Complications With Rolling Credit Elect Transfers – Part 2

Bob Probasco returns with Part Two of his examination of rolling credit elect transfers and their treatment for interest purposes. Christine

In Part 1, I discussed the result in Goldring v. United States, 2020 U.S. Dist. LEXIS 177797, 2020 WL 5761119 (E.D. La. Sept. Sep. 28, 2020) and started laying the framework for a critique of the decision.  That included the treatment of credit elect transfers (CETs), which is now pretty much settled law.  Now we’ll take a look at previous cases with the specific scenario at issue in Goldring – rolling CETs – for which the results have been mixed.

Treatment of rolling CETs for interest purposes

FleetBoston Fin. Corp v. United States, 483 F.3d 1345 (Fed. Cir. 2007) is the only Circuit Court decision clearly on point, for now.  (Rolling CETs were also involved in Marsh & McLennan Cos. v. United States, 302 F.3d 1369 (Fed. Cir. 2002), but the taxpayer agreed with the government’s position later adopted in FleetBoston and the case addressed a different statutory provision, so the court did not have to decide this issue.)  It concluded that interest computation should take into account only the first CET, from the year at issue, and ignore subsequent (rolling) CETs.  Under that approach, the underpayment interest assessed against the Goldrings would be entirely valid.

In re Vendell Healthcare, 222 B.R. 564 (Bankr. M.D. Tenn. 1998), Otis Spunkmeyer, Inc. v. United States, 2004 WL 5542870 (N.D. Cal. 2004), and the dissent in FleetBoston follow the use of money principle from Avon Products and progeny.  The balance in the year at issue doesn’t become “due and unpaid” until the CET amount actually provides the taxpayer with a benefit in a subsequent year – either applied to an estimated tax installment to avoid the addition to tax or included in an overpayment that is refunded instead of transferred to the next year.  Under that approach, the Goldrings would be entitled to a full refund of the underpayment interest.

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FleetBoston disagreed with Vendell and Spunkmeyer, concluding that they

disregard both the account-specific meaning of the term “paid” in the Internal Revenue Code and the regulatory scheme under which a credit elect overpayment will be deemed to reside in the tax account for the succeeding year, even if it is not needed to pay estimated tax in that year. 

In other words, the use of money principle is a tool of statutory construction but cannot override the specific terms of the statutes enacted by Congress. 

Who’s right?

The FleetBoston interpretation may be correct, but I don’t think either the Code or the regulatory scheme are as clear as the Federal Circuit thought they are.  FleetBoston distinguished Vendell and Spunkmeyer in part because of “the account-specific meaning of the term ‘paid’ in the Internal Revenue Code.”  But the issue in these cases is when underpayment interest under section 6601(a) begins running, the “last date prescribed for payment,” not when it stops, “the date paid.”  As discussed in Part 1, Avon Products, Inc. v. United States, 588 F.2d 342 (2nd Cir. 1978) concluded that the beginning date was not clearly addressed by the statute and effectively re-wrote it; the IRS acquiesced in not only the holding but also the reasoning.  That suggests it would be feasible and permissible to re-write it again to address rolling CETs.

The relevant part of the regulatory language, which is the same in both § 301.6402-3(a)(5) and § 301.6611-1(h)(2)(vii), says only that “such amount shall be applied as a payment on account of the estimated income tax for such [succeeding] year or the installments thereof.”  The regulations were enacted back in 1957 and didn’t address when underpayment interest on a subsequently determined deficiency would run.  (I found nothing helpful in the Federal Register when the proposed and final regulations were issued; I doubt if the IRS thought about issues with subsequently determined deficiencies at that time.)  That was worked out through cases and revenue rulings, not regulations.  Even Revenue Ruling 99-40 doesn’t specifically address situations where the CET is not needed at all for estimated tax installments and is rolled to the next year rather than refunded. 

The parties in Goldring argued a lot about the interpretations of cases and rulings, and whether they should apply here.  The disagreement seems to flow from fundamentally different frameworks for thinking about CETs, both in general and with rolling CETs, in this context.

Government perspective – it’s a matter of accounting 

From the perspective of the government (and the FleetBoston court), the focus is on the fact that money has been transferred from one year to another year – the particular year to which the overpayment was first transferred.  The statute and regulations are clear.  The subsequent CETs and the other years are irrelevant.  This has intuitive appeal.  Generally, interest is computed on each tax year independently.  Independence of each tax year is a foundational principle for many purposes in our system and the language in the regulations for CETs is consistent with that perspective.  The initial CET is irrevocable and anything that happens thereafter (a subsequent CET) is not related to the original CET.  If a deficiency arises in the original year of the overpayment, you figure out the effective date of the transfer to the succeeding year, using the approach developed in the cases and summarized in Revenue Ruling 99-40.  If the election on the original year’s return is made before the due date of the return for the succeeding year, which it almost always is, the transfer (a “payment” in the succeeding year) would be effective no later than the due date of that return.

That amount of money is sitting in only one tax year at any point in time.  This is generally how the IRS would record it on account transcripts.  Under this interpretation, in the Goldring case, the amount at issue would be:

  • Included in the account for the 2010 tax year from April 15, 2011, until transferred out on April 15, 2012
  • Transferred into the account for the 2011 tax year on April 15, 2012, and remaining there until transferred out on April 15, 2013
  • Transferred into the account for the 2012 tax year on April 15, 2013, and remaining there until transferred out on April 15, 2014
  • Etc.

In other words, the Code doesn’t offset the 2010 deficiency against the overpayment in 2011 (or subsequent years) as a result of the CET.  The Avon Products decision was not a broad interest netting solution; it just addressed when the transfer between years is considered to take place.

Taxpayer’s perspective – prevent inequitable results

From the perspective of the taxpayer (as well as Vendell, Spunkmeyer, and the FleetBoston dissent), the language is ambiguous enough to allow a construction to meet the policy objectives of Congress.  Avon Products and its progeny, combined with other Code provisions such as sections 6601(f) and 6611(b)(1) and the global interest netting regime of section 6621(d), evidence a strong desire by Congress to avoid “interest arbitrage” results that might be unfair to taxpayers when there are both overpayments and underpayments outstanding.  Global interest netting protects taxpayers from paying underpayment interest at a higher rate than received for overpayment interest on equivalent balances outstanding at the same time.  The same principle should protect all taxpayers from paying underpayment interest during periods when there was an equivalent overpayment balance outstanding for which the taxpayer doesn’t receive interest at all.

Section 6621(d) only allows, by its terms, netting of overpayments on which interest is allowable and underpayments on which interest is payable.  If not for the fact that overpayments that the taxpayer elects to CET to the following year do not earn overpayment interest, that section would give the Goldrings the result they ask for.  But excluding CETs from the reach of section 6621(d) was not necessarily Congress’s intention.  I haven’t done a comprehensive review of the legislative history, but I suspect that limiting section 6621(d) to overpayments on which interest is allowable and underpayments on which interest is payable was only intended to maintain certain restricted interest provisions that give the government an incentive to act quickly. 

For that matter, was the regulation providing that an overpayment transferred by CET does not earn overpayment interest the best decision?  Section 6402(b) is a broad specific grant of authority to issue regulations.  But this was also an exception to the general rule of section 6611(a).  The provision makes some sense, given the solution in Avon Products and progeny, if the taxpayer does not continue to roll over CETs.  The IRS could have written the regulation to address rolling CETs in a way that would conform to the Congressional purpose of disallowing government interest arbitrage.

Avon Products and its progeny have an effect very similar to netting.  Prior to those decisions, the IRS treated the original overpayment in those situations (on which interest was not allowable because it was used for a CET) and the subsequently determined deficiency as separate and independent transactions.  Thus, until the CET was effective, there was – for the same year – an overpayment transaction that didn’t earn interest at all and an underpayment transaction for which the IRS charged interest.  Avon Products combined the two transactions into a single balance before computing interest, what I term “annual interest netting.” 

Notably, the final result of this line of cases and rulings did not treat the CET as effective based on an artificial date, such as the date the return was filed for the overpayment year or the unextended filing due date of the overpayment year.  Instead, the CET was effective only when the taxpayer got a benefit from having the money in the succeeding year.  The current IRS practice limits the effective date of the CET to no later than the unextended filing due date for the succeeding year.  Why should it be limited that way, if the taxpayer receives no benefit in the first succeeding year and instead rolls the amount over to the next year? 

Even if the government’s accounting perspective is respected, is the application of it necessarily immutable?  The CET from Year 1 to Year 2 creates a “negative payment” in Year 1 and a payment in Year 2.  The CET from Year 2 to Year 3 creates a “negative payment” in Year 2 and a payment in Year 3.  Can we consider the payment in Year 2 (from Year 1’s CET) and the “negative payment” in Year 2 (from Year 2’s CET) to have simply offset to eliminate both?  Perhaps.

Where do we go from here?

The government’s position prevailed in FleetBoston, the only Circuit Court decision on the issue of rolling CETs to date.  Vendell, Spunkmeyer, and the FleetBoston dissent held for taxpayers on this issue.  The Goldring decision ruled for the government in a fairly cursory manner and it has now been appealed.

I’m not sure which of the opposing position will prevail in the Fifth Circuit.  I suspect the interpretation in FleetBoston will prevail.  But there are certainly arguments for the taxpayers’ position.  We have an example, over the past couple of years, of a single Circuit Court decision on an issue that might have seemed durable – but wasn’t, once other Circuit Courts eventually considered the issue.  We’ll see whether that happens here.

Complications With Rolling Credit Elect Transfers – Part 1

We welcome back guest blogger Bob Probasco. In Part One of this two part post, Bob dives into the history of “credit elect transfers” and their treatment for interest purposes. Part Two will analyze the Goldring case in more detail and discuss the arguments that are likely to be made on both sides as the case goes before the Fifth Circuit. Christine

A brief order was issued in September, concerning an issue related to interest on federal tax overpayments and underpayments.  In Goldring v. United States, 2020 U.S. Dist. LEXIS 177797, 2020 WL 5761119 (E.D. La. Sept. Sep. 28, 2020), the court granted the government’s motion for summary judgement, concluding that the IRS properly assessed $603,335 of underpayment interest.  The court rejected the taxpayers’ arguments concerning the proper treatment of interest in situations with rolling credit elect transfers.

We’re all familiar with “credit transfers,” the terminology for IRS authority under Code section 6402(a) to apply an overpayment for one year against an outstanding tax liability for another year.  IRS records show tax balances from the government perspective, of course, under which an overpayment by the taxpayer is a liability or, in accounting terminology, a credit.  (These transfers show up on transcripts with transaction codes 826/706, labeled “credit transferred out”/“credit transferred in”.)

A “credit elect transfer” (CET) is one the taxpayer requests, on their tax return; I frequently make such an election and some of you may as well.  The election, made on line 36 of the Form 1040 for 2020, is to apply part or all of the overpayment shown on the return to your estimated tax obligations for the next year.  The overpayment that the taxpayer elects to transfer does not earn overpayment interest for the period before the transfer, even if the return is filed well after the due date of that return.  This is not a statutory restriction; section 6402(b) just authorizes Treasury to prescribe regulations governing such CETs.  It did, including § 301.6402-3(a)(5) and § 301.6611-1(h)(2)(vii).

As for “rolling credit elect transfers,” those may be most easily illustrated by the facts of this case.   

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Facts

I’m going to dispense with most of the details and just focus on the key facts regarding the specific issue at hand.

  • Mr. and Mrs. Goldring’s 2010 tax return showed an overpayment of $6,782,794, which was applied to their 2011 tax return at their request.
  • Their 2011 tax return showed an overpayment of $6,521,775, which was applied to their 2012 tax return at their request.
  • Their 2012 tax return showed an overpayment of $5,869,478, which was applied to their 2013 tax return at their request.
  • Etc., etc., etc.

Thus, “rolling” CETs – the Goldrings kept rolling over their overpayments to the next year instead of receiving refunds. 

I’ve used CETs often, occasionally even rolling CETs, although the numbers were much smaller than for the Goldrings.  I intended to use the CET against the estimated tax installment obligation due at the same time as my tax return.  It was easier to make that portion of the obligation by CET rather than making a separate payment for year 2 and getting a refund (without interest) for year 1 several weeks later.

Mr. and Mrs. Goldring had something else in mind.  They anticipated a possible audit deficiency for their 2010 tax return.  Their accountants had suggested the rolling CETs as a way to keep funds with the IRS sufficient to cover the potential deficiency, thereby avoiding underpayment interest.  Remitting a separate deposit in the nature of a cash bond would have been an option as well.  Perhaps rolling CETs were seen as a low key way to accomplish the same thing, without waving a red flag to alert the IRS of the potential deficiency?  If there had never been a deficiency for 2010, the rolling CETs wouldn’t have been an issue.  Eventually the Goldrings would have asked for a refund instead of rolling the overpayments over.  No interest would be allowed on the refund and that would have been an end of it.

But, as they feared, there was a deficiency for 2010.  The IRS began an audit on April 15, 2013 and issued a 30-day letter on August 11, 2015.  Appeals agreed with the audit determination and issued a notice of deficiency for $5,250,549 on March 30, 2017.  On June 20, 2017, rather than go to Tax Court, the taxpayers consented to immediate assessment.  The audit deficiency was eventually paid from overpayment balances for later returns, specifically, Mrs. Goldring’s 2014 separate tax return and Mr. Goldring’s 2016 separate tax return. A refund claim and this refund suit followed.

The validity of the 2010 deficiency itself had been resolved in this same case, by an order issued on April 13, 2020.  That left the question of interest that had been assessed on the deficiency.  The IRS assessed underpayment interest on the 2010 deficiency for the period from April 15, 2012, the due date for the 2011 tax return, until paid.  The Goldrings argued that, because the IRS always had money in its possession sufficient to cover the audit deficiency, no underpayment interest should be accrued.        

The District Court’s Opinion

The court decided this issue in favor of the government.  Section 6601(a) provides for underpayment interest as follows:

If any amount of tax imposed by this title . . . is not paid on or before the last date prescribed for payment, interest on such amount . . . shall be paid for the period from such last date to the date paid.

The regulations sections cited above provide that the portion of an overpayment designation as a CET “shall be applied as a payment on account of the estimated tax for [the succeeding] year or the installments thereof.”  The 2010 CET was irrevocable and resulted in transferring $6,782,794 from the account for the taxpayers’ 2010 tax year to the account for their 2011 tax year.  That transfer from 2010 to 2011 was effective as of April 15, 2012, the due date of the 2011 tax return.  The original overpayment in 2010, transferred to 2011, would not earn overpayment interest.  But it could shield the taxpayers from underpayment interest from a subsequently determined deficiency, until the funds were deemed transferred to 2011.  Underpayment interest began accruing on April 15, 2012, the last date prescribed for payment for the year to which the overpayment was transferred, and continued until April 15, 2015 and April 15, 2017, when the deficiency was paid by section 6401(a) transfers from subsequent tax returns.  The plaintiffs were not entitled to a refund of underpayment interest and the government was entitled to summary judgement.

This sounds like a very straightforward application of clear law, doesn’t it?  Particularly since the printed order was just barely over 4 pages and the “law and analysis” portion is only 2 pages, double-spaced.  But I’m not sure that answer is necessarily the best interpretation of the law.  Here’s why.

Treatment of CETs for interest purposes

Today, in most instances when you elect to apply some or all of an overpayment to estimated taxes for next year, interest issues don’t come up at all.  You’re not entitled to interest on the overpayment, by regulation.  When an interest issue does come up, it’s because the IRS audits the year with the overpayment and determines a deficiency.  With most CETs, the method of calculating underpayment interest on that subsequently determined deficiency is no longer contested. 

But there was a great deal of uncertainty before the decision in Avon Products, Inc. v. United States, 588 F.2d 342 (2nd Cir. 1978).  By the last date prescribed for payments of its 1967 taxes, the unextended filing due date, the taxpayer had paid in $44,500,086.58.  When it finally filed its tax return on September 15, 1968, it reported its tax liability as $44,384,460.26, resulting in an overpayment of $115,626.32, which it elected to apply to 1968’s tax liability.  A subsequent audit determined that its correct liability was $44,483,062.42, resulting in a deficiency of $98,602.17.

Section 6601(a), by its literal terms, only charges interest on underpayments if the correct tax liability was not paid on or before the last date prescribed for payment.  But the amount paid as of the last date prescribed for payment was $44,500,086.58, which was more than the adjusted tax liability of $44,483,062.42.  Under the literal terms of the statute, the IRS could not assess any underpayment interest at all for that deficiency.

The interpretation didn’t seem right either, but the Second Circuit found an elegant solution.  It interpreted “last date prescribed for payment” in these situations to mean the moment at which the tax first became “due but unpaid.”  It was fully paid by March 15, 1968, the last date prescribed for payment.  But a CET was effectively a “negative payment,” just as a refund would have been.  It reduced the net amount paid by Avon from $44,500,086.58 (as of the date prescribed for payment) to $44,384,460.26 (after the CET).  At that point, the tax liability became “due but unpaid” and underpayment interest would begin accruing.

When the “negative payment” is a refund, we know when that happened and therefore when underpayment interest on a subsequently determined deficiency begins.  But what is the effective date of a “negative payment” by CET?  That wasn’t clear.  The IRS argued for the due date of the return without regard to extensions, or March 15, 1968.  Avon argued for September 15, 1968, the date of both (a) filing the 1967 return and making the election to apply the CET to 1968’s tax liability and (b) the due date of an estimated tax installment for Avon’s 1968’s tax liability.  The Second Circuit agreed with Avon.

Avon Products, several subsequent cases – May Dep’t Stores Co. v. United States, 36 Fed. Cl. 680 (C.F.C. 1996); Kimberly-Clark Tissue Co. v. United States, 1997 U.S. Dist. LEXIS 3100 (E.D. Pa. 1997); Sequa Corp. v. United States, 1996 U.S. Dist. LEXIS 5288 (S.D.N.Y. Apr. 22, 1996); Sequa Corp. v. United States, 1998 U.S. Dist. LEXIS 8556 (S.D.N.Y. June 8, 1998) – and a series of revenue rulings eventually developed what is now the standard treatment for CETs.  “When a taxpayer elects to apply an overpayment to the succeeding year’s estimated taxes, the overpayment is applied to unpaid installments of estimated tax due on or after the date(s) the overpayment arose, in the order in which they are required to be paid to avoid an addition to tax for failure to pay estimated income tax under §§ 6654 or 6655 with respect to such year.”  Revenue Ruling 99-40.

The logic behind this solution was to avoid a double benefit, to either the taxpayer or the government.  The CET amount would provide a potential benefit to the taxpayer in the year of the overpayment (1967 in the Avon Products case) for periods before the effective date of the transfer.  Overpayment interest was not allowable, but the CET amount would reduce the subsequently determined deficiency that would be subject to underpayment interest.  The CET amount would benefit the taxpayer in the succeeding year (1968 in the Avon Products case) for periods after the effective date of the transfer.  It would either (a) avoid the addition to tax for failure to pay estimated taxes or (b) be refunded to the taxpayer for its use.  There would be no period during which the taxpayer received a potential benefit for neither year or received a potential benefit for both years. 

None of the cases or revenue rulings specifically dealt with situations in which the CET is not needed for an estimated tax installment.  IRS practice has been to apply any remaining portion as of the due date of payment for the succeeding year’s tax liability.  That makes perfect sense if there is no rolling CET, as the taxpayer will either need that amount to pay the liability or receive a refund.  It makes less sense in situations with rolling CETs, as in the Goldring case.  That had to wait for a new series of cases, and the results are mixed.  I’ll turn to that in Part 2.

The Validity of Near Duplicate Notices, Designated Orders: November 18 – 22, 2019

Five orders were designated during the week of November 18 – November 22, 2019 and the most interesting two are discussed below. The orders not discussed involve an unchallenged American Opportunity Tax Credit denial (here), a motion for failure to prosecute an absent petitioner (here), and a bench opinion involving frivolous returns and whether more than one section 6702(a)(1) penalty should apply (here).

Docket No. 11284-18, SNJ Limited, Ritchie N. Stevens & Julie A. Keene-Stevens, Partners other than the Tax Matters Partner v. CIR (Order Here)

In this first order the Court addresses the IRS’s motion to dismiss for lack of jurisdiction. This case is before the Court on notices of federal partnership administrative adjustment (“FPAA”), and the outcome of the IRS’s motion depends on whether the FPAAs are valid.  

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Validity is at issue because the two separate near duplicate sets of notices, for the same tax periods, were sent a few months apart from each other. Petitioners timely petitioned the Tax Court based on the date on the second set of notices, however, section 6223(f) states that only one FPAA can be valid (with some limited exceptions not applicable here) – which means that if the first set notices is valid, then the second is not and petitioners’ petition was not timely filed.

The notices pertain to 2006 and 2008. The first set was mailed in November of 2017 and the second in February of 2018. Petitioners oppose the IRS’s motion to dismiss by arguing that the first set of notices are not valid, because they were not sent to petitioners’ correct address.

In addition to that argument, but not specifically raised by petitioners, the Court considers whether the November notices are not valid by looking to the reason why the February set of notices covering the same periods were sent.

First, regarding petitioners’ address-related argument, the Court looks to section 6223(c)(1), which requires the IRS to send the FPAAs to the names and addresses listed on a partnership return. In this case, the partnership did not file returns for either year at issue. The IRS is obligated to use another address if it is provided in the manner specified in Treas. Reg. Sec. 6223(c)-1(b)(2) and (b)(3)(v), which is in a written statement signed by the person supplying it, and filed with the service center where the partnership return is filed.

Petitioners did not provide a new address in this manner, and instead, listed the allegedly incorrect address on unsigned returns provided during the examination. The IRS is permitted, though not required, to use the address provided on these unsigned returns pursuant to Treas. Reg. 301.6223(c)-1(f) and that is what it did. The IRS also sent a set of FPAAs (in November and February) to what it believed to be the Tax Matters Partner’s (“TMP”) address. Petitioners argue that address was not the TMP’s address. Petitioners, however, received the February FPAAs sent to that address because they were attached to their petition. As a result, the Court finds that the November FPAAs were not invalid as a result of being incorrectly addressed.

The Court then goes on to evaluate why a second set of FPAAs was even sent – was there an issue with the first set that calls into question its validity?

The IRS explains that it sent the second set of FPAAs out of an abundance of caution because an incorrect partnership name was used on a schedule attached to the November FPAAs. The correct partnership name was used on FPAAs themselves, the FPAAs and schedule listed the partnership’s correct EIN, and the adjustments reflected on the schedule appear to be based on information for the correct partnership. In other words, it was only the partnership name used on the schedule that was incorrect and nothing else, and as a result, the Court determines that doesn’t impact the validity of the November FPAAs. 

In making this determination the Court looks to Campbell v. CIR, 90 T.C. 110, 113-114 (1998), which upheld the validity of a notice of deficiency that named another taxpayer (and even listed amounts related to that other taxpayer) in an attached schedule. Although this case involves FPAAs, rather than a notice of deficiency the Court points out that “the standards governing the validity of an FPAA are less exacting than those governing the validity of a statutory notice of deficiency” and “for an FPAA to be valid it needs to only provide ‘minimal notice’ that the IRS has finally determined adjustments to the partnership return.”

The Court determines that even with the error the November FPAAs meet the “minimal notice” test and are valid. As a result, petitioners’ petition is not timely, the Court does not have jurisdiction, and the case is dismissed.

Docket No. 11229-15, Michael J. Hogan v. CIR (Order Here)

In this bench opinion the Court addresses the IRS’s motion for partial summary judgment on an interest abatement request related to petitioner’s 1994 and 1995 balances. It also addresses the IRS’s motion to compel, which I do not discuss. The years at issue do cause one to wonder why these balances still exist nearly 25 years later, but was the delay caused by an IRS ministerial act?

More information on the interest abatement request is found in an earlier order (here), but to summarize: the Form 843 was submitted in 2012 and requested abatement for interest accrued, according to petitioner, as a result of the returns being “put in a drawer by IRS/CID agent .  .  .” and “not filed by the IRS and processed until August 13, 2001.”  The petitioner never clearly stated the exact period for which he is requesting interest abatement.

The period referenced in the IRS’s motion for partial summary judgment in the earlier order was from the return due dates in 1995 and 1996 through when the original returns were filed in September 1997. The IRS was granted summary judgment with respect to that limited period because petitioner did not assert there was a delay caused by a ministerial act (or any genuine issue of material fact) for the 1995 – 1997 period.

It’s also relevant that in 1999 petitioner pled guilty to conspiring to defraud the government and tax evasion related to his 1994 and 1995 tax years. Pursuant to terms of the agreement, petitioner filed amended tax returns for those years in 2001.

The Court found that all of petitioner’s interest abatement related assertions are for the period after he filed his original returns in 1997, and it is (partially) that period which is addressed in this order. The IRS’s motion here requests that the Court grant summary judgment for the period from 1997 through November 21, 2000, which is the date both parties agree the criminal proceedings related to 1994 and 1995 terminated.

Relying on similar cases cited by the IRS (Badaracco v. CIR and Taylor v. CIR), which reference generally the IRS’s right to take more time evaluating cases that involve fraud or criminal proceedings, the Court decides petitioner is not entitled to interest abatement for the 1997 – 2000 period for either tax year and grants IRS’s motion for partial summary judgment.

The bench opinion doesn’t discuss whether periods after 2000 remain at issue in this case, but I assume they do since only a limited period is addressed by the IRS’s motion. Although the Court acknowledges that it is unclear, petitioner’s interest abatement request may include the interest accrued until at least 2012 when the Form 843 was submitted.

The Surprise Bill – Interest Due after Bankruptcy

The case of In re Widick, No. 10-40187 (Bankr. D. Neb 2019) provides a reminder that bankruptcy does not discharge all debts even when the debtor pays all of the tax for the year through the bankruptcy plan.  Mr. and Mrs. Widick completed a chapter 13 plan.  To obtain the plan and to complete the plan, they paid all of the income taxes for two years and all of the trust fund recovery penalties for two quarters.  I suspect that their bankruptcy attorney did not mention to them that paying all of the taxes does not keep the IRS from coming back after the bankruptcy case to collect the interest.  They brought this action to hold the IRS in contempt for violating the discharge injunction due to its efforts to collect from them after the bankruptcy court granted the discharge in this case.  With relative ease, the bankruptcy court delivered to them the sad news that the IRS could continue to collect from them after the discharge and the authority for the IRS actions went back for three decades in the controlling circuit case of Hanna v. United States (In re Hanna), 872 F.3d 829 (8th Cir. 1989).

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In bankruptcy creditors cannot generally collect post-petition interest from a debtor.  An exception to this rule exists if the creditor has a secured claim with enough equity to pay the interest or if the debtor is in chapter 11 where the creditor can receive interest after the plan confirmation (but not for the period from the petition to confirmation.)

Although bankruptcy generally serves as an interest free zone, interest still runs.  The difficult concept for debtors with tax debt comes where the IRS starts pursuing them after discharge to collect interest on a debt that they believe they have satisfied.  Whether the IRS can come after this debt post-discharge depends on whether the debt itself qualified as non-dischargeable debt.  In the case of the Widicks, it did.  Because the debt satisfied the exception to discharge in 523, the IRS could pursue collection of the interest after the granting of the discharge.

The Widicks owed income taxes that were recently incurred.  These income taxes received priority status under B.C. 507(a)(8)(A).  The unpaid TFRP liabilities also attained priority status under B.C. 507(a)(8)(C) and due to their nature have priority status no matter how old they were.  Because the income taxes and TFRP taxes had priority status, the debtors had to provide for payment in full of these taxes and all pre-petition interest in order to obtain confirmation of their plan.  The chapter 13 plan did not require, and could not require, the Widicks to pay the interest that ran on these taxes over the 5 year life of the plan.  Debtors might think that because the plan did not require payment of post-petition interest, they got a pass on this interest.  Because debtors might easily reach this conclusion, their lawyer must carefully advise them of the interest rules with respect to taxes.  Otherwise, they will become quite upset when the IRS offsets post-discharge refunds and takes other collection action.

A similar situation occurs in offers in compromise.  The standard language of the offer in compromise developed by the IRS requires that the debtor forego any refund for the year in which the IRS accepts the offer (and any pre-offer years.)  As with bankruptcy, the taxpayer’s representative must carefully explain to the individual obtaining the offer the consequence of this provision.  The taking of the refund might occur 12 months or more after the offer acceptance.  At that point the taxpayer can easily have forgotten the promise to forego the refund.  For this reason, putting a discussion of the refund taking in the letter closing out the offer provides a good way for the representative to prepare the taxpayer for the future and protect themselves from criticism and anger that occurs when the IRS takes the refund.

Here, the debtors’ chapter 13 attorney did not prepare his clients for the consequence of the post-discharge interest liability.  In its relatively short opinion the court points out that although the Hanna case cited above involved a chapter 7 debtor, case law existed with respect to chapter 11 and 13 cases in their district.  The law here is well settled even if it is surprising.  Clients may not like this aspect of the law, but if they know it’s coming, then they understand it’s part of the bargain of the discharge — just as the taking of the post-offer acceptance refund is part of the bargain of the offer in compromise.

A Question of Identity – Interest Netting, Part 2

Today, guest blogger Bob Probasco brings us the second part of his post on interest netting. At the end of this part he refers to an article in the most recent edition of The Tax Lawyer. If you are a member of the ABA Tax Section you can link through to the article after signing in as a member. If you are not a member but have access to Heinonline, Westlaw or Lexis you can also get to articles of The Tax Lawyer. As the editor of that law review, I invite you to look at the articles there which explore issues in much more depth than we are able to do on the blog. I hope you would agree with me that after 70 years it continues to be a premier tax law review. If you have a law review article on tax you want to publish, consider sending it to The Tax Lawyer. Keith

We’re continuing to explore the “same taxpayer” issue for interest netting under Section 6621(d), for which the Federal Circuit issued an important decision in November. In Part 1 of this two-part series, I discussed other approaches to netting, the background of Section 6621(d), early IRS guidance, and the first of four major cases that have addressed this question. In Part 2, I’ll wrap up with the remaining cases plus some thoughts about the future.

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The evolution of “same taxpayer”

Section 6621(d) allows netting only of equivalent overpayments and underpayments “by the same taxpayer.” Part 1 covered what I consider one of the more interesting attempts at IRS guidance on this issue, Field Service Advice 2002-12028,. It concluded that to qualify for this benefit, one must “both be liable for the underpayment of tax, and entitled to the overpayment of tax.” This kept the restrictive adjective “same” while creating exceptions for mergers and consolidated returns by attributing overpayments or underpayments of one corporation to another. As taxpayers starting filing cases for expansive interpretations of “same taxpayer,” the DOJ retreated from the IRS guidance to very narrow interpretations that would, in practice, make interest netting virtually impossible for the large corporations that most need it.

Balances that arose prior to consolidation: Energy East Corp. v. United States, 645 F.3d 1358 (Fed. Cir. 2011), aff’g 92 Fed. Cl. 29 (2010). This case involved acquisitions in which the subsidiaries survived as members of an affiliated group and tried to net overpayments and underpayments for pre-acquisition tax years. The taxpayers lost. That was probably the right result, although I still have some reservations. The case was decided by a “temporal requirement” that later cases borrowed. Read Part I for the gory details.

And now on to the other three cases.

Attribution of an overpayment on a consolidated return to its members: Magma Power Co. v. United States, 101 Fed. Cl. 562 (2011). Magma Power had an underpayment for its 1993 tax return; it was acquired by CalEnergy on February 24, 1995; it was included thereafter on consolidated tax returns with CalEnergy and other subsidiaries; and the consolidated group overpaid its taxes for 1995-1998. The question was whether Magma’s 1993 underpayment could be netted against the consolidated group’s overpayments. If the situation were reversed – a 1993 overpayment by Magma and consolidated group underpayments for 1995-1998 – it would be an easier decision because all group members are severally liable for group underpayments. But this fact pattern is the one that FSA 200212028 answered as “theoretically possible.”

Magma provided an affidavit to the effect that a substantial portion of the overpayments by the consolidated group were attributable to Magma. How substantial? More than 100% of the reduction of consolidated taxable income resulting in the 1995 and 1997 overpayments; 92% of the reduction of consolidated taxable income resulting in the 1996 overpayment; and 79% of the reduction of consolidated taxable income resulting in the 1998 overpayment. The government disputed the plaintiff’s methodology and amounts but conceded that some portion of the overpayments were attributable to Magma.

The Court of Federal Claims’ opinion is one of the best and most comprehensive analyses of this issue I’ve read – kudos to the court and the litigants. I think it’s also potentially the most important for future developments in interpretation of Section 6621(d). The court interpreted “same taxpayer” as “same TIN.” In that respect it accepted the government’s argument. But the court also concluded that overpayments could be attributed to individual members of a consolidated group, not just underpayments (for which all members are severally liable per regulation); the government appeared to concede neither. The court also rejected the “complete identity” or “exact DNA identity” argument of the government. Key to the decision was the court’s observation that the group is not itself a taxpayer, merely a method of combining all the members for computing tax liability; the members of the group are the taxpayers. Further, the tax liability of the consolidated group must be allocated to individual members as part of tracking E&P for each member pursuant to Section 1552. Either individual members pay their allocated share of the tax liability or the amount they don’t pay would be treated as a contribution from the other member who did pay, Treas. Reg. section 1.1502-33(d)(1). Because the tax liability is allocated and payments by the group are allocated, that should be enough to allocate overpayments to individual members as well, shouldn’t it?

After a careful consideration of legislative history, previous IRS guidance, and the remedial nature of the legislation, the court held that pre-merger Magma Power and post-merger Magma Power “should be properly considered the same taxpayer to the extent the consolidated group’s overpayment can be traced to the company” (emphasis added). Because there had not yet been an agreement by the parties or determination by the court of how much of the overpayments could be attributed, the court ordered the parties to propose further proceedings to resolve the case.

The parties entered a stipulation as to the amount owed about eleven months later – interest computations can be difficult and securing the required government approvals for settlement can drag out – and the court entered judgment. The government filed a notice of appeal on November 20, 2012, and then filed a motion in the Federal Circuit to dismiss the appeal on December 12, 2012. We have no assurance of how the Federal Circuit would rule on this issue but apparently, DOJ was not confident or at least wanted to avoid the risk of an adverse precedent.

This analysis seems to follow the “attribution to a single entity” framing of FSA 200212028 rather than a “two entities are treated as the same taxpayer” framing.

Statutory mergers, various scenarios: Wells Fargo & Co. v. United States, 827 F.3d 1026 (Fed. Cir. 2016), aff’g in part and rev’g in part 119 Fed. Cl. 27 (2014). Stephen Olsen posted here a few years ago when the Court of Federal Claims and Federal Circuit opinions came out.

This case included many different factual circumstances, resulting from a series of seven mergers and 64 separate refund claims. The government and Wells Fargo identified three “test claims”; the principles would govern all of the claims. Wells Fargo (represented by the same firm that represented Magma Power) argued that merged corporations are always treated as the “same taxpayer,” regardless of the timing of the payments. The government argued that taxpayers are only the “same taxpayer” if they have the same TIN at the time of the payments.

Scenario One: Wachovia had an overpayment for 1993; First Union had an underpayment for 1999. The two merged in a statutory merger in 2001, and First Union survived. The government argued that the netting was not available because the two corporations had different TINs and were unaffiliated at the time of both the overpayment and the underpayment.

Scenario Two: First Union had an overpayment for 1993, underwent four statutory mergers between 1993 and 1999 (in each of which it was the surviving corporation), and First Union had an underpayment for 1999. The government conceded the availability of netting in this situation; “the underpaying and overpaying company retained the same TIN because it was the surviving corporation in the mergers.”

Scenario Three: CoreStates had an overpayment for 1992 and merged with First Union in 1998 with First Union surviving. Then First Union had an underpayment for 1999. The government argued that netting was not available because the two corporations had different TINs.

The Federal Circuit mentioned the “same taxpayer = same TIN” rule from Magma Power, without explicitly adopting the rule. But it mischaracterized the Court of Federal Claim’s application of the rule as that “the consolidated group or corporations met the ‘same taxpayer’ requirement because they shared a single TIN.” As discussed above, that is not what the CFC did in Magma Power. The court focused on the TIN of the subsidiary, Magma Power, rather than the consolidated group. It allowed netting, but only if the consolidated return’s overpayment could be traced or attributed to the company.

Based on merger law, the Federal Circuit concluded that two merging corporations are the “same” regardless of which survives. The Court of Federal Claims declined to apply the temporal requirement from Energy East because joining an affiliated group (when both corporations maintain their separate identity) differs from a statutory merger (in which only once corporation survives). But the Federal Circuit disagreed, applied the temporal requirement, and allowed netting in Scenario Three but not in Scenario One.

In Energy East, the Federal Circuit seemed to say that the taxpayer must be the same before both the underpayment and the overpayment. Of course, that was the situation being decided; the court wasn’t dealing with a situation with an overpayment made prior to the acquisition. But in Wells Fargo, the court allowed netting in Scenario Three, when the overpayment was made prior to the merger. Apparently, the requirement is that the taxpayer must be the same when the overpayments or underpayments are made. That seems plausible; there are no overlapping balances to be netted until the second balance comes into existence.

I don’t find the temporal requirement imposed in Energy East and Wells Fargo completely persuasive. The court interpreted an overpayment or underpayment as being associated with a particular date rather than a period. That’s understandable, given the language in Sections 6601(a) and 6611(b). But I think the antiquated language of the Code has effectively been superseded by Avon Products Co. v. United States, 588 F.2d 342 (2d Cir. 1978), and the realities of tax administration. In Avon Products, the Second Circuit concluded that individual transactions must be netted into a single balance before computing interest. The IRS has acquiesced in not only the result of that case but also the reasoning. Over a period of time, the single balance required by Avon Products may change from underpayment to overpayment back to underpayment, and the traditional determinations of the “date” of an overpayment and underpayment no longer fit well. They are better considered in terms of a period rather than a particular date when they arise. Admittedly, no court has yet reached the same conclusion.

Further, the “last antecedent rule” is simply an interpretative standard, not an ironclad rule any more than other canons of statutory construction. Given the remedial nature of netting, it would have been possible to interpret the provision more broadly. Even if both the underpayments and overpayments began before the merger or joining into an affiliated group, netting might be permissible if both are still outstanding afterward. At that point, once the two corporations become the “same taxpayer,” the harm that Section 6621(d) is intended to remedy exists. Netting might be allowed from that point. This argument is likely stronger for mergers than for affiliated groups that file consolidated returns.

But that’s not what the court ruled.

Not part of the parent’s consolidated return: In Ford Motor Company v. United States, 908 F.3d 805 (Fed. Cir. 2018), aff’g 132 Fed. Cl. 104 (2017), the court concluded that Ford Motor Company (“Ford”) and a wholly-owned subsidiary were not the “same taxpayer” for purposes of interest netting. Against the backdrop of the earlier cases, Ford seems an even harder case for the taxpayer to win. Ford formed Ford Export Services B.V. (“Export”), its wholly-owned subsidiary, in 1984 as a foreign sales corporation. Because FSCs must be foreign rather than domestic corporations and a consolidated group cannot include foreign corporations, Ford and Export filed separate U.S. income tax returns between 1990 and 1998. Ford had an overpayment for the 1992 tax year and Export underpaid its taxes for 1990-1993 and 1995-1998. Ford claimed that Ford and Export were the same taxpayer because Ford “exercised near complete control over Export’s operations” and “Export never performed any activity that Ford did not direct.”

Instead of relying on a dictionary, the Federal Circuit concluded that the meaning of “same taxpayer” depended on “background legal principles” at the time Congress enacted Section 6621(d). One of those background legal principles was that a parent corporation and its subsidiaries are separate taxable entities. (Cases cited in the opinion concluded that even if the parent and subsidiaries join to file a consolidated return, the group is not as a single entity and individual members retain their identity.) The court identified “the unique legal effects of a merger” as an exception to that general rule, citing Wells Fargo. Ford argued that the FSC statute was another relevant background legal principle that would constitute an exception to the general rule, but the court disagreed. There was no statutory provision for FSCs comparable to the continuation of the identity of the acquired corporation in the successor corporation after a merger.

The plaintiff’s arguments here were based on control and direction because of the factual situation: Export was not a member of the affiliated group that filed a consolidated return. That suggests that the decision may be relatively narrow in scope and may also help explain why the court reached this decision. This level of “control and direction” will most often occur with a subsidiary that meets the 80% voting and value test for an includible corporation in an affiliated group (even if not includible for other reasons such as being a foreign corporation). Consider three categories such subsidiaries might fall into: (a) included in the affiliated group; (b) not included in the affiliated group but a foreign corporation with no US income; and (c) not included in the affiliated group but a corporation that files a US tax return. If the Federal Circuit eventually blesses netting involving attribution from consolidated returns, similar to FSA 2001-12028 and Magma Power, the effect of the decision in Ford may be limited to category (c). Further, allowing netting based on control and direction, rather than attribution from a consolidated return, would impose more of an administrative burden on the IRS because the factual determination is more difficult. It’s not well suited for a general background legal principle to apply as an interpretation of “same taxpayer.” On the other hand, netting with subsidiaries who meet the 80% test but are not includible for other reasons, might be a viable test.

What does the future hold?

The boundaries of “same taxpayer” are still not entirely clear. Because most netting claims include a request for additional overpayment interest, these cases will usually be brought in the Court of Federal Claims rather than district court. Review by the Supreme Court and legislative action both seem unlikely in the extreme. So the Federal Circuit’s decisions carry a lot of weight. But there are some possibilities the Federal Circuit has not yet ruled on.

In a statutory merger, the Federal Circuit will allow netting of a pre-merger balance against a post-merger balance but not if both balances are from pre-merger years. If a taxpayer or the government wants to change that, it will be difficult to do just through litigation.

The Federal Circuit has never directly ruled on netting in the context of consolidated returns. Energy East and Wells Fargo involved mergers; a Magma Power appeal was dismissed on the government’s request; and Ford involved a subsidiary that was not consolidated. The opinion in Ford seems to suggest that these situations are not an exception to the general rule that a parent and its subsidiaries are separate entities and therefore are not the same taxpayer. I don’t think that necessarily precludes netting, though.

First, I suspect that as a practical matter the IRS has been allowing netting administratively, and thus there have been no lawsuits, in circumstances where one member has an overpayment based on a separate tax return and the consolidated return has an underpayment. We haven’t seen such a case in the Federal Circuit and I would expect to by now if the IRS were disallowing the claims. If that’s correct, I’m not sure that the opinion in Ford will be enough for the IRS to change its administrative practice.

Second, treating a parent and its subsidiaries as separate entities does not preclude netting if you allow attribution of underpayment and overpayments to individual members of the affiliated group. Then, as in Magma Power, you are dealing with a single taxpayer; the attribution results in one taxpayer having equivalent overpayments and underpayments outstanding at the same time. The Federal Circuit has not addressed the attribution theory and, based on its mischaracterization of Magma Power in Wells Fargo, may not have considered it yet.

Netting in the context of consolidated returns, under an attribution theory, will still create administrative issues. Even in simple netting claims, the taxpayer cannot use balances if it has previously used them for netting. For example, if Corporation A nets a 2001 underpayment against a 2004 overpayment, Corporation A cannot later net the same 2001 underpayment against a 2006 overpayment. This would apply for netting under an attribution theory in the context of consolidated returns. Further, the netting claim would have to provide documentation to support the attribution. But such administrative issues should not be an impediment. Revenue Procedure 2000-26 simply shifts the burden to the taxpayer requesting netting. A more significant problem with netting in the context of consolidated returns might arise with respect to disputes between members of the group about the attribution – particularly after a member has left the group but still wants to net past balances as part of the group against post-departure balances.

Are there situations other than mergers and consolidated returns that might supply “background legal principles” to justify netting? Contractual assignments of tax liabilities and the right to refunds of overpayments might be a possibility, although courts are often reluctant to be bound by those when deciding tax issues. There may be others.

Even if the Federal Circuit is unlikely to approve netting in the consolidated return context or other situations, it’s worth still contesting issues on which the Federal Circuit has not yet ruled. Interest disputes for the largest corporations can involve significant amounts, which alone justifies taking a shot. Ford, as an example, involved a $20 million claim while Wells Fargo involved a $350 million claim (although that included items other than netting).

Postscript

As I was finishing this post up, I received the latest volume of The Tax Lawyer, which includes an article “More of the ‘Same’: Section 6621(d) in the Federal Circuit” by David Berke, an associate at Skadden, Arps. He and I are not in complete agreement, but for those with an interest in a different perspective on this topic, it’s worth perusing.

 

A Question of Identity – Interest Netting, Part 1

We welcome back guest blogger Bob Probasco who brings us a discussion of an important recent decision in the Federal Circuit. Bob directs the low income taxpayer clinic at Texas A&M Law School but he comes to that position after a career or representing large taxpayers while working at a large law firm (Thompson and Knight). His background representing large taxpayers gives him a perspective on this issue which turns on who is a sufficiently related corporate entity to allow interest owed to the IRS to net with interest owed to a taxpayer. For most of our clients interest is a painful reminder of consequences of owing additional taxes but for some large taxpayers the issue of netting can have consequences in the millions of dollars. Keith

On November 9, 2018, the Court of the Appeals for the Federal Circuit issued its decision in Ford Motor Company v. United States, 908 F.3d 805 (Fed. Cir. 2018), aff’g 132 Fed. Cl. 104 (2017). The Court concluded that Ford Motor Company and a wholly-owned subsidiary were not the “same taxpayer” for purposes of the interest netting provision in Section 6621(d).

Procedurally Taxing addressed this issue a few years ago when the last major case on Section 6621(d) was decided. With the decision by the Federal Circuit in Ford, now seems a good time to revisit the issue – both in Ford and the earlier cases – as well as speculate where it may be heading.

In Part 1, I will review the background of Section 6621(d), other netting methods, early IRS guidance on the “same taxpayer” question, and the first of four major cases interpreting that aspect of the provision. In Part II, I’ll cover the other three cases as well as take a look at the future.

Spoiler alert: this is a complex, confusing area of tax procedure. I think some of the cases could have, and perhaps should have, come out differently. But this is what we have.

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Why interest netting?

With some exceptions, the government charges taxpayers interest on unpaid tax liabilities and pays taxpayers interest on refunds. There were some rate differences in the earliest years of the modern income tax, but for a long period of time the government used the same interest rate for both underpayments and overpayments. That’s still the case for non-corporate taxpayers but changed for corporate taxpayers over 30 years ago.

In the Tax Reform Act of 1986, Congress created a 1% difference in Section 6621(a) between the base rate it charges corporations on underpayments of tax (the federal short-term rate + 3%) and the base rate it pays corporations on overpayment of tax (the federal short-term rate + 2%). As a result of subsequent changes, the gap can be much larger. The Omnibus Budget Reconciliation Act of 1990 added Section 6621(c), establishing the “large corporate underpayment” or “hot interest” rate (the federal short-term rate + 5%) for underpayments exceeding $100,000. The Uruguay Round Agreements Act of 1994 added the flush language at the end of Section 6621(a)(1), establishing the “GATT interest” rate (the federal short-term rate 0.5%) for overpayments exceeding $10,000. The proper application of hot interest and GATT interest is itself a complex issue beyond the scope of this post, but many large corporations will be subject to rates that differ by as much as 4.5%.

What happens when a corporation has both an outstanding overpayment of tax and an outstanding underpayment of tax, accruing interest during the same period of time? Might a corporation find itself paying more interest than it receives on equivalent amounts? Prior to the enactment of interest netting, taxpayers had two protections against that.

“Annual interest netting” addresses situations where a taxpayer has both an overpayment and an underpayment with respect to the same tax return outstanding during a given period. For example, Big Corp’s income tax return for 2012, filed on 3/15/2013, shows an overpayment of $3,000,000, which the IRS does not refund until 1/5/2015. After an audit, the IRS assesses additional tax of $5,000,000 for 2012. The IRS might try to assess interest on the $5,000,000 underpayment, from 3/15/2013 until paid, while paying Big Corp interest (at a lower rate) on the $3,000,000 original overpayment, from 3/15/2013 until 1/5/2015. In Avon Products Co. v. United States, 588 F.2d 342 (2d Cir. 1978), the Second Circuit concluded that individual transactions must be netted into a single balance before computing interest. Thus, the IRS would assess interest only on the net $2,000,000 underpayment from 3/15/2013 until 1/5/2015, and on $5,000,000 thereafter until paid. The IRS acquiesced not only in the result but also in the reasoning of Avon Products, although it has occasionally argued for a different result in particular cases. Revenue Procedure 94-60 and Revenue Ruling 99-40 are interpretations of the Avon Products doctrine; in recent years the IRS changed interest computation software and (somewhat) its methodology. (Revenue Ruling 99-40 actually – and likely unintentionally – mischaracterizes Avon Products in a subtle manner that obscures another procedural problem concerning recovery of excessive overpayment interest. The problem is potentially significant, although few people seem to be aware of it. But that is beyond the scope of this post.) However, “annual interest netting” only applies when the overpayment and underpayment are for not only the same type of tax but also the same tax return.

In other circumstances, the IRS exercise of its authority under Section 6402(a) to credit overpayments against outstanding tax liabilities, rather than issuing a refund, results in the elimination of the rate differential problem. A Section 6402(a) credit, of course, is not intended to and does not by itself accomplish netting. It is merely a collection method, almost always applied automatically to credit an overpayment under one TIN against an underpayment for exactly the same TIN. When the IRS makes such a credit, however, any interest rate differential is eliminated because of specific interest computation provisions. If an overpayment for 2010 is applied to an underpayment for 2011, for example, Section 6611(b)(1) provides that interest on the overpayment runs only to the due date of the 2011 underpayment – the same date that interest on 2011 underpayment starts accruing. If an overpayment for 2011 is applied to an underpayment for 2010, Section 6601(f) provides that there is no interest on that portion of the underpayment “for any period during which, if the credit had not been made, interest would have been allowable with respect to such overpayment.” This avoids an overlap period with interest accruing both on an overpayment and an underpayment, but a Section 6402(a) offset is only available if both balances are still outstanding. If the overpayment was refunded or the underpayment was paid, Section 6402(a) won’t help.

Those two solutions still left unresolved some instances of overlapping overpayments and underpayments. When Congress created the 1% rate differential in 1986, it asked the IRS to implement “the most comprehensive netting procedures that are consistent with sound administrative practice.” It continued to request IRS action as the rate differential widened to 3% and then 4.5%, and again when it enacted the Taxpayer Bill of Rights, but Treasury pushed back because it had no statutory authority for such netting. Congress eventually enacted Section 6621(d) in the Internal Revenue Service Restructuring and Reform Act of 1998. That provision requires that for any period when there are “equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period.” I’ve always referred to this as “global interest netting,” to differentiate it from “annual interest netting,” but I’ve dealt with some DOJ attorneys who prefer “net interest rate of zero.” For the remainder of this post, I’ll use “netting” to refer only to Section 6621(d).

Netting is available, under its terms, for taxes other than income tax. However, it only applies if underpayment interest is payable and overpayment interest is allowable during that period. Various “restricted interest” provisions of the Code state that under appropriate circumstances interest is not payable/allowable. Thus, if during the relevant period the taxpayer’s overpayment balance does not earn interest, there is no elimination or reduction of the interest rate on the equivalent underpayment balance. (Annual interest netting, however, does effectively net balances even if interest is not payable/allowable for one of the balances. In fact, that was the situation in Avon Products.)

The IRS computers cannot readily identify situations in which netting would be available. As a result, the IRS requires taxpayers to specifically request such netting on a refund claim. Revenue Procedure 2000-26 sets forth the requirements.

The evolution of “same taxpayer”

The legislative history for Section 6621(d) didn’t really explain what “same taxpayer” means. The meaning would be clear if we were talking about individuals. But corporations can change their corporate identity, through mergers, and join affiliated groups that file consolidated tax returns. What effect does that have? The IRS issued guidance as it began dealing with how to apply netting, and courts decided at least four major cases, including Ford, to clarify the boundaries of the term.

One of the IRS early attempts at guidance, Field Service Advice 2002-12028, required that one corporation “both be liable for the underpayment of tax, and entitled to the overpayment of tax.” This kept the restrictive adjective “same” while creating exceptions for mergers and consolidated returns. The principles it applied were:

  • In a statutory merger, as a matter of law the surviving corporation is liable for any underpayment and entitled to any overpayment of the non-surviving corporation, so netting is permissible even for balances from tax years prior to the merger. (Situations 5 and 7)
  • But in an acquisition in which both corporations survive, netting is impermissible because neither is liable for underpayments or entitled to overpayments of the other. Actual payment of the underpayment is not sufficient, absent legal liability for it. (Situation 6)
  • All members of an affiliated group are severally liable for underpayments of the consolidated return, Treas. Reg. section 1502-6(a), so they can net their own overpayments against the group’s underpayments. (Implied from the reasoning for Situations 8 and 9)
  • But a subsidiary is not liable for the group’s underpayment for tax years for which it was not a member of the group. Therefore, the subsidiary can’t net the group’s underpayment against its own overpayments. This applies when the subsidiary was acquired or came into existence after the year of the group’s underpayment (Situations 3 and 4), or if the subsidiary was owned by the parent during that year but was not part of the affiliated group (Situations 8 and 9).
  • It is unclear whether subsidiaries would be entitled to some or all of the group’s overpayments for tax years when they were members of the groups and therefore able to net the group’s overpayments against their own underpayments. It is theoretically possible but that will depend on the facts and circumstances of the particular case. (Situations 1 and 2) The IRS reiterated this position in Chief Counsel Advice 2004-11003 but later walked back this concession in Chief Counsel Advice 2007-07002.

This was not a perfect, or complete, analysis but it was a good start. When I first read it years ago, I thought it was an interesting way to frame the analysis. Although we sometimes use a shortcut and say that this issue is whether Company A and Company B are the “same taxpayer,” this FSA focuses on whether a single taxpayer – Company A – has equivalent overlapping overpayment and underpayment. But in doing so, it allows under appropriate circumstances the attribution of overpayments or underpayments on Company B’s tax returns to Company A. There is solid support for many of the attributions in FSA 200212028.

Litigation ensued and the courts began fleshing out the nuances. In that litigation, the government pushed for a much more restrictive interpretation than in FSA 200212028. At various times, DOJ advanced three alternative arguments that would substantially limit or eliminate the ability of affiliated groups to obtain the benefits of netting. First, the TIN associated with the overpayment must be identical to the TIN associated with the underpayment. Thus, an overpayment or underpayment of the affiliated group could never be netted against an underpayment/overpayment of individual members; further, balances of the surviving corporation in a statutory merger could never be netting against pre-merger balances of the non-surviving corporation. Second, even if the TIN were identical, the taxpayer must not have undergone any substantial change between the two years. Thus, any addition or removal of members of an affiliated group or merger with another corporation – among other changes – would eliminate the ability to net interest. This would effectively eliminate netting for the largest corporations, which are those most likely to benefit from netting. Third, Congress did not intend netting to be available for overpayments or underpayments by consolidated returns at all. The Federal Circuit has accepted the first argument, with exceptions carved out, but has not (yet) adopted the more extreme interpretations.

Balances that arose prior to consolidation: Energy East Corp. v. United States, 645 F.3d 1358 (Fed. Cir. 2011), aff’g 92 Fed. Cl. 29 (2010). Energy East Corporation acquired Central Maine Power Company (“CMP”) in 2000 and Rochester Gas & Electric Corporation (“RG&E”) in 2002. Both subsidiaries became part of Energy East’s affiliated group and were included in consolidated returns from that point forward. The refund claim requested that CMP’s and RG&E’s overpayments for 1995, 1996, and 1997 be netted against Energy East’s underpayment for 1999. Thus, all of the balances began before the subsidiaries were acquired by Energy East.

The Court of Federal Claims used a dictionary definition of “same” – “being one without addition, change, or discontinuance: identical.” By that definition, CMP and RG&E were no longer the same taxpayers after the acquisition by Energy East, as they became part of an affiliated group. I’m often uneasy about a court’s use of dictionary definitions and this is no exception. Not only did it open the door for DOJ to argue for an overly narrow definition, but it also fails to recognize multiple different shades of meaning. For example, since I got married 31 years ago, I have moved twice, got a law degree, changed jobs four or five times and professions twice, lost weight, qualified for Medicare, etc. In one sense, yes, people would say I’m “not the same person” I was 31 years ago. But “same person” is also commonly used more broadly so that “not the same person” would refer to, say, major psychological changes – or The Invasion of the Body Snatchers. “Same” just raises the questions “to what extent” or “in what essentials” and becomes a vaguely ontological inquiry. So, dictionary definitions are a (minor) pet peeve just because of the flexibility and nuances of human language makes them too susceptible to manipulation and an ineffective guide to Congressional intent. I’m not a fan of the CFC’s definition of “same” for this issue.

The CFC also noted that “although they later became members of the consolidated group, [Energy East], CMP, and RG&E were different taxpayers with different employer identification numbers at the time of their overpayments and underpayments.” There was no support for treating them as the same for tax years prior to joining the group. This temporal requirement became an important part of the analytical framework, although I argue in Part 2 that it’s not necessarily the right way to look at this issue.

The Federal Circuit agreed that the consolidated return regulations provided no basis for concluding that individual members of the group should be treated as the “same” for years prior to their joining the group. It also rejected Energy East’s alternative argument that the focus of the “same taxpayer” determination should be when interest (to be netted) was accruing. Instead, the court concluded that they had to be the “same taxpayer” on the date of the underpayment and overpayments, based on the “last antecedent rule.” It said that “by the same taxpayer” referred to “equivalent overpayments and understatements” in Section 6621(d); thus, “the statute provides an identified point in time at which the taxpayer must be the same [by virtue of being members of an affiliated group], i.e., when the overpayments and underpayments are made.” As I’ll discuss in Part 2, this may not be precisely correct, at least in other contexts.

The court did not state that these three companies were the same taxpayer for years in which they were included in consolidated returns. That determination was not necessary for the decision, as the parties agreed the companies were not the same taxpayer for the years when the overpayments and underpayments were made.

Under the “attribution to a single entity” framing of FSA 200212028, this decision was clearly right. CMP and RG&E had no connection to Energy East’s underpayment for 1999 that would allow attribution under existing rules. Under a “two entities are treated as the same taxpayer” framing, it’s not as clear. I’ll return to that in Part 2, in the discussion of the Wells Fargo case.

That’s it for Part 1. Stay tuned for Part 2, where the action heats up.

 

When Does Interest Start Running on a Transferee Liability

We welcome back guest blogger Marilyn Ames. Marilyn is retired from Chief Counsel’s office but works with us on IRS Practice and Procedure assisting with many chapters because of the breadth of her knowledge. She has done a lot of writing on transferee liability and provides insight on a recent case in that area. Keith

When a taxpayer has an unpaid income tax liability, the Internal Revenue Code is clear that interest on the unpaid tax accrues from the original due date of the return. However, when the Internal Revenue Service attempts to collect liability under Internal Revenue Code § 6901, the transferee liability section, questions arise as to the ability of the IRS to collect interest on the unpaid tax debt.  Because Section 6901 is merely a procedural law, the Internal Revenue Service must look to state law or other federal law for the substantive provisions that allow collection of taxes from a person who receives property from the taxpayer. The Internal Revenue Code provides that a transferee is liable for interest on the unpaid tax debt after the Internal Revenue Service issues a notice of transferee liability, but does state law govern the collection of interest before this date? The Ninth Circuit addressed this in the recent case of Tricarichi v. Comm’r, 122 AFTR2d 2018-6634 (9th Cir. Nov. 13, 2018). 

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The transferee in this case, Michael Tricarichi, was the sole shareholder of West Side Cellular, Inc., which received a $65 million settlement in 2003. Before its return for 2003 was due, Mr. Tricarichi, who was then a resident of Ohio, sold his West Side stock in a “Midco” tax-shelter transaction, leaving West Side Cellular with insufficient assets to pay its corporate income taxes for 2003. Mr. Tricarichi received about $35.2 million in the transaction, and then moved to Nevada to enjoy the fruits of his labors. (The workings of the Midco transaction, which have been the subject of frequent litigation in the recent past, are outlined in Diebold Foundation, Inc. v. Comm’r, 736 F3d 172 (2d Cir. 2013)).

In 2012, the Internal Revenue Service issued a notice of transferee liability to Mr. Tricarichi, which was duly litigated in the Tax Court, the result being that the Tax Court determined that Mr. Tricarichi was liable for the full amount of West Side’s tax deficiency and the associated penalties and interest in the tidy total sum of about $35.1 million. In a separate opinion, the Ninth Circuit affirmed the Tax Court’s conclusion that Mr. Tricarchi was liable as a transferee under Internal Revenue Code § 6901 and the Ohio Uniform Fraudulent Transfer Act, leaving the question of when and whether a transferee is liable for the amount of interest due on the transferor’s tax liability before the notice of transferee liability is issued to this opinion.

Mr. Tricarichi, the transferee, argued that Ohio law determined his liability for any interest before the notice of transferee liability was interested. Under Ohio law, Mr. Tricarichi would have owed nothing instead of the nearly $13.9 million that accrued between the due date for the 2003 return and the issuance of the notice of transferee liability in 2012. He cited the Supreme Court’s decision in Commissioner v. Stern, 357 US 39 (1958), for the proposition that state law should determine the existence and extent of transferee liability, including the amount of the interest that can be collected on the underlying claim – which in Mr. Tricarichi’s view would be the tax and penalties owed by the taxpayer, but not the interest that accrued between the due date of the taxpayer’s 2003 return and June of 2012 when the IRS issued the notice of transferee liability.

The Ninth Circuit disagreed, holding that Internal Revenue Service’s claim is computed under the Internal Revenue Code, and will include statutory interest. The extent of the liability to be determined under state law is actually a question of the amount of the claim that can be recovered from the assets transferred. When the taxpayer transfers sufficient assets to pay the underlying claim, including the interest that has been accruing under the Internal Revenue Code for the unpaid tax liability, it is unnecessary to look to state law for the creation of a right to interest. It is only necessary to look to state law for interest when the assets transferred are insufficient to satisfy the total claim for the liability of the transferor/taxpayer. In that case, the relevant state law determines whether the Internal Revenue Service may recover any prejudgment interest beyond the value of the assets transferred. The Ninth Circuit adopted the “simple rule” formulated by the First Circuit in Schussel v. Werfel, 758 F3d 82 (1st Cir. 2014) that “the IRS may recover from [the transferee] all amounts [the transferor] owes to the IRS (including section 6601 interest accruing on [the transferor’s] tax debt), up to the limit of the amount transferred to [the transferee], with any recovery of prejudgment interest above the amount transferred to be determined in accord with [state] law.”

Under this relatively simple rule, because West Side’s tax deficiency, including interest and penalties was $35.1 million, and Mr. Tricarichi received $35.2 million in assets from West Side, an amount in excess of West Side’s tax liability, Mr. Tricarichi was liable for the full amount of the $35.1 million. The fact that Mr. Tricarichi will also be liable for interest as a transferee from the issuance of the notice of transferee liability in 2012 is irrelevant to the determination that he received more from West Side in assets than the tax claim against West Side. As a resident of Nevada, Mr. Tricarichi should understand that his attempt to break the bank in his litigation with the IRS has left him busted.

 

 

 

 

Paresky– A Mirror Image of Pfizer

Today we welcome back Bob Probasco. Bob directs the Low-Income Taxpayer Clinic at Texas A&M University School of Law in Fort Worth. In this post Bob discusses the Paresky case in the Court of Federal Claims and follows up on issues he discussed in his post last month on the Pfizer case and the difficult issues arising from suits for overpayment interest. For good measure this terrific post sweeps in Bernie Madoff, equitable tolling and the possibility of some refund suits with no statutes of limitation.  Les

 I wrote a blog post recently on a jurisdictional issue in the Pfizer case, concerning claims for overpayment interest.  The district court for the Southern District of New York denied the government’s first motion to dismiss (based on lack of jurisdiction) but granted its second motion to dismiss (based on expiration of the statute of limitations).  Pfizer appealed and we’re still waiting to hear from the Second Circuit.

In the meantime, the Court of Federal Claims issued its decision on August 15th in the case Paresky v. United States, docket no. 17-1725, another suit for overpayment interest that involved essentially a mirror image of the jurisdiction issue in Pfizer. It also had some other interesting procedural twists and turns.

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Background

Here’s a recap of what the CFC called “[t]wo different, divergent, and conflicting jurisdictional paths . . . proffered by the parties.”  The first jurisdictional path is that set forth in 28 U.S.C. § 1346(a)(1)– district courts and the CFC have concurrent jurisdiction over

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.

Let’s call this “tax refund jurisdiction,” because that is its primary use – although Pfizer argued about whether that is the only use.

The second jurisdictional path is “Tucker Act jurisdiction” – 28 U.S.C. § 1346(a)(2)for district courts and 28 U.S.C. § 1491(a)(1) for the CFC – which authorizes suits for

any claim against the United States . . . founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.

What about statutes of limitation?  There is a general six-year statute of limitations for actions in federal courts – 28 U.S.C. § 2401 or 2501, for district courts and the CFC respectively. The Code also sets forth a statute of limitations.  Specifically, Section 7422 of the Code requires a refund claim be filed first for any suit

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.

And Section 6532 precludes a suit under Section 7422 begun more than 2 years after the IRS mails a notice of disallowance of the claim.

One might infer a link between the jurisdictional grant itself, for “tax refunds” or under the Tucker Act, and the corresponding statute of limitations.  That is, suits brought under the “tax refund” jurisdictional grant would be subject, based on similar language, to Code sections 7422 and 6532. Suits brought under the Tucker Act, however, would be subject to the general six-year statute of limitations for the district courts and the CFC.  However, the plaintiffs in both of these cases argued for a disconnect – either “tax refund” jurisdiction + the general six-year statute of limitations, or Tucker Act jurisdiction + the Code’s refund suit statute of limitations.  And there is actually a footnote in E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005) stating that the similarity of the language in Section 7422 and 28 U.S.C. § 1346(a)(1) doesn’t necessarily mean they are interpreted the same way.

 (Some cases have applied both statutes of limitations to tax refund suits, so the statute of limitations doesn’t remain open indefinitely when the IRS doesn’t issue a notice of disallowance of the claim.  See, e.g., Wagenet v. United States, 104 A.F.T.R.2d (RIA) 2009-7804 (C.D. Cal.). The Court of Claims, on the other hand, held that the six-year statute of limitations doesn’t apply to tax refund suits and allowed a refund suit filed 2 years after the notice of disallowance, which wasn’t issued until 28 years after the original refund claim.  Detroit Trust v. United States, 131 Ct. Cl. 223 (1955).  The IRS agrees with the latter position.  Chief Counsel Notice 2012-012.  But we’re wandering far afield from the issues in Pfizer and Paresky.)

Pfizer– recap

Pfizer brought its suit in district court under tax refund jurisdiction.  Its issue revolved around whether a taxpayer is entitled to overpayment interest when: (a) the IRS issued a refund within 45 days of the claim (when overpayment interest is not required under the exception in Section 6611(e)), (b) the check was not received, and (c) a replacement check was issued more than 45 days after the refund claim.  Pfizer wanted to rely on a favorable Second Circuit precedent on this issue, so it wanted to file in the SDNY rather than the CFC, but Tucker Act jurisdiction for district courts is limited to claims for $10,000 or less.  Thus, Pfizer filed its suit asserting tax refund jurisdiction.

Because Pfizer filed its suit late under the Section 6532 statute of limitations, it argued that its “tax refund suit” was subject instead to the general six-year statute of limitations.  The SDNY agreed that suits for overpayment interest qualified for tax refund jurisdiction, following Scripps.  So the taxpayer won on the government’s first motion to dismiss. But the court concluded tax refund jurisdiction carries with it the Section 6532 statute of limitations.  So the taxpayer lost on the government’s second motion to dismiss.  On appeal, Pfizer continues to argue for tax refund jurisdiction + Tucker Act statute of limitations.

Enter the Pareskys

The Pareskys had a different problem.  They filed their suit in the CFC as a Tucker Act claim.  But in their case, the two-year statute of limitations in Section 6532 was still open although the six-year statute of limitations for Tucker Act claims was not.  Two years is less than six years, but the two different limitation periods began running at different times.  So the Pareskys argued that a Tucker Act claim was nevertheless subject to the statute of limitations for tax refund suits.  Again, they argued for one jurisdictional grant coupled with a statute of limitations apparently applicable to a different jurisdictional grant. As with Pfizer, but in reverse.

The Pareskys’ problems traced back to investments with Bernie Madoff.  They reported substantial income for 2005 through 2007 that turned out to be fictitious.  On their tax return for 2008, they claimed a net operating loss from the Ponzi scheme. Revenue Procedure 2009-20 provides an optional safe harbor method of treating losses from investments in fraudulent schemes. That method precludes double-dipping: taxpayers claim the entire loss in the year the fraud was discovered but cannot file amended returns to exclude the fictitious income (never received) that was reported in taxable years before the discovery year.

The Pareskys did not follow the optional Revenue Procedure method.  Instead, in October 2009, they filed amended returns on Forms 1040X for years 2005 – 2007, to exclude the fictitious income reported in those years. The claimed a loss on their 2008 tax return, when they discovered the fraud.  In December 2009, they filed Form 1045s, claiming tentative carryback refunds under Section 6411for years 2003 – 2007, by carrying back the net operating loss from 2008. But the net operating loss was reduced by the amount of the fictitious income for 2005 – 2007, so there was still no double-dipping.  The overpayment interest claim involves solely the tentative carryback refunds, not the refunds associated with the amended returns on Forms 1040X.

The refunds claimed on Forms 1045 for tentative carrybacks, totaling almost $10 million, were issued in April and May of 2010, just a few months after the Pareskys filed the Forms 1045 in December 2009.  The government paid no interest on those refunds, even though it issued the refunds more than 45 days after it received the Forms 1045, because it argued the applications were not in processible form when originally submitted.  The Pareskys, of course, disagreed.

The IRS examination of the Pareskys’ tax liabilities for 2003 through 2008, trigged by the amended returns, also included the refunds sought on the Forms 1045 as well as the Pareskys’ claim for overpayment interest on the Form 1045 refunds.  The examination continued until October 2011, during which time the parties agreed to an extension of the limitations period. In October 2011, the IRS began preparing a report to the Joint Committee on Taxation (JCT), required under Section 6405 for large refunds.  (Section 6405(a) prohibits the IRS from issuing such large refunds until 30 days after the IRS submits the report to JCT, but that restriction does not apply to refunds made under Section 6411.  Section 6411 provides for only a “limited examination” of the tentative carryback applications before issuing the refund.)  The IRS submitted the report to JCT on January 25, 2013, stating that the refunds sought on the Forms 1045 had been approved.

The Pareskys filed a protest with the IRS on June 6, 2014, concerning the resolution of the examination. Appeals determined, on September 4, 2014, that no overpayment interest was due on the Form 1045 refunds because the refunds were issued within 45 days after the applications were submitted in processible form.  That determination letter instructed the Pareskys to file a formal claim on Form 843 by September 12, 2014, which they did.  The claim was denied on September 24, 2015, and the Pareskys filed their complaint in the CFC on September 15, 2017.

Was it timely? 

The government argued that, under the Tucker Act, the claim accrued in May 2010 and the plaintiffs did not file suit within the six-year statute of limitations.  The plaintiffs asserted three alternative arguments.  First, they argued that the tax refund statute of limitations, rather than the six-year period applicable to Tucker Act claims, applied and began running when their claim was denied on September 24, 2015. Second, they argued that if the six-year limitations period applied, their claim didn’t accrue until the report to JCT on January 25, 2013.  Finally, they argued that under the “accrual suspension rule” the claim doesn’t accrue until the plaintiff is aware of the claim.  The court rejected all three arguments.

The Sixth Circuit in Scripps and the SDNY in the Pfizercase agreed that taxpayers could bring a suit for overpayment interest under the “tax refund jurisdiction” provision.  But the CFC didn’t buy that argument.  There were too many precedents in that court, the Federal Circuit, or the Court of Claims to the contrary.  The Federal Circuit might decide to overrule those, but the CFC would not.

The court also rejected the argument that the suit was filed within the six-year limitations period. The claim accrued when the underlying tax refunds were “scheduled.”  There was an evidentiary dispute regarding when the refunds had been scheduled; the Pareskys therefore argued that the date of the report to JCT was the earliest moment when it was certainthat the refunds had been allowed.  But the government pointed out that the report to JCT has nothing to do with the date a tentative carryback refund is allowed, and the court found the government’s evidence sufficient to establish that the refunds were scheduled in early 2010.

The accrual suspension rule didn’t save the Pareskys either.  The IRS may not have explicitly disclosed to the taxpayers the date that the refunds were scheduled, but they received the refunds and knew they did not include overpayment interest.  Those were the relevant facts that established their claim and the IRS did not conceal those.

Equitable tolling or estoppel?

In both Pfizer and Paresky, the IRS sent the taxpayers a letter stating a different statute of limitations than the court determined applied to their respective situations.  Appeals sent Pfizer a letter stating that the six-year statute of limitations applied, presumably because the claim involved overpayment interest, without addressing the impact of which jurisdictional grant Pfizer would rely on.  The Pareskys received the determination by Appeals concerning their protest and also a denial of their subsequent refund claim, both of which stated the Section 6532 statute of limitations, without addressing potential different treatment for claims involving overpayment interest.

That misinformation certainly seems to provide a potential factual predicate for equitable tolling or estoppel of filing deadlines, but many courts have been resistant to that.  Carl Smith and Keith Fogg are continuing their quest to overcome that resistance including by filing an amicus brief in Pfizer, which I am shamelessly paraphrasing for the following summary.

In brief, statutory deadlines that are “jurisdictional” cannot be waived or extended for equitable reasons.  Unfortunately, as the Supreme Court observed in 2004, courts have been careless in applying that label.  “Clarity would be facilitated if courts and litigants used the label ‘jurisdictional’ not for claim-processing rules, but only for prescriptions delineating the classes of cases (subject-matter jurisdiction) and the persons (personal jurisdiction) falling within a court’s adjudicatory authority.”  Kontrick v. Ryan, 540 U.S. 443, 455 (2004).  The Supreme Court has also held that time periods in which to act are almost never jurisdictional, unless Congress makes a “clear statement” to that effect.  In particular, if the filing deadline and the jurisdictional grant are not part of the same provision, that likely indicates that the time bar is non-jurisdictional. United States v. Wong, 135 S. Ct. 1625 (2015).

Carl and Keith are arguing in Pfizer that Section 6532’s statute of limitations is not jurisdictional and is subject to estoppel under the standard set forth in recent Supreme Court decisions.  The Supreme Court has never ruled on whether the Section 6532(a) deadline is jurisdictional or subject to estoppel or equitable tolling.  However, before the recent Supreme Court decisions, the Second Circuit applied estoppel to prevent the government from arguing that the filing deadline barred the court from hearing the case.  Miller v. United States, 500 F.2d 1007 (2nd Cir. 1974).  Although some other circuits had disagreed, the Second Circuit could rely on that precedent to estop the government in the Pfizer case.

Theoretically, the same result should apply to the six-year filing deadline in 28 U.S.C. § 2501. Alas, this argument would not work for the taxpayers in the Pareskycase.  The Supreme Court has not ruled on Section 6532’s deadline but it has ruled on 28 U.S.C. § 2501, and concluded that it was jurisdictional and therefore not subject to equitable tolling or estoppel. John R. Sand & Gravel Co. v. United States, 552 U.S. 130 (2008). However, that was more a matter of stare decisisbecause the Court had called the deadline jurisdictional in a number of opinions over decades.  In the Wongcase, the Court held that the FTCA filing deadline in 28 U.S.C. 2401(b) was non-jurisdictional and subject to equitable tolling, while observing that the John R. Sand & Gravel Co.did not follow the Court’s current thinking because of those precedents.

So – hopefully Carl and Keith will persuade the Second Circuit in Pfizer, as well as other courts in other cases.  The National Taxpayer Advocate also proposed, in her most recent annual report to Congress, a legislative fix by amending the Code to provide that judicial filing deadlines are non-jurisdictional.  We wish them well!

Where do we go from here?

The Court of Federal Claims agreed to transfer the case, at the plaintiffs’ request and over the government’s objections, so the Pareskys are headed to the Southern District of Florida. They hope to persuade the SDF that a suit for overpayment interest fits within “tax refund jurisdiction” and the suit therefore would be timely under the tax refund statute of limitations in Section 6532.  There is a split between the Federal Circuit and the Sixth Circuit – add the Second Circuit if it affirms the District Court in the Pfizer case.  Neither party cited precedents from the Eleventh Circuit, so it’s at least possible that the SDF will follow Scrippsand find it has jurisdiction.

Meanwhile, Pfizer is still waiting for a ruling by the Second Circuit.  Paresky offers arguments for both sides in PfizerParesky held that the six-year statute of limitations applies (good for Pfizer) but that tax refund jurisdiction is not available (bad for Pfizer).  Pfizer has requested, if the Second Circuit affirms the SDNY, that it also transfer the case to the CFC.  It seems that court would clearly have jurisdiction under the Tucker Act, and Pfizer met the six-year statute of limitations, so the CFC apparently would hear the merits of the case.  The favorable Doolin precedent in the Second Circuit wouldn’t carry as much weight in the CFC but Pfizer might still prevail on the merits.

The government stated in its brief that it may or may not oppose transfer, depending on whythe Second Circuit (hypothetically) rules against Pfizer.  If the Second Circuit rules that “tax refund jurisdiction” does not apply to suits for overpayment interest, the government would not oppose transfer.  But if the Second Circuit agrees that “tax refund jurisdiction” applies to the case and rules against Pfizer only on the basis that Pfizer did not file its suit within two years of the notice of disallowance, the government asked that transfer be denied.