While it is too late to file claim now, the opinion states that the government “hinted” that previously NetJets may indeed have filed another formal claim for some of the amounts. Moreover, the opinion discusses that NetJets may have submitted informal refund claims, though there was insufficient evidence in the record on that point, and a party who files an informal claim must also perfect that informal claim with a formal claim in order for a court to have jurisdiction.
While NetJets may be able to salvage some of its refund the lesson of this case is clear: if litigating a divisible tax refund suit taxpayers should be on the lookout for IRS applying any overpayments to the dispute that is at issue in the suit. Even if the taxpayer wins on the merits, absent a specific refund claim for those amounts, taxpayers are vulnerable to the government’s argument that it has not waived sovereign immunity.
NetJets Large Aircraft v US, 119 AFTR2d 2017-1246 (SD Ohio 2017)