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.

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

We welcome back guest blogger Bob Probasco of Texas A&M University School of Law for an update on taxpayer suits to recover overpayment interest. Today, Part One sets the stage and recaps the status of the ongoing Pfizer and Paresky cases. Christine

Last year, I wrote about the Pfizer and Paresky cases, which involved questions about jurisdiction and statutes of limitations for taxpayer suits seeking interest payable to them by the government for overpayments. Recently, the District Court for the Western District of North Carolina issued its opinion in Bank of America Corp. v. United States, 2019 U.S. Dist. LEXIS 109238 (W.D.N.C. June 30, 2019) addressing the issue.

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, so I will refer to it as “tax refund jurisdiction.” But I will keep that term in quotes; taxpayers sometimes argue successfully that this covers suits for overpayment interest, although technically those are not refund suits.

The second is § 1346(a)(2), which provides jurisdiction for any 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 limitation.

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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.

As a result of all this, not to mention different precedents in different circuits, taxpayers who file suits for overpayment interest may sometimes want to file in district court and other times prefer the Court of Federal Claims. The government’s position is that these claims fit under Tucker Act jurisdiction only, not “tax refund jurisdiction.” And the government may disagree about whether the taxpayer’s preferred venue is available. There may also be a secondary dispute, concerning which statute of limitations applies and whether the suit was filed timely.

Brief recap and current status of Pfizer

The underlying issue in the Pfizer case was straightforward: whether overpayment interest is due when the IRS mails a refund check within the 45-day safe harbor of section 6611(e) but the check is not received by the taxpayer and must be replaced. Pfizer filed suit in the Southern District of New York (SDNY), asserting “tax refund jurisdiction,” to take advantage of a favorable precedent in the Second Circuit. Tucker Act jurisdiction would be available in the SDNY, but is limited to $10,000, and therefore inadequate for this case. The government filed a motion to dismiss for lack of jurisdiction, asserting that standalone suits for overpayment interest do not fall within the scope of “tax refund jurisdiction.” The court agreed with Pfizer and denied that motion to dismiss.

But the government filed a second motion to dismiss for lack of jurisdiction, arguing that the refund statute of limitations in the Code had expired and the suit was not filed timely. Pfizer argued that the general six-year statute of limitations in § 2401 applied even though Pfizer was relying on “tax refund jurisdiction” rather than Tucker Act jurisdiction. The court disagreed with Pfizer, applied the two-year statute of limitations from the Code, and granted the government’s motion to dismiss the case.

The case is currently on appeal. Pfizer asked the court, if it affirms the decision below, to transfer the case to the Court of Federal Claims (CFC). 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. Keith and Carl 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. At oral arguments on February 13, 2018, the Second Circuit panel asked the parties whether it could assume without deciding that claims for overpayment interest fell within the terms of § 1346(a)(1) and proceed to the statute of limitations issue. Roughly 18 months later, we’re still waiting for an answer.

Brief recap and current status of Paresky

The Pareskys have been trying to resolve these tax issues since 2009, first to claim substantial losses that generated refunds and then to get interest on the refunded amounts. It has been a very long, complicated struggle and makes you wonder what would have happened if they hadn’t been represented by very competent tax advisors. In the course of the attempted resolution, the IRS advised them to file a refund claim and, when the claim was denied in 2015, advised that they had two years to file suit. Relying on those statements, the Pareskys filed suit in 2017 in the CFC. The government filed a motion to dismiss, arguing that the six-year statute of limitations applied and had expired in 2016. The plaintiffs argued that the two-year statute of limitations applied; alternatively, they argued that that the six-year statute of limitations didn’t start in 2010, as the government asserted, or was suspended due to government misconduct.

The first step in the court’s decision was relatively easy, because there are numerous precedents in the Federal Circuit that the six-year statute of limitations applies to claims for overpayment interest. It took more effort to analyze when the claims accrued. The normal documentary evidence was not available because it had been destroyed in the normal course of business, during the very long period this dispute had lasted. The court was left with “complicated factual issues” that it resolved in the government’s favor. Finally, the court concluded that the taxpayers had not met the burden of proof to apply the accrual suspension rule. But the CFC denied as moot the government’s motion to dismiss because it granted the taxpayers’ motion to transfer the case to the District Court for the Southern District of Florida (SDF). That would allow the Pareskys to try to persuade the SDF that “tax refund jurisdiction” covers claims for overpayment interest and that the Code statute of limitations applies.

In Pfizer, the taxpayer appealed to the Second Circuit and the question of whether to transfer to another jurisdiction if that was unsuccessful was deferred. In Paresky, the case was transferred immediately rather than giving the plaintiffs an opportunity to convince the appellate court to rule in their favor on the jurisdictional issue. I don’t know if the plaintiffs’ desires were a deciding factor in that difference between the two cases. But Pfizer clearly wanted to remain in the SDNY if possible, while the Pareskys seemed caught by surprise at the jurisdictional challenge, given the advice they received from the IRS, and were open to immediate transfer. They filed a motion to transfer very soon after the government’s motion to dismiss.

In the SDF case, the Pareskys filed an amended complaint, asserting jurisdiction under §§ 1346 and 1491. (This phrasing provides for alternative theories, as “§ 1346” does not distinguish between “tax refund jurisdiction,” § 1346(a)(1), and Tucker Act jurisdiction, § 1346(a)(2). But § 1491 does not apply in district court.) The government quickly filed a motion to dismiss for lack of jurisdiction, and the parties repeated their arguments over which statute of limitations applied. The parties’ submissions on the motion to dismiss were completed on February 26, 2019. We’re still waiting for the district court’s decision, and possibly an appeal to the Eleventh Circuit.

The Broad Impact of Guralnik

On July 12, 2019, I wrote about one case in which the Tax Court applied the reasoning in Guralnik v. Commissioner to extend the time within which a taxpayer could file their Tax Court petition during the government shutdown. We picked up that case through the Tax Court’s designated order feature. As we have discussed before the order feature of the Tax Court’s web site allows users to perform word searches. Inspired by the first case and expecting there should be others, Carl Smith did such a search and found others to which he alerted me. I had my research assistant, Michael Waalkes, follow up on Carl’s research and this post will identify the cases we have found in which Guralnik has made a difference as well as a few where it did not. Leading into the shutdown, we reminded readers on December 31, 2018, not to forget Guralnik. It’s clear from these orders that the Tax Court did not forget it and that the earlier case we wrote about was part of a concerted effort on the part of the court to identify cases in which the court opened its doors to cases which would otherwise have been late but for the application of Guralnik to the situation.

In each of these cases the IRS moved to dismiss. At some point perhaps the IRS will accept Guralnik and no longer file a motion to dismiss or it will seek to litigate it in the circuits. At least for this round of government shutdown, the IRS seems content to raise the issue in every case but accept the outcome in every case without filing an appeal. Of course, if the IRS accepts Guralnik without filing a motion to dismiss, we would not find the case through an order search so it may have accepted many more cases than it contested. Perhaps the issue is a function of getting the word to the field offices. The possibility also exists that it wants to bring each situation to the court’s attention and have the court make the specific decision allowing the case to move forward.

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Per the search of the Tax Court orders: here are the cases involving Guralnik’s application to the government shutdown, in which the Court denied an IRS motion to dismiss for a petition due during the shutdown: Coleman v. Commissioner, Docket No. 1856-19; Baird v. Commissioner, Docket No. 1706-19; Meaut v. Commissioner, Docket No.: 1851-19; Crager v. Commissioner, Docket No. 2191-19; Vlach v. Commissioner, Docket No. 614-19S; Wilson v. Commissioner, Docket No. 0691-19S; Hamilton v. Commissioner, Docket No. 436-19S; Doherty v. Commissioner, Docket No. 101-19; Cajuste v. Commissioner, Docket No. 2190-19; Witt v. Commissioner, Docket No. 2071-19; Kendrick v. Commissioner, Docket No. 806-19S; Baird v. Commissioner, Docket No. 1706-19; Worku v. Commissioner, Docket No. 1864-19; Gettys v. Commissioner, Docket No.1686-19S; Hager v. Commissioner, Docket No. 1854-19.

The Tax Court appears to have adopted a standard policy in cases where the IRS files a Motion to Dismiss for Lack of Jurisdiction on timeliness for petitions due during the government shutdown. The Court first issues a generic order (sample linked here) citing Guralnik and requiring that the IRS supplement its motion, which leads to the IRS conceding timeliness in its supplement and the Court then denying the motion to dismiss. 

Despite the 14 cases listed above in which the Tax Court did open its doors, some petitioners still remained outside of the benefit created by the extra time resulting from the government shutdown. These cases deserve a closer look since they do not follow the cookie cutter results of the cases listed above. In Bancroft v. Commissioner, Docket No. 2063-19, the Tax Court issued its standard order for the IRS to file a supplement to its motion to dismiss, which the IRS did. The Tax Court then granted the motion to dismiss without issuing an order, so it’s unclear why the Court wasn’t convinced that the shutdown affected the timeliness of the petition filing. It would have been nice to have some reasoning here given the importance of the issue. We did not pay to obtain the response filed by the IRS which might have made it clear why the court granted the motion to dismiss in this case.

And in Barnhart v. Commissioner, Docket No. 5783-19S, in response to an IRS motion to dismiss for late-filing a petition that was due on December 24, 2018 (several days before December 28, 2018 when the Tax Court stopped operating), the petitioners argued that their efforts to administratively resolve their issue with the IRS had been hampered by the government shutdown, as the IRS began its furlough earlier on December 22, 2018, two days before the filing deadline. But Judge Foley granted the motion to dismiss and issued an order finding that a government shutdown at the administrative level was not sufficient to alter the filing deadline with the Tax Court, which at the time was still unaffected. This case demonstrates the confusion that some petitioners might have had between the shutdown of the IRS (and most of the government) and the shutdown of the Tax Court (and most of the courts). The non-budget funds available to the courts allowed them to remain open for a short period after the rest of the government shut its doors. Perhaps this confusion should not matter from a jurisdictional standpoint but the whole issue of shutdown must have caused confusion for some parties seeking a remedy.

Finally, in Janjic v. Commissioner, Docket No. 2003-19, the petitioner was a taxpayer who lived abroad and did not return to the U.S. until during the period of the IRS furlough. The petitioner argued that she was unaware that the Tax Court was still operational during this time and thus the Court should still consider the case. The Tax Court disagreed, and Judge Foley granted the IRS motion to dismiss, while noting his sympathy for the petitioner’s situation. The Janjic case most clearly raises the issue of confusion and provides a possible basis for equitable tolling should the time frame for filing a petition in a deficiency proceeding prove not to be jurisdictional.

The issue of jurisdictional nature of the timing of the filing of a deficiency case will be argued in the 9th Circuit in San Francisco on October 22, 2019, in the cases of Organic Cannabis Foundation LLC v. Commissioner, Ninth Circuit Docket No. 17-72874 and Northern California Small Business Assistants, Inc. v. Commissioner, Ninth Circuit Docket No. 17-72877.  We will be closely watching those cases as the decision there could impact other petitioners like Ms. Janjic who file their Tax Court petitions late but have a reason for doing so that would support a finding of equitable tolling. Although we have not written as standalone post on Organic Cannabis and Northern California Small Business Assistants, we did discuss them in the December 31, 2018 post linked above. Just as a reminder, here is what we wrote in that post:

There are currently before the Ninth Circuit two companion cases of petitions sent in around the same time as Guralnik, also by FedEx First Overnight, that arrived a day late. In these cases, Organic Cannabis Foundation LLC v. Commissioner, Ninth Cir. Docket No. 17-72874, and Northern California Small Business Assistants, Inc. v. Commissioner, Ninth Circuit Docket No. 17-72877, it is not clear why the petitions were filed late, but it appears that the Federal Express driver could not access the open Tax Court Clerk’s Office on the last day – either because of construction work, police activity, or some other reason – so the driver returned the following day (one day too late if section 7502 can’t be used). In unpublished orders issued on July 25, 2017 (here and here), the Tax Court declined to extend Guranik to cover situations where the Clerk’s Office was in fact open.

In the Ninth Circuit, the taxpayers not only seek to extend Guralnik, but also argue (as the tax clinic at Harvard did in Guralnik) that the deficiency petition filing deadline is not jurisdictional and is subject to equitable tolling. The DOJ relies on the holding in Guralnik, but argues that Guralnik cannot be stretched to cover the situation where the Clerk’s office is actually open. Since the parties cannot confer jurisdiction in a case merely by not making certain arguments, it would not be impossible for the Ninth Circuit to eventually rule both in these cases that the filing deadline is jurisdictional and that the Tax Court cannot import into its own rules any rule from the Federal Rules of Civil Procedure that extends the filing deadline when the Clerk’s Office is formally closed. That is, nothing stops the Ninth Circuit from rejecting the latter holding in Guralnik. Thus, until there are some court of appeals rulings on this fact pattern, it may be wise not to try to rely on the closure of the government as a reason for not mailing a Tax Court petition on time or attempting hand delivery to the court on the first date it reopens. The cases before the Ninth Circuit are fully briefed… Among the briefs there are amicus briefs from the Harvard tax clinic arguing that the filing deadline is not jurisdictional and is subject to equitable tolling.

Of course, we are closely following the jurisdictional nature of the timing of filing Tax Court petitions in several of the bases for jurisdiction. With respect to the recent decision of the D.C. Circuit that the time for filing a petition in a whistleblower case is not jurisdictional, blogged here, the Department of Justice has requested more time to decide whether to request an en banc review of the decision. As discussed in the blog post on the Myers case, because the language in the whistleblower statute essentially mirrors the language in the Collection Due Process statute passed several years earlier, the Myers decision essentially sets up a split between the D.C. Circuit and the 9th Circuit on this issue which creates at the least the possibility of a trip to the Supreme Court.

Losing Jurisdiction through Excessive Payments – Designated Orders: May 27 – 31, 2019

Another week with only two designated orders (likely caused by the Memorial Day holiday). The first comes from Judge Carluzzo, but is a fairly unremarkable order that grants a petitioner’s motion to dismiss his own CDP case. There was a motion for summary judgment pending from Respondent; perhaps Petitioner agreed to a collection alternative or otherwise came to a realization that defending against summary judgment would be futile. We don’t know, as there remains no electronic access to documents on the Tax Court’s docket other than orders and opinions.

The other order from Judge Leyden likewise dismisses a case, but for a different reason: the petitioners in this deficiency case had paid the Service’s proposed tax before it issued a notice of deficiency. Nevertheless, the Service ended up issuing a Notice of Deficiency, from which the Petitioners timely petitioned the Tax Court.

Ordinarily, when dealing with jurisdictional motions in the deficiency context, we see two failures of jurisdiction: (1) the Petitioner hasn’t timely filed their petition, or (2) the Service issued an invalid notice of deficiency—most often because the Service failed to mail the notice to the Petitioner’s last known address.

Here, Respondent filed a motion to dismiss for lack of jurisdiction. Judge Leyden finds the Notice of Deficiency is invalid, but not because it was inappropriately mailed. Rather, the Notice is invalid because, the Court concludes, no deficiency exists.

Conceptually, this feels a bit like putting the cart before the horse. Isn’t the question of whether a deficiency exists a determination to be made on the merits? Why is the Court deprived of jurisdiction? Payment of a deficiency and the deficiency itself seem to be independent concepts. Why is the Tax Court not empowered, as a statutory matter, to determine the propriety of a deficiency—even if it’s been paid before the Notice of Deficiency is issued?

The Court doesn’t cite to any caselaw in the order, but a number of Courts of Appeals agree with Judge Leyden’s analysis. For example, in Conklin v. Commissioner,  897 F.2d 1027 (10th Cir. 1990), a Notice of Deficiency was issued for a joint liability. However, prior to the Notice of Deficiency, the wife paid the entire proposed joint liability in full. The husband sought to challenge the liability in Tax Court. The Tax Court determined the merits of the issue, but the 10th Circuit reversed, holding that the no deficiency existed under I.R.C. § 6211, because it had been fully paid prior to the husband’s Notice of Deficiency. Therefore, the Tax Court had no jurisdiction to hear the case and determine the merits.

What’s the statutory underpinning of this decision? It begins and ends with IRC § 6211, which defines a deficiency. I teach this section each year to my Tax Clinic class, which results in some mild bewilderment. Let’s look at the statute:

For purposes of this title in the case of income . . . taxes imposed by subtitles A… the term “deficiency” means the amount by which the tax imposed by subtitle A …exceeds the excess of—

  • The sum of  
  •  The amount shown as the tax by the taxpayer upon his return . . . plus
  • The amounts previously assessed (or collected without assessment) as a deficiency, over—
  • The amount of rebates, as defined in subsection (b)(2), made.

Clear as mud. I try to frame this as a mathematical equation in class. As elements in the equation, we have:

  1. TaxA: The tax imposed by subtitle A—i.e., what the tax actually should be, under the Internal Revenue Code;
  2. TaxR: The amount shown as the tax by the taxpayer upon his return;
  3. A: Amounts previously assessed as a deficiency;
  4. C: Amounts collected without assessment—the critical issue in this order; and
  5. R: The amount of rebates.

As much as I try to tell students wanting to enroll in Tax Clinic that there’s minimal math involved, it’s time to express this as a proper equation.

Deficiency = TaxA  – ((TaxR  + A + C) – R)  

And, remembering with much appreciation my high school algebra classes, we can simply the equation as follows:

Deficiency = TaxA  – TaxR  – A – C + R  

(My wife—who majored in mathematics—tells me that this is an example of the “distributive property”.)

For simple cases, this makes some conceptual sense. A deficiency primarily equals the tax under subtitle A, less the tax that the taxpayer reported on the tax return.

Let’s add some complexity. If there were previous deficiency assessments made, then those amounts should be reduced from the new deficiency. If there were rebates made (as would occur if, for example, a previous audit resulted in an additional refund to the taxpayer), those amounts should be added to the new deficiency.

That brings us to the issue in this case—“amounts previously . . . collected without assessment.” Those too must be reduced from the definition of a deficiency under section 6211. And if the Notice of Deficiency is issued after the “amounts collected without assessment” exceed the amount of any proposed deficiency, then no deficiency existed when the Notice was issued—or at least, no deficiency that the Commissioner is asserting.  In effect, the Notice is asserting something that cannot exist under section 6211, and it’s therefore invalid. In contrast, if payment occurs after the Notice is issued, the Notice itself remains valid as a deficiency existed at the time of the Notice.

Ultimately, taxpayers in this situation still have an option to dispute the merits of an IRS audit determination: they may file a refund claim with the Service and (upon denial) sue for a refund in District Court or the Court of Federal Claims. This isn’t the most helpful result for pro se taxpayers, given the relative procedural complexity in those courts. Yet, it remains the sole option for these taxpayers.

There are some practical problems with this approach, however. In Judge Leyden’s order, the Petitioners didn’t object to Respondent’s motion. Presumably they agreed that they owed a deficiency, had paid it, and wanted to simply finalize the matter with the IRS.

But there’s still a potential problem. The Service issued a Notice of Deficiency several months after the Petitioners fully paid the proposed deficiency. It seems likely that when they made the payment the Petitioners would have signed Form 4549, Income Tax Examination Changes, which waives the restrictions in section 6213 on assessment and collection. If they did, and the IRS made an assessment pursuant to the Form 4549 at that time, then there is potentially a risk that the Service could assess the same tax again subsequent to the Notice of Deficiency. Stranger things have happened; indeed, Judge Leyden references this possibility in the order itself, and notes that the Service has assured the Court it will take care not to make a duplicate assessment.

What happens if the Service does make that mistake? Can the Petitioner return to Tax Court to enforce the Service’s promise reflected in the order? Maybe, as a practical matter. Perhaps the Court would exercise such jurisdiction as in similar cases involving improper mailings that invalidate the Notice of Deficiency.

At present, this case represents a cautionary tale to taxpayers and their representatives wishing to dispute a tax deficiency in the U.S. Tax Court, yet also wish to prevent the running of penalties and interest. Either (1) they should designate their payment as a “deposit” or (2) they should wait until after issuance of the Notice of Deficiency to make payment. Otherwise, any dispute is heading to District Court or the Court of Federal Claims.