Overpayment Interest – Is the Tide Turning?, Part Two

Guest blogger Bob Probasco returns with the second of a two-part post on developments in overpayment interest litigation. Christine

In the last post, I discussed the latest developments in the Paresky and Pfizer cases.  The latter in particular was an important milestone that may change how courts approach the issue of district court jurisdiction for taxpayer suits seeking interest payable to them by the government on tax refunds.  This post turns to Bank of America, with some additional general observations.

These cases involve the interpretation of 28 U.S.C. § 1346(a)(1), which provides district court jurisdiction over tax refund suits.  Does it also offer jurisdiction for suits for overpayment interest, even though technically those are not refund suits?  The government says no, but taxpayers may argue it does, in order to escape the $10,000 dollar limitation for district court jurisdiction under the “little” Tucker Act, § 1346(a)(2).  If § 1346(a)(1) provides jurisdiction for these overpayment interest suits, which statute of limitations applies – the general six-year statute of limitations under § 2401 or the two-year statute of limitations for refund suits under section 6532(a)(1)?

As discussed in the last post, the report and recommendation by the magistrate judge in Paresky concluded that the Southern District of Florida had jurisdiction under § 1346(a)(1) but the suit should be dismissed because the refund claim was not filed timely.  We’re waiting to see what the district court judge thinks.  In Pfizer, we had the first Circuit Court decision to directly decide that § 1346(a)(1) does not provide jurisdiction for these kinds of suits, setting up a circuit split.  And in Estate of Culver, the District of Colorado adopted the Second Circuit’s reasoning in Pfizer.  It will be a while before we see what effect, if any, Pfizer has in the Bank of America case, where there has also been a new development.

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What is happening with Bank of America?

Bank of America filed this case in the Western District of North Carolina (WDNC), apparently to avoid an unfavorable precedent in the CFC (see here for details).  The bank’s interest netting case sought both recovery of underpayment interest and additional overpayment interest.  The government filed a motion to transfer the claims requesting overpayment interest to the CFC; in the alternative, to dismiss because § 1346(a)(1) does not cover suits for overpayment interest.  It also suggested that cases filed under § 1346(a)(1) would be subject to the Code refund claim requirement and statute of limitations, sections 7422 and 6532 respectively.  The WDNC denied the government’s motion on June 30, 2019, relying heavily on the Scripps decision.

An interlocutory appeal by the government to the Fourth Circuit seemed more probable than the alternative of waiting until a decision on the merits.  A transfer to the CFC would likely result in certain victory by the government for most of the amount at issue, so it certainly would make sense to challenge the jurisdictional ruling now.   Then I belatedly checked the docket for Bank of America and realized there was a third possibility that I hadn’t even counted upon (gratuitous reference for fellow baby boomers).  The government filed a notice of appeal on August 28, 2019 – not to the Fourth Circuit, but to the Federal Circuit. 

Appellate specialists are probably nodding their heads now and murmuring “of course.”  And they may have been rolling their eyes at my earlier speculation about an interlocutory appeal to the Fourth Circuit.  But, alas, I am not an appellage specialist and had never before encountered 28 U.S.C. § 1292(d)(4).  I now know that the Federal Circuit has exclusive jurisdiction for appeals of a district court interlocutory order granting or denying, in whole or in part, a motion to transfer an action to the CFC.  Before I ran across this provision, I assumed that the CFC and Federal Circuit would never have occasion to rule on a jurisdictional provision that applied only to district courts (more about that below).  But that assumption is apparently wrong.  The WDNC’s denial of the motion to transfer the case to the CFC was based on its determination that district courts do have jurisdiction under § 1346(a)(1) so that is presumably what the Federal Circuit will have to decide.

The government could also have appealed to the Federal Circuit in the Pfizer case, after the denial by the SDNY back in 2016 of the first motion to dismiss, but did not do so.  Perhaps it wanted to get a ruling on the separate statute of limitations issue.  But it may have just been a case of different strategies by different trial teams.  Pfizer was handled by the U.S. Attorney’s office for the SNDY; while Bank of America was handled by DOJ Tax Division, as was Paresky.

Is there a Supreme Court visit in the future?

We now have a circuit split between the Second (Pfizer) and the Sixth (Scripps).  But the government won in Pfizer, so the taxpayer would have to seek certiorari.  Pfizer may decide to proceed without the favorable Second Circuit precedent; it can still win in the CFC.  Bank of America seems more likely than Pfizer to go to the Supreme Court, since both parties have strong motivations.  The government wants to overrule Scripps and Bank of America would lose most of the value of its interest netting claim if forced to litigate in the CFC.  We’ll have to wait to see how Paresky and Estate of Culver proceed.

A comment on underlying policy

We all recognize the Tax Court’s relative expertise, compared to courts of general jurisdiction, on tax issues.  But there is also a difference in expertise between the CFC and district courts.  The district court jurisdictional structure demonstrates two different policy decisions, aiming in different directions.  The dollar limitation in § 1346(a)(2) – the “little” Tucker Act – was based on a judgement by Congress that the Court of Claims (now the CFC) would have more expertise with claims against the government, because that is a major part of its caseload compared to district courts.  Small claims could be pursued in district courts so that taxpayers wouldn’t have to litigate in far off Washington, D.C., but larger ones should be filed in the Court of Claims.

When the predecessor of § 1346(a)(1) was enacted, it also was subject to a dollar limitation but that limitation was later removed.  That was based on a judgement by Congress that tax refund suits were different from other claims against the government and taxpayers should always be able to litigate those locally instead of with the CFC.

Which of those policy judgements should apply to the specific questions of interest on overpayments and underpayments of tax?

Many years ago, Mary McNulty and I were tracking all significant interest cases (both overpayment interest and underpayment interest).  I recently looked back at the list as of five years ago.  It showed 5 cases filed in district courts and 63 filed in the CFC.  When you factor in the number of district court judges compared to the number of CFC judges, that ratio is orders of magnitude more experience by the CFC judges (as well as the Federal Circuit) with the specific, complex issues of interest.  Most taxpayers chose that forum, although as precedents built up and unresolved issues were narrowed, there may be more motivation for taxpayers to avoid unfavorable precedents in the CFC and Federal Circuit, as in Bank of America.

And a final comment on CFC jurisdiction

I’ve been focusing in all of these blog posts on district court jurisdiction.  But when I discussed Pfizer recently with Jack Townsend, he pointed out something in some of these opinions that I skipped over.  The courts occasionally referred to § 1346(a)(1) as granting jurisdiction to both the district courts and the CFC.  Early in my career, I read the provision that way but over the years I came around to the idea that the reference to the CFC is just a reminder rather than an actual grant of jurisdiction.  I don’t recall offhand ever seeing the CFC refer to that provision as the basis for its jurisdiction over a tax refund suit.  I mentioned that briefly in this blog post but it’s worth pointing out explicitly.

The structure of the statute strongly supports that interpretation.  Section 1346(a)(1) is part of Chapter 85 of Title 28, which is titled “District Courts; Jurisdiction.”  Chapter 91 covers the CFC’s jurisdiction.  The specific language “shall have original jurisdiction, concurrent with the United States Court of Federal Claims, of” appears in § 1346(a) and thus applies not only to § 1346(a)(1) but also to § 1346(a)(2).  The latter certainly doesn’t grant jurisdiction to the CFC for Tucker Act claims, since the CFC already has jurisdiction under § 1491.  And § 1346(a)(2) refers to “any other civil action or claim against the United States,” whereas § 1491 just says “any claim against the United States.”  That convinces me that tax refund suits, covered by § 1346(a)(1), are a “claim against the United States” encompassed within § 1491.

If that doesn’t convince you, Jack’s blog post has a footnote by Judge Allegra on the topic that should.

Overpayment Interest – Is the Tide Turning?, Part One

Today Bob Probasco returns with further updates on overpayment interest litigation, in a two-part post. We are grateful to Bob for following the issue closely and sharing his observations with us. Christine

In August, I wrote about the Bank of America case (here and here), and provided updates on the status of the Pfizer and Paresky cases, all of which addressed the question of district court jurisdiction for taxpayer suits seeking interest payable to them by the government on tax refunds.  Recently we’ve had developments in all three cases, plus one new case.  This post will cover Paresky and Pfizer.  Part Two will move on to Bank of America, speculation concerning where this issue may head next, and some general observations about jurisdiction and policy considerations.

Setting the stage

There are two district court jurisdictional statutes at issue in these cases. This first is 28 U.S.C. § 1346(a)(1). It has no dollar limitation. That’s the statute we rely on when filing tax refund suits in district court, so I usually refer to it as “tax refund jurisdiction.” However, some taxpayers argue that this provision also covers suits for overpayment interest, although technically those are not refund suits.  The government strongly opposes that interpretation and we’ve seen a lot of litigation over the issue recently.

The second is § 1346(a)(2), which provides jurisdiction for any other claim against the United States “founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department . . . .” This is commonly referred to as “Tucker Act jurisdiction” and for district courts is limited to claims of $10,000 or less. The comparable jurisdictional statute for the Court of Federal Claims, § 1491(a)(1), has no such dollar limitation.  Practitioners often refer to § 1346(a)(2) as the “little” Tucker Act.

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There are also two different statutes of limitation potentially applicable. The general federal statute of limitations, § 2401 (for district courts or § 2501 for the Court of Federal Claims), requires that complaints be filed within six years after the right of action first accrues. In the Code, section 6532(a)(1) requires the taxpayer to file a refund suit no later than two years after the claim is disallowed.

A preliminary decision in Paresky

In the interest of space, I’ll just refer you back to the earlier blog post for the factual background on Paresky.  The taxpayers originally filed in the Court of Federal Claims (CFC).  That court concluded that it did not have jurisdiction over the suit because the applicable six-year statute of limitations in § 2501 began running in 2010 and had expired.  The Pareskys had previously requested that the court transfer the suit to the Southern District of Florida (SDF), in response to the government’s motion to dismiss, and the CFC agreed.  That would allow the Pareskys to try to persuade the SDF that § 1346(a)(1) covers claims for overpayment interest and that the two-year statute of limitations in section 6532(a)(1) applies.

After the transfer, the government quickly filed a motion to dismiss for lack of jurisdiction, arguing that § 1346(a)(1) did not apply and that the Pareskys’ claim exceeded the $10,000 limit for jurisdiction under the “little” Tucker Act.  On August 30, 2019, the magistrate judge issued her report and recommendation.  The report agreed with the Pareskys that § 1346(a)(1) covers claims for overpayment interest but also agreed with the government that taxpayers have to file an administrative refund claim within the time limitations set forth in the Code.  They had done so timely for the 2007 tax year but not for the earlier years.  The Pareskys argued for equitable estoppel based on the directions they had received from IRS personnel, but the judge was not convinced.  She concluded that equitable estoppel for the timely refund claim requirement is not available, based on the decision in United States v. Brockamp, 519 U.S. 347 (1997).  Technically, Brockamp involved an equitable tolling claim but the judge quoted a statement in the decision that suggested application to any equitable doctrines.

This is still a preliminary decision, not yet adopted by the district court judge in the case.  Both parties filed objections (on different grounds) to the report and recommendation on September 10, 2019; both parties filed a response to the other side’s objections on September 19, 2019; and the government then filed a reply on October 7th.  We’re still waiting to hear from the district court judge.  That decision may be complicated by the development in our next case.

A new decision in Pfizer

The IRS mailed refund checks to Pfizer within the 45-day safe harbor of section 6611(e).  The checks were never received, and the IRS eventually direct deposited a replacement approximately a year later, without overpayment interest.  The IRS takes the position that when the original refund check is issued timely but never received, the replacement refund still falls within section 6611(e).  (Some exceptions to this position are set forth in I.R.M 20.2.4.7.3.) Pfizer filed suit in the Southern District of New York (SDNY), asserting jurisdiction under § 1346(a)(1) to take advantage of the favorable Doolin v. United States, 918 F.2d 15 (2d Cir. 1990) precedent on the issue of interest on replacement refund checks. The government filed a motion to dismiss for lack of jurisdiction, arguing that district courts only have jurisdiction for standalone suits for overpayment interest under the “little” Tucker Act but the amount at issue exceeded the $10,000 limit. The court agreed with Pfizer and denied that motion to dismiss.  The court granted a second motion to dismiss, because the refund statute of limitations under section 6532(a)(1) had expired before suit was filed.  Pfizer argued that the general six-year statute of limitations in § 2401 applied.  But the court agreed with the government regarding the statute of limitations and dismissed the case.

In the first motion to dismiss, Pfizer requested that the case be transferred to the Court of Federal Claims (CFC) if the motion to dismiss were granted.  That was denied when the SDNY ruled that it had jurisdiction under § 1346(a)(1).  In the second motion to dismiss, Pfizer did not make the same request for transfer.  The government also did not recommend transfer.  But on appeal, Pfizer asked that the Second Circuit, if it affirmed the decision by the SDNY, transfer the case.  That would allow the case to proceed, as suit was filed within the six-year general statute of limitations for Tucker Act claims, although the Second Circuit precedent Pfizer wanted to rely on would not be binding in the CFC.  

The government argued that if the Second Circuit concluded that § 1346(a)(1) applies to suits for overpayment interest but affirmed the SDNY because of the statute of limitations issue, it should not transfer the case because it was not timely when originally filed in the SDNY.  This struck me as over-reaching.  The CFC does not apply the Code statute of limitations to these cases and under the CFC’s jurisdictional statute (more discussion below), it would have been timely filed.   The argument that transfer would not be in the interests of justice because Pfizer had successfully resisted transfer under the first motion of dismiss might carry more weight.  In any event, the government said that it would not oppose transfer if the Second Circuit concluded that § 1346(a)(1) does not apply to suits for overpayment interest.  That is the result the government was hoping for.

On September 16, 2019, the Second Circuit ruled – and the government got exactly what it was hoping for.  The court disagreed completely with the analysis by the district court and in E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005).  The text in § 1346(a)(1) that those decisions relied on – “a sum alleged to have been excessive or in any manner wrongfully collected” – did not apply to suits for overpayment interest.  Read in harmony with the rest of the statute, that would “plainly refer to amounts the taxpayer has previously paid to the government and which the taxpayer now seeks to recover.”  Further, “any sum alleged to have been excessive or in any manner wrongfully collected” is written in present-perfect tense, indicating that “excessive” or “wrongfully collected” occurred in the past, that is, an assessment previously paid by the taxpayer.  Finally, dicta in Flora v. United States, 362 U.S. 145 (1960), stating that “any sum” would encompass interest, was clearly referring to underpayment interest based on the context.  The Second Circuit therefore transferred the case to the CFC.

Judge Lohier filed a concurrence to point out that if the district court had jurisdiction under § 1346(a)(1), it would have been subject to the Code statute of limitations and Pfizer would have lost anyway.  He rejected Pfizer’s attempt to disassociate § 1346(a)(1) and section 7422 of the Code.  Keith and Carl had filed an amicus brief arguing that even if the filing deadline in section 6532(a) applies, it is not jurisdictional and is subject to estoppel or equitable tolling arguments.  The judge rejected equitable tolling in a footnote due to the lack of an “extraordinary circumstance” but did not mention estoppel.  But it’s a footnote in a concurrence, so this is still an open question.

I found the statutory interpretation in this decision much more persuasive than that in Scripps, although the statute may be sufficiently ambiguous that other courts could reasonably disagree.  In any event, this is a significant milestone.  Before Pfizer, Scripps was the only other Circuit Court decision to have directly ruled on this issue.  (Sunoco, Inc. v. Commissioner, 663 F.3d 181, 190 (3d Cir. 2011) suggested the same interpretation, but that was dicta.)

What effect will this have on other cases?  On October 7th, in Estate of Culver v. United States, the district court for the District of Colorado also adopted the reasoning of the Second Circuit and transferred that case to the CFC.  Even district court decisions disagreeing with Scripps have been rare, so this may also be a sign that the tide is turning.  As with Bank of America, an immediate appeal of that order would go to the Federal Circuit.

As one might expect, the government quickly brought the Pfizer decision (on September 18th) and the Culver decision (October 7th) to the attention of the SDF in the Paresky case.  If the district court judge is influenced by Pfizer and rejects the magistrate judge’s report and recommendation, the Pareskys may have to appeal to the Eleventh Circuit and hope that court agrees with Scripps

It will be a while before we see what effect, if any, Pfizer has in the Bank of America case, where there has also been a new development.  I’ll turn to that in Part Two.

D.C. Circuit Denies DOJ En Banc Rehearing Petition in Myers Whistleblower Case

Just a short update:  In Myers v. Commissioner, 928 F.3d 1025 (D.C. Cir. 2019), on which I blogged here, the majority of a 3-judge panel held that the 30-day deadline in section 7623(b)(4) to file a whistleblower award petition in the Tax Court is not jurisdictional and is subject to equitable tolling.  In a petition for en banc rehearing in Myers, on which I blogged here, the DOJ argued that not only was the panel wrong, but it had set up a clear conflict with the Ninth Circuit in Duggan v. Commissioner, 879 F.3d 1029 (9th Cir., 2018).  In Duggan, the Ninth Circuit held that the very-similarly-worded 30-day deadline in section 6330(d)(1) to file a Collection Due Process petition in the Tax Court is jurisdictional and not subject to equitable tolling.  On October 4, 2019, the D.C. Circuit issued an order denying the DOJ’s petition for en banc rehearing.  In the order, the court noted that none of the 11 D.C. Circuit judges (plus Senior Judge Ginsburg, who wrote the opinion) requested a vote on the petition for en banc rehearing.  Thus, that means that even dissenting Judge Henderson did not ask for a vote on the petition. 

Now, the Solicitor General will have to decide how upset the government is and whether to file a petition for certiorari with the Supreme Court.  Will the apparent indifference of all of the judges of the D.C. Circuit to reviewing the matter en banc suggest to the Solicitor General that maybe a majority of the Supreme Court will also think the Myers opinion is correct?

Whistleblower Jurisdiction: Is Anyone Listening? – Designated Orders: July 22 – 26, 2019

This week featured three orders from Judge Armen, along with another brief order from Judge Kerrigan that extended the time for responding to a discovery request.

These will be among the last orders from Judge Armen. The Tax Court recently announced that Judge Armen retired from the bench, effective August 31, 2019. I’ve appeared before Judge Armen numerous times for trial sessions in Chicago. In those sessions, I always found him to be fair, thorough, and thoughtful. He always took time to walk pro se petitioners through the Court’s procedures, carefully listened to them, and explained the applicable law in an approachable manner. His presence on the bench will, indeed, be missed.

His first order is relatively unremarkable, save the exacting detail that Judge Armen uses to walk a pro se taxpayer through a relative simple issue (unsurprising, given his similar willingness to do so at trial sessions). Petitioner had contended that including unemployment income in gross income is “cruel, short-sighted, and runs afoul any theory of economic success.” That may well be, but Judge Armen painstakingly runs through the Code to demonstrate that unemployment income is specifically included in gross income under § 85 (and is otherwise generally includable under § 61(a)).

The other two orders are in pro se Whistleblower cases. Both grant summary judgment to the government because there was no administrative or judicial action to collect unpaid tax or otherwise enforce the internal revenue laws. For the Tax Court to obtain jurisdiction under IRC § 7623(b)(4), the IRS must commence such an action.

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Docket No. 17586-18W, Hammash v. C.I.R. (Order Here)

Petitioner submitted a Form 211, Application for Award for Original Information, with the IRS Whistleblower office, alleging that a certain business underreported taxes, and that the Petitioner had previously reported the business to the “IRS in California”. (One wonders whether Petitioner means an IRS office in California, or the California Franchise Tax Board; my clients often refer to the Indiana Department of Revenue as the “Indiana IRS”.) But, there wasn’t any further explanation or supporting documentation of the alleged malfeasance.

According to Respondent’s exhibits, the Whistleblower Office denied an award and didn’t otherwise refer the case for further investigation. The Petitioner timely filed a petition; from a review of the docket, it seems he may been represented by a POA at the administrative level, as a motion to proceed anonymously was originally filed by someone not admitted to practice before the Tax Court. The Court struck it from the record soon thereafter.

In any case, the particulars don’t really matter here. The limited information provided in the Form 211 isn’t what dooms Petitioner’s case; rather, it’s that the IRS never initiated an administrative or judicial proceeding to collect tax from the allegedly delinquent taxpayer.

For the Tax Court, this is a jurisdictional requirement under IRC § 7623(b)(4). The Tax Court is authorized to review a “determination regarding an award under [§ 7623(b)(1)-(3)]. IRC § 7623(a)(1), (2), and (3) provide for various awards. Paragraph (1) authorizes an award “[i]f the Secretary proceeds with any administrative or judicial action” related to detecting underpayments of tax or detecting and bringing to trial and punishment criminal tax violators. See IRC § 7623(a), (b)(1); see also Cohen v. Commissioner,139 T.C. 299, 302 (2012). Paragraph (2) and (3) awards are likewise premised upon an “action described in paragraph (1)”. Moreover, the government must collect some unpaid tax from the target taxpayer pursuant to such action, for the Tax Court to obtain jurisdiction.  

Neither an investigative action nor collection of proceeds occurred here. Petitioner didn’t provide any evidence to the contrary in the Tax Court proceeding; indeed, after the Tax Court struck his representative’s motion to proceed anonymously, he seemed to not participate at all. Therefore, summary judgment was appropriate and the Court sustained Respondent’s whistleblower determination.

Docket  No. 19512-18W, Elliott v. C.I.R. (Order Here)

This whistleblower claim contained substantially more detail than Hammash, but nevertheless Petitioner finds herself in the same situation.

Petitioner filed a Form 211, which according to the Court, alleged “a brokerage services firm . . . that was custodian for a certain qualified retirement plan was mishandling former plan participants’ accounts.” Unlike in Hammash, where it appears no outside review occurred, here the Whistleblower Office did forward the claim to a Revenue Agent at the IRS Tax Exempt and Government Entities division. The RA sent the claim back to the Whistleblower Office, noting that TEGE does not investigate custodians, but rather investigates qualified plans themselves.

The Whistleblower Office didn’t send the claim on to any other division of the IRS. Instead, it issued a denial letter essentially identical to the one in Hammash, noting that the information provided was speculative, lacked credibility, and/or lacked specificity.

Petitioner argued that her information was, in fact, credible and specific, and asked the Court to compel Respondent to investigate the claim.

While this case involved a much more engaged Petitioner with facially troubling allegations, one fact remains: it’s undisputed that the IRS did not conduct an administrative or judicial action to recoup any unpaid tax or otherwise prosecute violations of the internal revenue laws. No proceeds were collected either. Further, the Court cannot, under the limited jurisdiction provided in IRC § 7623, determine the proper tax liability of the target taxpayer or require the IRS to initiate an investigation. See Cooper v. Commissioner, 136 T.C. 597, 600 (2011).

Thus, the Court granted Respondent’s motion for summary judgment and sustained Respondent’s administrative denial of the whistleblower award claim.

One small nitpick: here and in Hammash, the Court determined that it lacked jurisdiction. Yet it “sustained” Respondent’s administrative determination. While it arrives at the same conclusion, I don’t believe that’s the proper result under Cohen or Cooper. Under those cases, the Court lacks the power to sustain or overturn the determination to deny the claim; it should therefore dismiss the case for lack of jurisdiction, rather than sustaining Respondent’s determination.

Innocent Spouse Survives Motion to Dismiss in Jurisdictional Fight with the IRS

We welcome Sarah Lora, Assistant Clinical Professor and Director of Lewis and Clark’s Low Income Taxpayer Clinic and Kevin Fann, 3L at Lewis and Clark Law School.  Their clinic just won an important victory in the innocent spouse arena overcoming an argument from the trial section of the Department of Justice Tax Division that completely disagrees with the arguments made by the appellate section of the Tax Division.  Keith

In his Opinion and Order issued last month in Hockin v. United States, Oregon District Court Judge Michael Simon rejected in part a magistrate judge’s findings and recommendations to dismiss and rejected the DOJ’s argument that the government had not waived sovereign immunity to be sued, holding that a taxpayer could bring an innocent spouse claim in federal district court as part of her larger tax refund claim against the IRS.

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The dispute concerned whether an alleged innocent spouse could follow the Flora rule of “pay first, litigate later” in her § 6015(f) claim.  In the past, the DOJ has presented contradictory arguments for and against the Flora rule in these innocent spouse refund cases, a contradiction highlighted by several advocates, including former NTA Nina Olson as well as Keith and Carl from Harvard’s Low-Income Taxpayer Clinic. In previous cases against clients at Harvard LITC , the DOJ insisted that taxpayers who miss the chance to file in U.S. Tax Court could still pay the assessment and litigate a refund claim in federal district court. In Hockin and several other cases, however, the DOJ turned a 180, arguing exactly the opposite, that the district court has no jurisdiction in innocent spouse refund suits.

Several years ago, Plaintiff Kimberly Hockin filed a claim with the IRS for innocent spouse relief of joint and several liability for tax years 2007 and 2008.  The claims for each year were based on the same facts: she did not sign the return and, in the alternative, she should be relieved of liability anyway based on § 6015(f).  The IRS granted her 2008 claim, but it denied the 2007 claim with no clear explanation for the different outcomes.

Ms. Hockin attempted to appeal the decision by filing a petition in U.S. Tax Court, but she had missed the filing deadline by 555 days. After the Tax Court’s dismissal, Ms. Hockin sought the assistance of the Lewis & Clark Law School LITC. By the time she contacted us, Ms. Hockin had paid the full balance due for 2007 through offset refunds over the years. After filing for a refund administratively, the LITC filed a complaint in U.S. District Court, led by volunteer attorney Scott Moede of the Office of the City Attorney in Portland, Oregon. The complaint sought a refund of her payments for 2007 made within the last two years, citing jurisdictional statutes 28 U.S.C. § 1346(a)(1) and IRC § 7422(a), for three reasons:

  1. Ms. Hockin never signed the return;
  2. the IRS is barred from collecting the tax liability for 2007 under the theory of quasi-estoppel (i.e. it granted relief for tax year 2008 but not 2007 under the same facts); and
  3. the United States erroneously collected taxes she should have been relieved of paying under the rules of innocent spouse relief.

The United States filed a motion to dismiss, arguing that the taxes had not been “illegally or erroneously collected” as required by § 1346(a)(1) for the district court to have subject matter jurisdiction. 

After extensive briefing, including an amicus curiae brief filed by Keith and Carl of the LITC at Harvard Law School, magistrate Judge Jolie Russo held oral arguments. The United States conceded the first claim should go forward. After all, there was a genuine dispute of fact about whether the return had been signed, and no copy of the return had been produced by Ms. Hockin, the IRS, or the ex-spouse. On the claims of quasi-estoppel and innocent spouse, Judge Russo said she leaned toward granting the government’s motion to dismiss and asked Attorney Moede and Lewis and Clark law student John MacMorris-Adix ’19 to convince her otherwise.  Within a few weeks, Judge Russo issued her Findings and Recommendations (F & Rs). She had granted the government’s motion to dismiss the quasi-estoppel and innocent spouse relief.

Undeterred, the clinic objected to Russo’s F & Rs.  The Article III review Judge Michael Simon requested additional briefing, citing part of the government’s original motion to dismiss, which admitted that, if plaintiff had filed her claims in both U.S. Tax Court and U.S. District Court, § 6015(e)(1)(A) cedes jurisdiction to the District Court. Simon asked the parties to answer several questions, including, “[W]hy isn’t Plaintiff’s failure to file a timely petition in U.S. Tax Court excusable neglect of an administrative technicality?” We tried not to get too excited, since it is rare for an Article III judge to disagree with a magistrate’s F & R.

The parties briefed Judge Simon’s questions within about two weeks. Two days after briefing, he issued his ruling, granting the Government’s motion as to the quasi-estoppel claim but denying the Government’s motion as to both the unsigned return and the innocent spouse claim! The opinion relied primarily on Flora v. United States, Wilson v. Comm’r, and Merriam-Webster’s plain-language definition of “wrongfully.”

The court held:

The IRS may grant innocent spouse relief even when the amount of tax assessed or collected was precisely the correct amount that the married couple owed given their financial circumstances. But 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422(a) do not waive sovereign immunity and provide a cause of action solely for claims that a tax was erroneously or illegally assessed. They also apply to claims that the tax was “in any manner wrongfully co[ll]ected.” A claim that “it is inequitable to hold the individual liable” falls within the scope of an allegation that a tax was “in any manner wrongfully collected,” giving “wrongfully” its plain meaning, which would include unfairly or unjustly. See Wrongful, MERRIAM-WEBSTER.COM, https://www.merriam-webster.com/dictionary/wrongful (last visited August 14, 2019) (definition: wrong, unjust).

In addition to the plain-meaning definition of “wrongful,” the court also resisted the Government’s strained logic when it pointed to clear and basic principles of justice and economy. On that point, the court held that tax refund cases could obviously contemplate innocent spouse relief at the same time, because if the two issues were tried separately under separate jurisdictions, contradictory results might occur. The court stated, “If Plaintiff wins on her refund claim, then she must lose on her innocent spouse claim. Were this dispute adjudicated in two different forums, the result could be contradictory rulings.” The Government had produced dozens of pages of logical loopty-loops about why that simple judicial principle should not apply. In the end, the court did not buy it.

The question still arises, however, as to whether this ruling extends to stand-alone innocent spouse claims. Although the court stated that “[n]othing in the innocent spouse statute, or elsewhere in the Tax Code, suggests that a claimant seeking innocent spouse relief cannot opt to ‘pay first [and] litigate later’ in district court,” the court also made a point to recognize that this was not a stand-alone case, because it also involves a “jurisdictionally valid refund claim” for lack of a signature on the return. 

The Hockin case will be set for trial in federal district court early in 2020.

DOJ Seeks En Banc Rehearing of D.C. Cir. Myers Whistleblower Opinion

On July 2, 2019, the D.C. Circuit held that the 30-day filing deadline for bringing a Tax Court whistleblower award review suit at section 7623(b)(4) is not jurisdictional and is subject to equitable tolling. Myers v. Commissioner, 928 F.3d 1025. I blogged on the opinion here. Upset at its first loss in one of the cases in which Keith and I and the Harvard clinic have been making this argument as to various Tax Court filing deadlines (including in our amicus brief in Myers), the DOJ, on September 12, 2019, petitioned the D.C. Circuit to rehear the case en banc as to both the jurisdiction and equitable tolling rulings.

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I won’t repeat in detail from my prior post how the D.C. Circuit reasoned that the filing deadline is not jurisdictional under recent Supreme Court non-tax case law. But, basically, the court held that, while the Code section clearly gave the Tax Court jurisdiction to hear such cases, the Code section was not sufficiently clear, by using the words “such matter” in a parenthetical, that Congress also wanted the filing deadline to be jurisdictional. Absent such a “clear statement”, the Supreme Court’s current position is that filing deadlines are not jurisdictional. In the DOJ’s rehearing petition, the DOJ basically repeats what it argued before – that “such matter” necessarily implies the filing deadline as well as the subject matter of the case.

When the D.C. Circuit ruled (2 to 1) against the DOJ on this argument, the court stated that it recognized how its ruling was “in some tension with” both Duggan v. Commissioner, 879 F.3d 1029 (9th Cir. 2018), and Guralnik v. Commissioner, 146 T.C. 230 (2016), each of which held that the section 6330(d)(1) Collection Due Process Tax Court filing deadline is jurisdictional and not subject to equitable tolling on language virtually identical to that in section 7623(b)(4).

My favorite passage from the rehearing petition is one with which I wholly agree:

The majority recognized that its holding “is in some tension” with that of the Ninth Circuit regarding “a similarly worded provision of the Internal Revenue Code, 26 U.S.C. § 6330(d)(1).” (Add.20.) But that is an understatement (to say the least). It is simply not possible to reconcile the decision in this case with Duggan.

The petition makes no new arguments, with the exception of (in the equitable tolling section) adding information (not previously given to the court) about how many whistleblower award claims are received each year — over 10,000. The DOJ argues that there would be huge administrative problems if equitable tolling were allowed because a lot of those claimants (including ones whose claims were long ago turned down) could now file late in the Tax Court. That, of course, is pure speculation. What the DOJ doesn’t mention is that, up to now, there have only been about 100 whistleblower award cases under 7623(b)(4) pending in the Tax Court at a time. This latter figure appeared in the appellant’s brief from a 2017 report of the whistleblower office.

In its rehearing petition, the DOJ also raised the specter that some awards may already have been given to one whistleblower, but if late Tax Court petitions are allowed, equitable tolling could lead to duplicate awards. I seriously doubt that is a real concern. Equitable tolling is a matter of equity. If a court saw that by a petitioner waiting so long, the IRS could now be in a situation to have to pay two awards, no doubt that is an equitable fact the court would consider in deciding whether tolling should be allowed.

The DOJ also makes an argument that it did not make before to the panel below — that there should be no equitable tolling because there is a cottage industry of lawyers that brings whistleblower award suits. In Sebelius v. Auburn Regional Medical Center, 568 U.S. 145 (2013), the Supreme Court held that there should be no equitable tolling because the Medicare concerns who were seeking reimbursement decision reviews before administrative boards were sophisticated companies who elected continuously to participate in the Medicare system and were well-represented by counsel. The Myers court pointed out that, by contrast, the Tax Court generally is a place where petitions are filed pro se by people who have never filed before — like Myers himself. So, it distinguished Auburn.

It troubles me that the DOJ did not give statistics to support its argument on how many whistleblowers (percentagewise) file pro se and represented Tax Court petitions. In any event, whistleblowers can’t be said to have elected to participate in the award system. Mr. Myers simply felt that his former employer had misclassified both him and other similar workers as independent contractors and suggested an audit.

Observations

I am told by people who do appellate work full time that the D.C. Circuit is stingy with grants of rehearings en banc. So, I am not expecting the petition to be granted. Then, the question will be whether the Solicitor General seeks cert.

This may be a similar situation to when, as an amicus, I helped persuade the Ninth Circuit in Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015), that the filing deadline in section 6532(c) for a district court wrongful levy suit is not jurisdictional and is subject to equitable tolling under recent Supreme Court case law. The DOJ also filed a petition for a rehearing en banc with the Ninth Circuit – pointing to a clear conflict with opinions of other Circuits holding the filing deadline jurisdictional and not subject to equitable tolling (though those opinions predated the 2004 change in Supreme Court case law on jurisdiction). The Ninth Circuit did not grant the en banc rehearing. Then, the DOJ did not pursue the matter by filing a cert. petition.

But, I would be happy to see the jurisdiction and equitable tolling issues elevated to the Supreme Court. So, I am not hoping for a similar SG abandonment of the Myers case. In the rehearing petition, the DOJ argues that this is a matter of exceptional importance to the IRS. But, then, people seeking rehearing always say that.

An Estate Cannot Use the Financial Disability Provisions to Toll the Statute of Limitations for Filing a Refund Claim

The case of Carter v. United States, No. 5:18-cv-01380 (N.D. Ala. 8-9-2019) shows a limitation of the financial disability provision set out in IRC 6511(h). Ms. Carter is a personal representative of an estate. She failed to timely file an administrative claim for the estate and sought to use the financial disability provisions to hold open the time frame. The court finds that the language of the statute only applies to individuals. The court also spends a fair amount of time in its lengthy opinion talking about the issue of jurisdiction, a favorite topic at this blog. Both financial disability and jurisdiction will be discussed below. Carl Smith helped significantly in the writing of the jurisdictional portion of this post.

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Financial Disability

The decedent owned a lot of valuable stock in a bank but had the misfortune to pass away in the midst of the financial crisis of 2007-2008. The stock went down precipitously because of the great recession but fell to worthless status when a fraudulent scheme perpetrated on the bank was discovered. The dramatic drop in the value of the stock apparently caused Ms. Carter, the executor of the estate to develop issues that she alleges caused her to be late in submitting an amended return claiming a refund because the value of the stock at the valuation date for the estate tax return was actually lower than the amount reported on the return.

The IRS moved to dismiss because by the time she filed the amended return it was well past the ordinary time for filing a claim for refund. Ms. Carter withdrew her initial claim and filed another one to which she attached a doctor’s note explaining that she, the executor, was suffering from a medical impairment that prevented her from managing the affairs of the estate for five years. She also filed an affidavit with the second claim stating that no one other than her had the authority to act on behalf of the estate during the relevant time period. The IRS did not act on her new amended claim. After waiting six months she filed her complaint and the IRS moved to dismiss for lack of jurisdiction since the claim was filed out of time. The estate claimed a refund of over 3 million dollars stating that the stock was really worthless at the time of valuation based on non-public information that later became available.

We can all sympathize with someone who thought they were inheriting stock worth over $17 million and who found out it was worthless. Compounding this problem, according to footnote 2 of the opinion, was the fact that the bank executives urged Ms. Carter and a co-beneficiary not to sell their stock but to borrow from the bank to pay the estate tax. The two borrowed the money giving personal guarantees and they remain liable on those guarantees. So they not only lost all of the value that they thought the stock had but they owe money (lots of it) to boot. [I doubt they found much solace in the successful prosecution of the person who caused the devaluation.]

Such a turn of events could put someone in a tailspin that might cause some delays. The IRS did not argue that Ms. Carter was wrong in her assertion that she suffered from some unspecified medical impairment that kept her from acting. It essentially argued that this did not matter because the taxpayer was the estate and not an individual. It also did not matter that the stock may have been worthless at the time the estate reported it without knowing of the actions that devalued the stock. What mattered was that the refund claim came too late.

Footnote 6 of the opinion collects the case law on this issue which uniformly holds that the financial disability must belong to the taxpayer and not to some third person. Prior cases on this point include Murdock v. United States, 103 Fed. C. 389 (2012); Alternative Entm’t Enters., Inc. v. United States, 458 F. Supp. 2d 424 (E.D. Mich. 2006), aff’d 277 F. App’x 590 (6th Cir. 2008); Brosi v. Commissioner, 120 T.C. 5, 10 (2003) as well as others I will not detail here. I wrote a law review article several years ago detailing holes in the financial disability statute. This is another hole. I cannot say that Ms. Carter would win her case but if financial disability did keep her from filing her claim on time, and if she can prove the claim was valid, this seems like a worthy exception for Congress to make to allow a taxpayer to obtain the return of money that should not have come to the IRS in the first place. Until the statute changes to include a broader class of taxpayers with financial disability cases like this will continue to occur occasionally. Financial disability cases do not present large numbers and courts can sort through the disability claims. I would let them do it.

Jurisdiction

The court also spent time parsing its jurisdiction. This issue matters because nonjurisdictional filing deadlines are subject to waiver, forfeiture, estoppel, and, usually, equitable tolling. The Supreme Court in Brockamp v. United States, 519 U.S. 347 (1997) (remember it was Brockamp that caused Congress to pass IRC 6511(h) creating financial disability in the first place) merely held that equitable tolling doesn’t apply in 6511 cases, but the Court did not hold the other three defenses don’t apply. Brockamp says nothing about whether the filing deadline is jurisdictional. Indeed, the opinion doesn’t even contain the words “jurisdiction” or “jurisdictional”. Dalm v. United States, 498 U.S. 596 (1990) does contain language calling 6511 rules jurisdictional, but it goes on to reason that it is so because: 

Under settled principles of sovereign immunity, the United States, as sovereign, is immune from suit, save as it consents to be sued . . . and the terms of its consent to be sued in any court define that court’s jurisdiction to entertain the suit. A statute of limitations requiring that a suit against the Government be brought within a certain time period is one of those terms.

494 U.S. at 608 (cleaned up)

That statement is the reverse of good law today. SOLs now are almost never jurisdictional. 

The Supreme Court has not given much thought to the 1990 Dalm opinion in recent years, for if the Court did, the 1997 Brockamp opinion (which doesn’t even mention Dalm) could have been one sentence long: “Since jurisdictional filing deadlines are never subject to equitable tolling, and since, in Dalm, we called the 6511 filing deadlines jurisdictional, those deadlines cannot be equitably tolled.” 

Since the district court opinion did not involve the DOJ waiving or forfeiting the right to raise the untimeliness issue, nor did it involve facts that might cause estoppel, it really did not matter in Ms. Carter’s case whether the filing deadline is jurisdictional.

The district court has serious doubts that 6511 noncompliance arguments go to its jurisdiction. The court in the text relies on statements in Dalm making 6511 jurisdictional, but is sufficiently concerned that 6511 is not, that it goes on to decide the underlying merits against the taxpayer (not sure why it has to do this). Then, the court writes a long footnote about why 6511 might not be jurisdictional:

Supreme Court jurisprudence no longer accords similar limitations periods jurisdictional status. In United States v. Kwai Fun Wong, 135 S. Ct. 1625 (2015), the Supreme Court held the limitations period for filing a Federal Tort Claims Act case is not jurisdictional. The Court determined “the Government must clear a high bar to establish that a statute of limitations is jurisdictional.” Id. at 1632. “In recent years, [the Court has] repeatedly held that procedural rules, including time bars, cabin a court’s power only if Congress has ‘clearly state[d]’ as much.” Id. (citation omitted). “Time and again, [the Court has] described filing deadlines as ‘quintessential claim-processing rules,’ which ‘seek to promote the orderly progress of litigation,’ but do not deprive a court of authority to hear a case.” Id. (citing Henderson v. Shinseki, 562 U.S. 428, 435 (2011)). 

Therefore, to “ward off profligate use of the term ‘jurisdiction,’ [the Court has] adopted a ‘readily administrable bright line’ for determining whether to classify a statutory limitation as jurisdictional. . . . [Courts should] inquire whether Congress has ‘clearly state[d]’ that the rule is jurisdictional; absent such a clear statement, . . . ‘courts should treat the restriction as nonjurisdictional in character.’” Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145, 153 (2013). As a result, the Court has “repeatedly held that filing deadlines ordinarily are not jurisdictional. . . .” Id. at 154. 

Even more recently, the Supreme Court reconfirmed that a statute’s limitations period primarily pertains to claim-processing, not subject matter jurisdiction. See Fort Bend Cty., Texas v. Davis, 139 S. Ct. 1843, 1849 (2019) (“The Court has therefore stressed the distinction between jurisdictional prescriptions and nonjurisdictional claim-processing rules, which ‘seek to promote the orderly progress of litigation by requiring that the parties take certain procedural steps at certain specified times.’” (quoting Henderson v. Shinseki, 562 U.S. 428, 435 (2011))); Nutraceutical Corp. v. Lambert, 139 S. Ct. 710 (2019) (contrasting nonjurisdictional claim-processing rules subject to waiver by an opposing party with court procedural rules which clearly foreclose a flexible equitable tolling approach). “If a time prescription governing the transfer of adjudicatory authority from one Article III court to another appears in a statute, the limitation [will rank as] jurisdictional; otherwise, the time specification fits within the claim-processing category.” Hamer v. Neighborhood Hous. Servs. of Chicago, 583 U.S. at ___, 138 S. Ct. 13, 20 (2017).

Section 6511(a)’s filing deadlines appear to fall within the ambit of a claim-processing rule rather than a jurisdictional prerequisite. As similarly countenanced in Kwai Fun Wong, § 6511(a)’s “text speaks only to a claim’s timeliness, not to a court’s power.” 135 S. Ct. at 1632; see § 6511 (describing the filing deadlines for administrative claims for tax credits and refunds). Section 6511 “‘does not speak in jurisdictional terms or refer in any way to the jurisdiction of the district courts.’” Kwai Fun Wong, 135 S. Ct. at 1633 (citations omitted). Furthermore, § 6511’s limitations periods fall in a different section of the Internal Revenue Code from the jurisdiction granting provisions. See28 U.S.C. § 1346(a)(1); 26 U.S.C. § 7422.

The court cognizes the Supreme Court referred to § 6511’s time limits in jurisdictional terms in Dalm, In Dalm, the Court held the district court did not have jurisdiction over a suit seeking a refund of gift tax, interest, and penalties when the plaintiff did not file suit within the limitations period. Id. at 601. The Eleventh Circuit followed Dalm’s reasoning in dismissing a refund suit for lack of subject matter jurisdiction. Wachovia Bank, N.A. v. United States, 455 F.3d 1261, 1268-69 (11th Cir. 2006). However, the Supreme Court’s recent jurisprudence portrays that courts “once used [the term “jurisdiction”] in a ‘less than meticulous’ manner.” Nutraceutical, 139 S. Ct. at 714 n. 3 (citing Hamer, 583 U.S. at ___, 138 S. Ct. at 21; Kontrick v. Ryan, 540 U.S. 443, 454 (2004)). “Those earlier statements did not necessarily signify that the rules at issue were formally ‘jurisdictional’ as [the Court uses] that term today.” Id.

Nevertheless, the structural interpretation of § 6511(a) as a claims-processing rule may not overcome its prior construal as a jurisdictional provision. See Fort Bend, 139 S. Ct. at 1849 (The “Court has stated it would treat a requirement as ‘jurisdictional’ when ‘a long line of Supreme Court decisions left undisturbed by Congress’ attached a jurisdictional label to the prescription.”) Furthermore, notwithstanding the shadow cast on § 6511(a) as a jurisdictional provision, its limitations period applies to this action as it prescribes mandatory filing deadlines subject to a narrow tolling provision. See Nutraceutical, 139 S. Ct. at __ (“The mere fact that a time limit lacks jurisdictional force, however, does not render it malleable in every respect. Though subject to waiver and forfeiture, some claim-processing rules are “mandatory” — that is, they are “‘unalterable’” if properly raised by an opposing party.” (citing Manrique v. United States, 137 S. Ct. 1266, 1272 (2017); see also Kontrick, 540 U.S. at 456; Eberhart v. United States, 546 U.S. 12, 19 (2005) (per curiam) (A claim-processing rule manifests as “mandatory” when a court must enforce the rule if a party “properly raise[s]” it.). Therefore, Defendant properly raised the limitations period prescribed by 26 U.S.C. § 6511(a), and it applies whether it is designated as a jurisdictional or claim processing rule.

Conclusion

The Carter case provides much thought and analysis on the jurisdictional issue as it applies to refund claims. As you can see from this discussion, it does not simply stop at Brockamp. While the discussion does not help the taxpayer here, it may help to guide future taxpayers seeking to understand the possibilities for pursuing an otherwise late claim.

Another Court Rules on Jurisdiction for Overpayment Interest Suits – Part Two

Today Bob Probasco continues his update on overpayment interest suits. Part One can be found here Christine

And now Bank of America

Bank of America filed its case in the Western District of North Carolina (WDNC). As noted above, Pfizer chose its forum to take advantage of a favorable Second Circuit precedent; Bank of America likely chose the WDNC to avoid an unfavorable precedent. Approximately $141 million of the $163 million at issue involves interest netting and, as the government pointed out, Bank of America currently has another interest netting case pending in the CFC. 

The case in the WDNC likely raises the “same taxpayer” issue (see discussion here and here). It involved overpayments and underpayments for tax years ranging from 1987 to 2009, for six different entities that ultimately merged into a seventh, the plaintiff. Federal Circuit precedent, from Wells Fargo & Co. v. United States, 827 F.3d 1026 (Fed. Cir. 2016), allows separate companies that merge to be considered the “same taxpayer.” But it also applies a “temporal requirement” that the two entities must be the “same” for the entire period of overlap between the overpayment and the underpayment. Effectively, this means that the latest of the two tax years with balances to be netted must be after the date of the merger. Based on information in the complaint, most of the amount at issue appears to be precluded by the holding in Wells Fargo. Bank of America’s case in the CFC, on the other hand, did not have a Wells Fargo problem. Settlement negotiations began almost immediately and are ongoing.

Bank of America had a strong incentive to file the current case in the WDNC. As I stated before, in my second post on interest netting, I think Wells Fargo was an overly narrow construction of the statute. But the CFC is bound by that precedent, while the WDNC might reach a different conclusion. Unfortunately, the amounts at issue exceeded the limitation on Tucker Act jurisdiction by a district court. Thus, Bank of America had to argue that the case fell under “tax refund jurisdiction” and the government promptly filed a motion to dismiss for lack of jurisdiction, arguing that claims for additional overpayment interest are only cognizable under Tucker Act jurisdiction. A magistrate judge reviewed the motion to dismiss and concluded that “tax refund jurisdiction” encompasses claims for additional overpayment interest. In Bank of America Corp. v. United States, 2019 U.S. Dist. LEXIS 109238, the district court judge agreed and adopted the magistrate judge’s Memorandum and Recommendation.

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The court found the interpretation of § 1346(a)(1) in E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005) persuasive. The statute provides concurrent jurisdiction for district courts and the CFC over actions for the recovery of “any sum alleged to have been excessive . . . under the internal-revenue laws.” The Scripps court concluded that a claim for overpayment interest fit that part of the statute. The “sum” at issue is not the amount of overpayment interest at issue; it is the total balance the United States retained, the net of tax liability, penalties, underpayment interest, and overpayment interest.

That’s a bit abstract; here’s a simple illustration. Say that the taxpayer originally paid $5,000,000 but the IRS eventually determined that the correct tax liability was only $4,500,000 and refunded $500,000. The sum retained by the government is $4,500,000; it received $5,000,000 but then refunded $500,000. But if the government should have paid (but did not) $80,000 of overpayment interest, it should have only retained $4,420,000, the net of $5,000,000 originally received and $580,000 (tax refund plus overpayment interest) paid back to the taxpayer. The sum actually retained ($4,500,000) is “excessive,” more than the proper amount of $4,420,000. I think this is a somewhat strained reading of the statute, but it persuaded the Scripps court and the district court in Bank of America.

The opinion also noted that most courts that have considered the issue have held that claims of additional overpayment interest fall within “tax refund jurisdiction.” Strictly speaking, that may be true, but it fails to address a couple of limitations on that statement. First, only one Circuit Court (the Sixth), and few district courts outside the Sixth Circuit, have directly addressed the issue. Historically, most claims for overpayment interest have been filed in the CFC rather than district court. It’s not at all clear that other Circuit Courts would reach the same conclusion. For example, although technically dicta, in Sunoco, Inc. v. Commissioner, 663 F.3d 181, 190 (3d Cir. 2011) the Third Circuit stated that actions for overpayment interest in district court fall under § 1346(a)(2) rather than § 1346(a)(1).

Second, the CFC (which handles most interest cases) generally won’t have disputes as to which jurisdictional statute applies, for structural reasons. District court jurisdiction is split between § 1346(a)(1), for tax refund actions, and § 1346(a)(2), for Tucker Act claims, because there is a dollar limitation for the latter. The CFC has no such dollar limitation and only has one relevant jurisdictional statute, § 1491(a)(1), which is similar to the language of § 1346(a)(2). When a case includes both underpayment interest and overpayment interest (most interest netting cases do), some practitioners may specify both § 1346(a)(1) – under Chapter 85 of Title 28, governing district court jurisdiction, but referencing the CFC – and § 1491 for jurisdiction, just in case. But the CFC may not address the jurisdictional statute at all in those cases. When it does, it often refers to jurisdiction for both tax refunds and overpayment interest as arising under the Tucker Act, i.e., § 1491; only the underlying cause of action and statute of limitations are different. That was the only jurisdictional basis that Paresky mentioned and there are many other examples.

The government also relied on similar language in § 1346(a)(1) and Code section 7422(a). Here’s § 1346(a)(1), with the relevant language italicized:

Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws

And here’s Code section 7422(a), which states requirements for refund suits, also with the relevant language italicized:

No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.

The government argued that: (a) it is well-established actions for overpayment interest are not refund suits; (b) § 1346(a)(1)’s language is virtually identical to that in section 7422; (c) therefore, § 1346(a)(1) is limited to refund suits, just as section 7422 is; and (d) therefore, district courts only have jurisdiction over actions for overpayment interest under § 1346(a)(2), which is limited to $10,000.

Bank of America circumvented this conclusion by arguing that § 1346(a)(1) includes both refund suits and “non-refund” suits, such as those for overpayment interest. There are very minor differences in the language of the two statutes, but the court identified one significant difference that convinced it to agree with Bank of America’s argument. Section 7422(a) includes a qualifying header: “No suit prior to filing claim for refund.” And § 1346(a)(1) has no header. I’m not sure how much should be read into that; Chapter 85 of Title 28 appears to have no headers or titles at the paragraph level, and few at the subsection level, as opposed to the section level.

These issues might be reviewed by the Fourth Circuit on appeal at some point, but not soon. The WDNC’s opinion just denied the motion to dismiss; now the parties will need to proceed to the merits of the case. The case has more complex facts and legal issues (including the “same taxpayer” issue) than Bank of America’s CFC case, so a final determination might take a long time.

Conclusion

Now we have three recent cases that addressed the issue but with somewhat inconsistent results. Pfizer and Bank of America concluded that district courts’ “tax refund jurisdiction” encompasses claims for overpayment interest. Paresky did not address the jurisdictional statute, because the case was originally filed in the CFC, but may now with the post-transfer motion before the SDF. The CFC and Federal Circuit might view the issue differently than Pfizer and Bank of America did, but their jurisdictional statute doesn’t differentiate as the district court jurisdictional statute does and they will never rule on the district court statute.

Pfizer concluded that the Code statute of limitations applies. Paresky concluded that the general federal 6-year statute of limitations applies, but that may change in the SDF. Bank of America didn’t directly address the statute of limitations, as the government did not assert untimely filing as a basis for the motion to dismiss, but the court certainly suggested that it would not apply the Code statute of limitations.

These issues potentially could be addressed on appeal by three different Circuits – the Second (Pfizer), the Eleventh (Paresky), and the Fourth (Bank of America). So far, only the Sixth Circuit has ruled on whether district court jurisdiction for these cases fits under § 1346(a)(1). It will be interesting to see if a circuit split develops that would give the government an opportunity to overturn Scripps. And we might even see a decision in Bank of America that would create a circuit split on the “same taxpayer” issue and allow taxpayers an opportunity to overturn that part of the Wells Fargo result.