January 2022 Digest

February 1, 2022 by 2 Comments

A lot has happened in the tax world since the year began, then filing season began last week, and the ABA Tax Section 2022 Virtual Midyear Meeting began yesterday. There are no signs that things will slow down soon, except for (maybe) IRS notices.

Procedurally Taxing will continually provide comprehensive updates and information, but if you fall behind with your reading or struggle to keep up- I’ll be digesting each month’s posts from here on out.

January’s posts highlighted the NTA’s Report, the ongoing impact of the pandemic, and recent Circuit splits.

National Taxpayer Advocate’s Report

NTA Report Released: Essential Reading: The Report is available and contains new features, including an enhanced summary of the Ten Most Serious Problems and a change in the methodology used to determine the Most Litigated Issues.

What are the Most Litigated Issues and What’s Happening in Collection?: A closer look at the Most Litigated Issues. EITC issues are often petitioned but rarely result in an opinion, suggesting that most are settled before trial. In Collection, lien cases referred to the DOJ have declined substantially over the years corresponding with the decline in Revenue Officers and resources.

Who Settles Cases – Appeals or Counsel (and Why?): An analysis of data on the number of Tax Court cases settled by Appeals or Counsel. An increasing percentage of settlements are handled by Counsel, but why? Possible reasons and possible solutions are considered.

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Where Have Tax Court Deficiency Cases Come from in the Past Decade?: Most deficiency cases have come from correspondence exams of low- and middle-income pro se taxpayers. The focus of IRS examinations over the past decade has influenced the cases that end up in Tax Court. A shift in focus may be coming as IRS seeks to hire attorneys to specifically combat syndicated conservation easements, abusive micro-captive insurance arrangements and other tax schemes.

The Melt – Cases That Drop Away in Tax Court: Around 20% of Tax Court cases get dismissed each year- likely due, in part, to untimely filed petitions. Also due to a failure to prosecute, that is the petitioner abandoned the process somewhere along the way. Ways to address this issue are worth exploring, such as increasing access to representation and implementing a model utilized by the Veterans Court of Appeals.

Supreme Court Updates and Information

Who Qualifies as Press and the Boechler Supreme Court Argument Today: Being consider a member of the press comes with benefits, including the option to attend Supreme Court arguments with a press day pass when Covid-restrictions end. In lieu of being there in person, real-time broadcast links of Oral Arguments are made available on the Supreme Court website.

Transcript of Boechler Oral Argument: A link to the transcript of the Boechler Oral Argument is provided and Keith shares his in-person experiences observing the Supreme Court and the options available to others who are interested in doing so when Covid-restrictions end.

Pandemic-Related Considerations

Refund Claims and Section 7508A: A well-informed analysis of the disaster area suspensions under section 7508A and the refund lookback limits. Does the language in section 7508A allow for an extended lookback period? The IRS Office of Chief Counsel doesn’t think so, but TAS has recommended that Congress amend section 6511(b)(2)(A) for that purpose, and there is an argument that a regulatory solution is already available.

 Making Additional Work for Yourself and Others: The IRS has been cashing taxpayer payments without acknowledging receipt of the associated return. This improper recordkeeping resulted in the IRS sending CP80 notices to taxpayers requesting duplicate returns. This created more work for the IRS, practitioners, and clients. The IRS, however, recently announced it would stop doing this, as summarized directly below.

IRS Announces Stoppage of Notice to Paper Filers Who Remitted Payment and Tax Court Announces Continued Zooming: The IRS will stop requesting duplicate returns from paper filers who remitted payments with their original returns. Members of Congress also made specific requests to the IRS with the goal of providing relief to taxpayers until the IRS backlog is resolved, including temporarily halting automated collections, among other things. The Tax Court announced all February trial sessions will be by Zoom.

Practice and Procedure Considerations

“But I’ve Always Done It That Way!” Practitioner Considerations on Subsequent Year Exams: A TIGTA recommended change to IRS procedure may increase the audit risk for taxpayers who do not respond to audit notices. There is no blanket prohibition on telling clients about audit rates and general likelihoods of audit, so practitioners should be able to advise their clients of this potentially emerging risk and ways to avoid it.

New Rules in Effect for Refund Claims For Section 41 Research Credits Raise A Number of Procedural Issues: New rules for research credit refund claims require extensive documentation which increases costs and the risk of a deficient claim determination. Procedures for determinations were issued at the beginning of the month and have generated concern among practitioners because a determination cannot be challenged with a traditional refund suit and because the IRS modified regulatory requirements without utilizing formal notice and comment procedures.

Tax Court News

Tax Court Going Remote for the Remainder of January[and February]: January calendars (and now February, as mentioned above) scheduled in-person sessions have switched to remote sessions due to ongoing Covid-concerns.

Tax Court Orders and Decisions

The Tacit Consent Doctrine May Extend Far Beyond Signing a Joint Return: The Court in Soni v. Commissioner, allowed the tacit consent doctrine (where facts and circumstances led to finding of consent on the part of a non-signing spouse) to apply to returns, power of attorney authorizations and forms 872. The doctrine could be expanded in future cases, so it should be kept in mind when representing innocent spouses.

Timely TFRP Appeal?: The administrative 60-day deadline to respond to TFRP notices is discussed in an order requesting that the IRS supplement its motion for summary judgment. The origin of a deadline is important. Jurisdictional deadlines are different from administrative deadlines, and cases involving administrative deadlines can be reviewed for abuse of discretion.

Circuit Court Decisions

Eleventh Circuit finds Regulation Invalid under APA: The Eleventh Circuit, in Hewitt, calls into question who has the burden to show that a comment made during a notice and comment period: 1) was significant, and 2) consideration of it was adequate. The Tax Courts says it’s the taxpayer, the Eleventh Circuit says it’s the IRS, but what does this mean for everyone else?

The Fifth Circuit Parts Ways with the Ninth Circuit Regarding the Non-Willful FBAR Penalty: A difference in statutory interpretation results in a recent split between the Ninth and Fifth Circuits over whether the non-willful penalty under section 5321(a)(5)(A) should be assessed on a per-form or per-account basis. The Ninth Circuit held that legislative history, purpose, and fairness support a per-form penalty, but the Fifth Circuit held that Congress’ intent and the objective of the penalty support a finding that it’s per-account.

Goldring is Back with a Circuit Split: The Fifth Circuit addresses how underpayment interest should be computed on a later assessed deficiency when a taxpayer elects to credit forward an overpayment from an earlier filed return. It held “a taxpayer is liable for interest only when the Government does not have the use of money it is lawfully due.” This contrasts with other Circuits which have decided that the law allows the IRS to begin computing interest when an amount is “due and unpaid.”

Polselli v US: Circuit Split on Notice Rules for Summonses to Aid Collection: A recent Sixth Circuit decision continues a circuit split on a fundamental issue in IRS summons practice: does the IRS have to give notice when it issues a summons on accounts owned by third parties in the aid of collecting an assessed tax? The Sixth, Seventh and Tenth Circuits read section 7609 notice requirements and its exclusion without limitations, which contrasts with the Ninth Circuit’s more narrow interpretation.

D.C. Circuit Narrows Tax Court Whistleblower Award Jurisdiction: The D.C. Circuit overturns Tax Court precedent by holding that the Tax Court lacks jurisdiction over appeals of threshold rejections of whistleblower requests. Since all appeals of whistleblower cases go to the D.C. Circuit, the Tax Court is bound by the decision unless the Supreme Court takes up the issue. 

Liens and Judgments

Local Taxes and the Federal Tax Lien: The effect of the Tax Lien Act of 1966 was reiterated in United States v. Tilley.  Section 6323(a) sets up the first in time rule of law, but 6323(b) provides ten exceptions, including one for local property taxes, which allows a local lien to defeat a federal tax lien even when the local lien comes later in time.

Tax Judgments and Quiet Titles: Tax judgments can benefit the IRS beyond the 10-year federal collection statute of limitations. Boykin v. United States, like Tilley, involves real property held by nominal owners. The taxpayer brought suit to quiet title, the IRS counterclaimed that the money used to purchase the property was fraudulently transferred, and the taxpayer argued that a state statute of limitations prevented the IRS’s argument. The Boykin Court disagreed with the taxpayer relying upon Supreme Court precedent that state statutes do not override controlling federal statutes.

Bankruptcy and Taxes

Diving Beneath the Surface of In re Webb: An in-depth analysis of a technical bankruptcy issue that can impact taxes involving an election under section 1305, which allows postpetition tax claims to be deemed prepetition claims. The classification of the claims impacts whether a subsequent IRS refund offset violates a debtor’s rights.

Filed Under: Administrative Procedure Act (APA), Appeals, Bank Secrecy Act, Burden of Proof, Collection Due Process, Earned Income Credit, Equitable tolling, Exam, FBAR, Form 2848, Innocent Spouse, Interest, Judgment, Lien, Monthly Digest, Overpayment Interest, SCOTUS, Statutes of Limitation, Taxpayer advocate

Overpayment, or Not?

November 29, 2021 by 2 Comments

We welcome back guest blogger Bob Probasco. Today Bob untangles the issue of deposits versus payments in relation to stipulated decision documents filed with the Tax Court. The character of the taxpayer’s remittance matters here, as it determines whether they are entitled to overpayment interest. For those looking to make a deposit rather than a payment, the IRS gives detailed instructions in Rev. Proc. 2005-18, which Stephen discussed in a post here. Christine

A Tax Court memorandum opinion, dismissing the case for lack of jurisdiction, came out recently in Hill v. Commissioner, T.C. Memo 2021-121 (Oct. 25, 2021).  I almost didn’t read it, because lack of jurisdiction is usually clear-cut and (by definition) memorandum opinions don’t address novel or unsettled issues of law.  This sounded like something I could skip, without missing much.  But that would have been a mistake. 

The jurisdictional issue was not quite as clear as I assumed, and the opinion included a lot of helpful little nuggets along the way.  Reminders of nuances that I rarely think about or skip when discussing a topic; or explanations of things that I’ve seen for years without giving them much thought.  When you read nuggets like that, you may think “Of course, that makes sense; why didn’t I think of that?”  This sometimes qualifies as a Blinding Flash of the Obvious, or, for persons of a certain age, perhaps a “V-8 moment.”  These nuggets were that for me anyway, and hopefully also for at least a few of the readers of Procedurally Taxing.

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The parties had entered a stipulated decision in the case on July 19, 2019.  (Docket no. 794-18; the stipulated decision is not available in DAWSON.)  Then the petitioner filed a motion on August 14, 2020, to redetermine interest under section 7481(c) and Tax Court Rule 261.  Those rules allow the petitioner to challenge either (a) excessive underpayment interest assessed pursuant to the court’s decision and paid or (b) insufficient overpayment interest allowed on an overpayment determined by the court.  The first category was a good reminder for me of a nuance I occasionally skip when explaining procedure to students: underpayment interest is not subject to deficiency procedures but there is still a route to a refund suit in Tax Court for such amounts. 

But this case involved the second category.  The IRS had not paid any overpayment interest on a check received from the government for this case after the stipulated decision was entered, and the petitioner argued that it should have.  A basic requirement of a motion to redetermine overpayment interest is that the court finds in its previous decision that the taxpayer made an overpayment.  The stipulated decision, however, determined a gift tax deficiency but did not determine an overpayment.  I was generally aware of this type of motion but somehow had never dealt with it before.  So the opinion offered a useful explanation, but the conclusion that there was no jurisdiction seemed straight-forward. 

Money Due to Petitioner, But . . . It’s Not an Overpayment

The jurisdictional issue was not as easy to resolve as I had assumed.  The petitioner did get a $3,473,750 check (without interest) because of the decision, but the court decided that there was no overpayment.  The gift tax deficiency for tax year 2011 was $6,790,000 but the petitioner had given the IRS a check for $10,263,750 back in 2012.  Why wasn’t that an overpayment??  Because the 2012 remittance was a deposit under section 6603, not a payment.  A deposit does not become a payment until it is used to pay a tax, which happens after the assessment, which happens after the Tax Court decision.

The petitioner didn’t argue that the 2012 remittance was a payment.  That would have been very difficult to do, as the opinion cites multiple times that the petitioner had referred to it as a deposit and cited section 6603 specifically.  The petition itself referred to “depositing” that amount and the petitioner alleged that it was “intended as a deposit pursuant to I.R.C. § 6603(a)” in the motion to redetermine interest.  Apparently, the petitioner did not refer to the 2012 remittance as a payment until his reply to the IRS response to the motion.

He did, however, argue that the 2019 stipulated decision had in substance determined an overpayment.  It was an ingenious argument (kudos to counsel) but ultimately unsuccessful.  I’ll get to what that involved, and why the judge disagreed, after a brief digression.

Asking For the Return of a Deposit

When explaining the differences between “deposit” and “payment” to my students, I usually explain one key difference much the way the court did here.  A taxpayer “could demand the immediate return of his deposit at any time” but could get back a payment “only by pursuing the IRS’ formal refund process, which could be lengthy.”  That certainly is an important benefit, as the court points out, particularly when the statute of limitations for refund claims has expired.  Of course, that is a slight simplification.  Section 6603(c) says that the right of return on request is not absolute and does not apply “in a case where the Secretary determines that collection of tax is in jeopardy.”  This was another nuance that I sometimes skip when explaining deposits; I hadn’t really given it much thought.  I have some questions/concerns about the process for jeopardy determinations, in this context or others, but that’s a topic for another day.

In this case, the petitioner requested in 2014 that the IRS return the deposit.  Did the IRS return the deposit right away?  No.  It asked for additional information about the potential gift tax liability, citing the limitation on return when collection in jeopardy.  (This may have sounded strange to some Texans – worry that a member of the extended Hunt family, as in “Hunt Oil Company,” would not be able to pay the tax?)

The IRS apparently resolved its concerns about ability to collect the tax, but it still did not return the deposit.  The gift tax liability arose from a settlement of civil litigation in district court over division of wealth among family members.  Under the settlement reached, the petitioner was required to assign his rights to installment payments from his father (total amount $30,675,000) to trusts for the benefit of his children.  Because of the potential gift tax liability, the registry of the district court, rather than the taxpayer, issued the check for $10,263,750 payable to Treasury.  The IRS eventually concluded that, if the petitioner insisted on return of the deposit, it would have to be returned to the district court registry instead.  So the funds remained with the IRS.

In Substance, A Determination of an Overpayment?

OK, back to the jurisdictional argument.  The stipulated decision stated that “there is a deficiency in gift tax due from petitioner for the calendar year 2011 in the amount of $6,790,000” and that “there are no deficiencies in gift tax due from, nor overpayments due to petitioner for the calendar years 2010 and 2015.”  It said nothing about an overpayment for 2011.

The petitioner argued that a stipulation in the decision was, in substance, a determination of an overpayment.  That stipulation provided for the $10,263,750 to be transferred from the 2012 tax year, where it was originally applied, to the 2011 tax year.  It then went on to say: “It is further stipulated that the deficiency for the taxable year 2011 is computed without considering the prepayment credit of $10,263,750.”  Since $10,263,750 is more than the $6,790,000 deficiency, that sure sounds like the court had determined an overpayment, doesn’t it?

The court pointed out two problems with that argument.  The second problem was that the stipulation referenced the $10,263,750 as a “prepayment credit” rather than a payment.  There could not have been an overpayment when the 2019 decision was entered, because “a deposit is not a payment of tax prior to the time the deposited amount is used to pay a tax,” and that doesn’t occur until after assessment.  Even then, only the amount used to pay the tax becomes a payment; the remainder is an unused deposit that is returned to the taxpayer.  No overpayment.

One thing that is not intuitively clear to most of my students is that “deficiency” is not the same thing as “amount the taxpayer owes.”  The Form 4549, Income Tax Examination Changes, in a notice of deficiency helps them to see the difference.  (We see the Form 4549 version more often than the Form 5278 version, but they’re very similar.)  At the bottom of page 1 of Form 4549, line 13 includes changes to certain amounts on the return that are subject to deficiency procedures.  Line 14 is the total deficiency.  Line 15 is for changes to that are not subject to deficiency procedures, but which affect how much the taxpayer owes.  And line 16 is the bottom-line amount that either the taxpayer owes the government, or the government owes the taxpayer. 

Line 15, for our clinic clients, tends to be one of two different things: a frozen refund, or additional withholding because the Automated Underreporter program identified an information return not included on the return.  That makes sense to students, that our client would owe less because more was withheld than reported on Form 1040 or the account transcript shows a balance due the taxpayer for a frozen refund.  Page 2 of Form 4549 helpfully lists other things that might be included there: taxes paid by a RIC or REIT on undistributed capital gains, excess Social Security, additional Medicare tax, and other timely payments.

The notice of deficiency, as with virtually all notices, is an opportunity for the IRS to “suggest” payment, so of course they tell the taxpayer how much to send.  They include an estimated amount of interest on page 2 of Form 4549, for the same reason.  But clinic clients don’t always catch that and may be needlessly worrying about having to pay the full amount of the deficiency when the actual amount due might be substantially less.  But I digress.

The stipulation used the term “prepayment credits” but the court concludes that the deposit not only doesn’t affect the deficiency amount but also doesn’t create an overpayment, for the reasons stated above.

I realized something, while reading this opinion, about what I’ve been seeing on stipulated decisions for years.  If something like a frozen refund or additional withholding resulted in an overpayment, there is no stipulation about that on page 2 of the decision.  It’s not necessary, because if those adjustments created an overpayment, the amount of the overpayment is already stated on page 1 of the decision.  The stipulation only appears if such adjustments reduce the balance due, but still leaves a balance due the government.  I think I noticed and understood that subconsciously but had never thought about it consciously that way.  So . . . “Blinding Flash of the Obvious.”

Above The Line versus Below The Line

I’ve always thought of those terms as differentiating deductions, whether one that reduces gross income to adjusted gross income or one that reduces adjusted gross income to taxable income – where the “line” is adjusted gross income.  You likely do, too.  As it turns out, those terms are also used to differentiate parts of stipulated decisions.  In that case, the “line” is the judge’s signature at the bottom of page 1.  As Judge Lauber explained, only the information “above the line” reflects determinations by the court.  That’s all the court has jurisdiction to decide – the amount of the deficiency, the amount of any penalties, and the amount of any overpayment.  The stipulations on page 2, “below the line,” are simply agreements between the parties.  This was another “Blinding Flash of the Obvious” for me; if you asked me, I might have explained it properly, but I hadn’t really given it much if any conscious thought. 

Most stipulations are routine items.  The court can enter the decision.  Any deficiency stated does not include underpayment interest, which will be assessed as provided by law.  Any overpayment stated does not include overpayment interest, which will be credited or paid as provided by law.  For regular cases, the parties may stipulate that respondent can assess without waiting for the Tax Court decision to become final.  And there may be stipulations of “prepayment credits” that reduce the amount owed by the petitioner but do not create an overpayment.

Since the stipulation that the petitioner relied on was “below the line,” the court (judge) hadn’t even determined that there was a deposit.  This was the court’s first reason for rejecting the petitioner’s argument – not only was there no overpayment, but also the court had not made a determination even about the existence of the deposit.

But All Is Not Lost!

The petitioner got no relief from the court, but that’s not the end of the story.  The IRS hadn’t previously paid any interest on the returned $3,473,750.  While arguing the motion to redetermine interest, at least the IRS conceded that the petitioner was entitled to interest on the returned deposit, although at the lower interest rates applicable to section 6603 deposits.  (That rate is 3% less than the rate for overpayments; from the fourth quarter of 2011 through the first quarter of 2016, it was 0%.)  The IRS said that meant the interest payable would be $218,122 instead of the $1,267,323 that petitioner had claimed.  At least it’s something.

For me, this “simple” dismissal for lack of jurisdiction in a memorandum opinion was a very good explanation/reminder/Blinding Flash of the Obvious!

Filed Under: Deposits, Overpayment Interest Tagged With:

Complications from Extensions and Unprocessible Returns

September 8, 2021 by 1 Comment

Bob Probasco returns today with an important alert on overpayment interest. Christine

A few months ago, Bob Kamman flagged a number of surprising phenomena he’d observed recently, one of which related to refunds for 2020 tax returns.  Normally, when the IRS issues a refund within 45 days of when you filed your return, it doesn’t have to pay you interest.  That’s straight out of section 6611(e)(1).  Yet, taxpayers were getting refunds from their 2020 returns within the 45 day period and the refunds included interest.  As Bob explained, that was a little-known benefit of COVID relief granted under section 7805A.  Not only were filing and payment dates pushed back but also taxpayers received interest on refunds when they normally would not have.

On July 2, 2021, the IRS issued PMTA 2021-06, which raised two new wrinkles—one related to returns that were not processible; the other related to returns for which taxpayers had filed extensions.  How do those factors affect the results Bob described?

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Interest on Refunds Claimed on the Original Return

The general rule is that the government will pay interest from the “date of the overpayment” to the date of the refund.  Normally the “date of the overpayment” will be the last date prescribed for filing the tax return, without regard to any extension—April 15th for individuals—unless some of the payments shown on the return were actually made after that date.  But there are three exceptions applicable to refunds claimed on the original return: 

  • Under section 6611(b)(2), there is a “refund back-off period” of “not more than 30 days” before the date of the refund, during which interest is not payable.  In practice, this period is significantly less than 30 days.  See Bob Kamman’s post and the comments for details.
  • Under section 6611(b)(3), if a return is filed late (even after taking into account any extension), interest is not payable before the date the return was filed.
  • Under section 6611(e)(1), no interest is payable if the refund is made promptly—within 45 days after the later of the filing due date (without regard to any extension) or the date the return was filed.

Section 6611(b)(3) and (e)(1) affect when overpayment interest starts running, while section 6611(b)(2) affects when it ends.

Other Code provisions, however, may adjust this further.

When Is the Return Considered Filed?

This is where “processible” comes in.  Section 6611(g) says that for purposes of section 6611(b)(3) and (e), a return is not treated as filed until it is filed in processible form.  As the PMTA explains, a return that is valid under Beard v. Commissioner, 82 T.C. 766 (1984), may not be processible yet, because it omits information the IRS needs to complete the processing task.  IRM 25.6.1.6.16(2) gives an example of a return missing Form W-2 or Schedule D.  Those are not required under the Beard test, but the return cannot be processed “because the calculations are not verifiable.”  The PMTA also mentions a return submitted without the taxpayer identification number; still valid under the Beard test but the IRS needs the TIN to process it.

As a result, under normal conditions, if a valid but unprocessible return is filed timely, and a processible return is not filed until after the due date, the latter is treated as the filing date for purposes of section 6611(b)(3) and (e).  The return is late, so the taxpayer is not entitled to interest before the date the (processible) return was filed.  And the 45-day window for the IRS to issue a refund without interest doesn’t start until the (processible) return was filed.

And Now We Add COVID Relief

The previous discussion covered normal conditions, but today’s conditions are not normal  As we all recall, the IRS issued a series of notices in early 2020 that postponed the due date for filing 2019 Federal income tax returns and making associated payments from April 15, 2020, to July 15, 2020.  The IRS did the same thing for the 2020 filing season, postponing the due dates from April 15, 2021, to May 17, 2021.  (Residents of Oklahoma, Louisiana, and Texas received a longer postponement, to June 15, 2021, as a result of the severe winter storms.)

This relief is granted under authority of section 7508A(a)(1), responding to Presidential declarations of an emergency or terroristic/military actions.  For purposes of determining whether certain acts were timely, that provision disregards a period designated by Treasury—in effect, creating a “postponed due date.”  The acts covered are specified in section 7508(a) and potentially, depending on what relief Treasury decides to grant, include filing returns and making payments.  For the 2019 filing season, the IRS initially postponed the due date for payments and then later expanded that relief to cover the due date for filing tax returns.

(Yes, the section 7508A provision for Presidentially declared emergencies piggybacks on the section 7508 provision for combat duty.  As bad as the disruptions caused by COVID have been, I prefer them to serving in an actual “combat zone.”  Hurricane Ida, which I am also thankful to have missed, may be somewhere in between.  All get similar relief from the IRS.)

Section 7508A(a)(2) goes beyond determining that acts were timely.  It states that the designated period, from the original due date to the postponed due date, is disregarded in calculating the amount of any underpayment interest, penalty, additional amount, or addition to tax.  No penalties or underpayment interest accrue during periods before the postponed due date, just as they don’t accrue (in the absence of a Presidentially declared emergency) before the normal due date. 

That’s the right result, and section 7508A(a)(2) is necessary to reach it.  Section 7508A(a)(1) simply says that the specified period is disregarded in determining whether acts—such as payment of the tax balance due—are timely.  It doesn’t explicitly modify the dates prescribed elsewhere in the Code for those acts.  The underpayment interest provisions, on the other hand, don’t focus on whether a payment was timely.  Section 6601(a) says underpayment interest starts as of the “last date prescribed for payment” and section 6601(b) defines that without reference to any postponement under section 7508A.

What about overpayment interest on a refund?  Section 7508A(c) applies the rules of section 7508(b).  That provision tells us that the rule disregarding the period specified by Treasury “shall not apply for purposes of determining the amount of interest on any overpayment of tax.”  Great!  We won’t owe interest for that designated period—April 15, 2020 to July 15, 2020 for the first emergency declaration above—on a balance due, but we can potentially be paid interest for that period on a refund.

Section 7508(b) also states that if a postponement with respect to a return applies “and such return is timely filed (determined after the application of [the postponement]), subsections (b)(3) and (3) of section 6611 shall not apply.”  That certainly sounds reasonable with respect to 6611(b)(3); it’s a de facto penalty of sorts for filing late, but if you filed your 2019 tax return by July 15, 2020, that should be treated as though you had paid by the original due date of April 15, 2020. 

Section 6611(e)(1) is a little bit different.  It’s not a de facto penalty for late filing; it’s essentially (1) a recognition that processing returns and issuing refunds takes some minimal amount of time and (2) possibly a small incentive for the IRS to do that expeditiously.  But when Treasury grants relief after a Presidentially declared emergency, any refund issued from a timely return will include interest, unless some other provision overrides it.  That’s what Bob Kamman’s Procedurally Taxing post pointed out and explained. 

And Now, the PMTA

It appears that the PMTA is correcting earlier analysis.  I haven’t been able to track down any earlier guidance, but the PMTA refers to “our previous conclusions” and those differed from the conclusions in the PMTA.  The conclusions in the PMTA seem correct.  Summarized:

  1. If the IRS determined a postponed due date under section 7508A, a return filed by the postponed due date means section 6611(b)(3) and (e) do not apply.  The return need only be valid under the Beard test to be timely and trigger the provisions of section 7508A; it doesn’t need to be processible.  This is what the “previous conclusions” got wrong, apparently thinking that whether a return was timely for purposes of section 7508A depended on whether it was processible.  But section 6611(g) defines “timely” only for purposes of section 6611(b)(3) and (e), not section 7508A.  It doesn’t matter whether the return was timely filed for purposes of 6611(b)(3) and (e); section 7508A negated them.  The default rules below don’t apply.  Interest will run from the date of the overpayment and there is no exception for a prompt refund.
  2. If the IRS determined a postponed due date under section 7508A, but a valid return is not filed by the postponed due date, it doesn’t meet one of the requirements for sections 7508A(c)/7508(b)—that the return is timely filed by the postponed due date—so the default rules below apply. 

Default rules, if there was no section 7508A relief from Treasury, or the taxpayer did not file a valid return by the postponed due date.  Sections 7508A(c)/7508(b) have no effect, so sections 6611(b)(3) and (e) are in effect and the return is “filed” only when it is processible pursuant to section 6611(g).  Thus:

  • If a processible return is filed by the original due date (or extended due date if applicable) it is not late under section 6611(b)(3), so interest runs from the date of the overpayment.  If it is filed after the original due date (or extended due date if applicable) it is late under section 6611(b)(3), so interest runs from the date the processible return was filed.
  • Whether or not the processible return is filed late, no interest is payable at all if the IRS makes a prompt refund under section 6611(e).  The 45-day grace period starts at the later of the original due date (even if the taxpayer had an extension) or the date the return is filed. 

Note that a return filed after the postponed due date (July 15, 2020) but on or before the extended due (October 15, 2020, if the taxpayer requested an extension) is not timely for purposes of section 7508A.  As a result, sections 6611(b)(3) and (e) are not disregarded.  But it is timely for purposes of 6611(b)(3).  Interest runs from the date of the overpayment rather than the date the return is filed, but the taxpayer may still lose all interest if the IRS issues the refund promptly.

Although the PMTA doesn’t mention it, the “refund back-off period” of section 6611(b)(1) will apply in all cases.  That rule is not dependent on whether a return is processible or filed timely, and it is not affected by a Presidentially declared emergency.

Two Final Thoughts

First, I think the PMTA is clearly right under the Code.  That the IRS originally reached the wrong conclusion, in part, is a testament to the complex interactions of the different provisions and the need for close, attentive reading.  I double-checked and triple-checked when I worked my way through the PMTA.  This was actually a relatively mild instance of a common problem with tax.  Code provisions are written in a very odd manner.  They’re not intended to be understandable by the general public; they’re written for experts and software companies, and sometimes difficult even for them.  I suspect that people who work through some of these complicated interpretations would fall into two groups: (a) those who really enjoy the challenging puzzle; and (b) those who experience “the pain upstairs that makes [their] eyeballs ache”.  My bet is that (b) includes not only the general public and most law school students but also a fair number of tax practitioners.  Which group are you in?

Second, that (relative) complexity leads to mistakes.  I assume that these interest computations have to be done by algorithm.  There are simply too many returns affected to have manual review and intervention for more than a small percentage.  An algorithm is feasible but will require re-programming every time there’s a section 7508A determination, with changes from year to year.  Even when the law is clear, there is a lot of opportunity for mistakes to creep in.  (We’re seen some of those recently in other contexts, e.g., stimulus payments and advanced Child Tax Credit.)  Whether by algorithm or manual intervention, particularly given the change from the original conclusions, there’s a good chance that some refunds were issued that are not consistent with the correct interpreation and may not have included enough interest.  Is the IRS proactively correcting such errors?  If the numbers are big enough, it might be worth re-calculating the interest you received—it’s easier than you may think—and filing a claim for additional interest if appropriate.

Filed Under: Beard, Overpayment Interest, refund claim, Return Tagged With:

Things That Make You Say Hmmm

May 27, 2021 by 3 Comments

We welcome back guest blogger and commenter in chief, Bob Kamman.  As usual, Bob has found things that the rest of us overlook. 

In addition to the interesting twists on the way things work that Bob discusses below, I received a message from Carl Smith who, though retired, still takes some interest in what is happening in the world of tax procedure.  Carl provides some data on the Tax Court that might be of interest to court watchers.  After checking DAWSON, Carl sent the following message:

The last docket number for 2020 was 15,351.  Since the court doesn’t give out the first 100 docket numbers (i.e., the court starts at docket no. 101), that means filings in 2020 totaled 15,251, which is the lowest in two decades.  (The 1998 Act so froze the IRS that, according to Dubroff and Hellwig (Appendix B), only roughly 14,000 petitions were filed in 1999 and 15,000 petitions were filed in 2000.)  The last docket number in 2019 was 23,105, so filings in 2020 fell off about a third from 2019 to 2020.

As of right now, May 27, before the court’s Clerk’s Office opens, the last docket number is 8856-21 — only slightly ahead of the pace for 2020, though I would note that the first 10 weeks of 2020 were not impacted by the virus at all.

Oddly, the Tax Court is still very backlogged in serving petitions on the IRS.  Docket 8856-21 was filed on 3/15, but says it was served 5/27 — i.e., it will be later today.  That time gap of two and a half months to serve the petition is typical right now. Looking to the last few dockets of 2019, it typically took only 14 days to serve a petition filed on Dec. 31, 2019.

Keith

I thought I knew at least the basics of tax procedure, but lately I am starting to wonder if they changed the rules while I was slipping into old age.

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For example, there is the statute of limitations for refunds of individual income tax.  From a Notice CP81 mailed from IRS in Austin and dated May 24, 2021: “We haven’t received your tax return for the year shown above.  The statue [yes, that’s what it says, not statute] of limitations for claiming a refund for the tax year shown above is set to expire.  As a result, you are at risk of losing the right to a potential refund of your credits and/or payments shown above.”

The credit on the account is $145. The tax year is 2017.

No, the taxpayer does not live in Texas or other disaster area.  I should say, did not live there.  He died in July 2020. 

Of course it’s possible that the credit came from a timely-filed extension request in April 2018.  No one alive now, has any records of what he did back then.  We do know that IRS paid him refunds on 2018 and 2019 returns, without any reminders or requests about 2017.  Requesting an account transcript for a decedent would take some time, to find out. 

And another thing.  I thought I knew the rules about when IRS would pay interest on refunds, and when it would not.

Then another tax practitioner reported that a Form 1040 that was e-filed on April 15 resulted in a refund deposited on April 23, with several dollars of interest added.  The refund was in the $10,000 range.  I had my doubts about this, until something similar happened with one of my clients.

They had filed their return in March, but claimed a “Recovery Rebate Credit” for a payment they had not received.  IRS is verifying all of these, so the refund was not approved and deposited to their bank account until April 28.  It included $1.31 in interest. 

I had always thought that IRS has 45 days from the date the return is due, or when received if later, to pay the refund without interest.  The IRS website states, “We have administrative time (typically 45 days) to issue your refund without paying interest on it.”

So I did some research, and this is what I found.  But I may not have gone far enough.

Code Section 7508A deals with disaster areas and allowed IRS to permit last year’s 3-month extension and this year’s 1-month extension.  It provides:

( c)        Special rules for overpayments
The rules of section 7508(b) shall apply for purposes of this section.

And Section 7508(b) says

(b)         Special rule for overpayments
(1)         In general
Subsection (a) shall not apply for purposes of determining the amount of interest on any overpayment of tax.
(2)         Special rules
If an individual is entitled to the benefits of subsection (a) with respect to any return and such return is timely filed (determined after the application of such subsection), subsections (b)(3) and (e) of section 6611 shall not apply.

So what are these two parts of Section 6611 that should be disregarded?

The second one mentioned, 6611(e) has the 45-day rule. So IRS can’t rely on that.

But the first one, 6611(b)(3), deals only with “late returns”. That still leaves Section 6611(b)(2), which gives IRS 30 days to issue a refund with no interest:

(b)         Period
Such interest shall be allowed and paid as follows: . . .
(2)         Refunds
In the case of a refund, from the date of the overpayment to a date (to be determined by the Secretary) preceding the date of the refund check by not more than 30 days, whether or not such refund check is accepted by the taxpayer after tender of such check to the taxpayer. 

So the 45-day rule is out, but shouldn’t the 30-day rule still be followed? At least, that’s the way I followed the trail.  But I could be wrong. I’m expecting a TIGTA or GAO report later this year, telling me why IRS did it right.  But I also expect some members of Congress to lament the interest expenditures.

Then there came along the repeal of the tax on ACA premium underpayments in 2020.  If taxpayers paid less for health insurance last year because they underestimated their income and received too much premium tax credit, they would have to make up the difference – until that requirement was repealed by the American Rescue Plan (ARP) in mid-March.  So now IRS has started issuing refunds to those who had already paid this tax. 

According to other practitioners, these refunds have included interest, even when paid before May 15.

IRS is about to start paying refunds to taxpayers who included unemployment compensation in income, before it was excluded for most returns by ARP.  Should these refunds include interest, even if paid within 45 days of April 15?  I suppose so.  These are, after all, not normal times.

Filed Under: Overpayment Interest, Tax Court Tagged With: ,

The End of the Line for the Pareskys?

May 3, 2021 by Leave a Comment

Guest blogger Bob Probasco returns today with perhaps his final update on the Paresky case. Christine

I’ve blogged about the Paresky case before (here, here,  here, and here).  The latest development, and probably the end of the line, came on Friday when the Eleventh Circuit issued its opinion.  The circuit court agreed with the district court, as well as the Second Circuit in Pfizer Inc. v. United States, 939 F.3d 173 (2d Cir. 2019), and the Federal Circuit in Bank of America Corp. v. United States, 964 F.3d 1099 (Fed. Cir. 2020).  District court jurisdiction for “tax refund suits” does not apply to stand-alone suits for additional overpayment interest.

Nothing about the decision was really surprising.  The contrary decision in E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005) was always a strained interpretation of the jurisdictional statutes, and the trend has been moving away from that interpretation over the past few years.  The Eleventh Circuit evidently thought it was an easy case as well; Carl Smith pointed out to me that the decision came only 35 days after oral argument, compared to 17 months for the Pfizer decision.  That’s fast!  But I thought I would offer a few comments as we perhaps close this chapter.

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What was this dispute all about, again?? There are two provisions that might offer district court jurisdiction for a stand-alone case seeking additional interest from the government on tax overpayments.  28 U.S.C. § 1346(a)(1) covers claims for recovery of taxes, that is, tax refund suits.  28 U.S.C. § 1346(a)(2)—the “little” Tucker Act—covers claims against the government under the Constitution, Acts of Congress, regulations, contracts with the government, or non-tort damages.  The little Tucker Act is limited to claims of $10,000 or less, whereas the courts can hear tax refund suits for any amount.  Under 28 U.S.C. § 1491(a)(1), however, the Court of Federal Claims can hear Tucker Act claims for any amount.

Court also have, with very rare exceptions, concluded that a tax refund suit—even if that includes stand-along cases for additional overpayment interest—is subject to the 2-year statute of limitations (from the IRS denial of the administrative claim) in section 6532.  Tucker Act claims, however, fall under the general 6-year statute of limitations (from the date the cause of action accrued, generally when the overpayment was scheduled): 28 U.S.C. § 2401 for district courts or 28 U.S.C. § 2501 for the CFC.

In these cases—Scripps, Pfizer, Bank of America, and Paresky—the taxpayers were arguing that their cases fit under “refund suit” jurisdiction.  And the government was arguing strenuously that their claims only qualified for jurisdiction under the Tucker Act.  Thus, when the amount at issue was over $10,000, the CFC would be the only available forum.

If taxpayers can always go the Court of Federal Claims, why is this important to them??

I think it’s primarily a matter of forum-shopping.  Pfizer’s case involved an issue—interest payable when a refund check is lost and has to be re-issued—for which there was a favorable Second Circuit precedent: Doolin v. United States, 918 F.2d 15, 18 (2d Cir. 1990).  Bank of America’s case, on the other hand, appears to have been filed in Western District of North Carolina to avoid an unfavorable Federal Circuit precedent, specifically, Wells Fargo & Co. v. United States, 827 F.3d 1026 (Fed. Cir. 2016).  (I’m guessing here, but it seems very likely from looking at the pleadings that Wells Fargo would have been a huge incentive to avoid the Federal Circuit.)

For Pfizer and Bank of America, the courts’ decision were not fatal.  Pfizer could still hope for the same result in the CFC; at least, I’m not aware of any negative precedent there.  Bank of America may have lost a significant portion, but not all, of its claim by winding up in the CFC.

The Pareskys, though, were not forum shopping.  In fact, they initially filed suit in the Court of Federal Claims.  But they faced a statute of limitations problem.  By the time they filed suit, the 6-year statute of limitations for Tucker Act claims had expired.  So the CFC dismissed their case for lack of jurisdiction but transferred it to the Southern District of Florida at their request.  A refund suit, for which the statute of limitations had not yet expired, was their only hope.  (The Eleventh Circuit pointed out in a footnote that the Tucker Act statute of limitations had not expired yet when the IRS denied their refund claim, so they still had time to file in the CFC.  And, of course, they could have filed suit even while the refund claim was pending.  Alas, they did not.)

Does this result make sense from a policy perspective?

Debatable.  There are two conflicting policies involved here.  On the one hand, Congress wanted most—and all large—Tucker Act claims to go to the CFC, because claims against the federal government are their area of expertise.  Thus, the $10,000 limit on Tucker Act claims in district court; provide easier access to local courts, but only for smaller cases where the difficulty and expense of litigating in a far-off forum would be relatively harsher.

On the other hand, Congress wanted taxpayers to be able to bring all federal tax refund suits in their local forum.  That may have reflected a judgement that: (a) the relative expertise of the CFC is less of an issue; and (b) there may be a lot more tax refund suits than Tucker Act claims, so it’s better to spread those out. Which of those policies should rule when the suit at issue is for additional interest on federal tax overpayments?  Hard to say.  There are fewer of these cases than tax refund suits, and it may be beneficial to establish precedents that will apply uniformly to all taxpayers.  But the same rationales for district court jurisdiction without a dollar limitation for refund suits might apply to these suits as well.  I doubt if Congress collectively gave it much thought.  If they had, perhaps they would have been comfortable with district courts hearing these cases, just as Pfizer, Bank of America, and the Pareskys wanted.  But we now have three circuit courts that have decided that’s not what Congress enacted.

So, is this really the end of the line for the Pareskys?

They’re really very sympathetic plaintiffs.  The dispute arose out of their losing a lot of money in the Bernie Madoff Ponzi scheme and filing refund claims to recoup taxes because of the loss.  (Rather ironic that Mr. Madoff passed away between oral arguments and the decision, isn’t it?)  This decision is pouring salt on the wound.  But, alas, I don’t see much hope at all for them.  They might ask for an en banc review or file a cert petition with the Supreme Court.  But I think both would likely be rejected.  (DOJ Tax Division might like to see this case go to the Supreme Court, to overturn Scripps, but I seriously doubt if they could convince the Solicitor General to support granting cert.)  And even if an en banc review by the Eleventh Circuit or cert by the Supreme Court were granted, I would certainly expect them to reach the same decision.

As far as the issue in general, without a Supreme Court decision, we may still see some of these cases crop up occasionally in other circuits.  The score is still only 3–1 and if the money involved is enough and precedents dictate that a district court would be a more favorable forum, taxpayers may take a shot at it.  But if the issue comes before any of the nine circuits remaining that still haven’t addressed it, I expect they would wind up agreeing with the Second, Eleventh, and Federal Circuits.

Filed Under: Interest, Overpayment Interest Tagged With:

Complications With Rolling Credit Elect Transfers – Part 2

February 5, 2021 by Leave a Comment

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.

Filed Under: Interest, Overpayment Interest Tagged With:

Complications With Rolling Credit Elect Transfers – Part 1

February 4, 2021 by 2 Comments

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.

Filed Under: Interest, Overpayment Interest Tagged With:

The Tide Keeps Going Out, Carrying Overpayment Interest Suits Away from District Courts

July 6, 2020 by Leave a Comment

We welcome back regular guest blogger Bob Probasco. Bob is the director of the Low Income tax Clinic at Texas A&M University School of Law. Prior to starting the clinic at Texas A&M, Bob had a long a varied career in different tax positions. Before law school, he spent more than twenty years in various accounting and business positions, including with one of the “Big Four” CPA firms and Mobil Oil Corporation. After law school and a year clerking with Judge Lindsay of the Northern District of Texas, he practiced tax law with the Dallas office of Thompson & Knight. He left T&K in 2014 and started a solo practice before switching to full time academia. Keith

We return to the jurisdictional dispute over taxpayer stand-alone suits claiming additional overpayment interest in excess of $10,000.  The latest development, a decision on July 2nd by the Federal Circuit in Bank of America v. United States, docket number 19-2357, continues a trend that I’ve been following for two years now.  Until recently, the only decision on this issue at the Circuit Court level was E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005), which concluded that district courts can hear such claims.  For years, most lower courts followed the Sixth Circuit.  But recently the tide turned.  Here’s a timeline of recent cases illustrating the change.

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First, the lower courts follow Scripps and agree that district courts have jurisdiction over these claims:

  • October 31, 2016:  The Southern District of New York follows Scripps in Pfizer, Inc. v. United States, 118 A.F.T.R.2d (RIA) 2016-6405 (S.D.N.Y. 2016) and decides it has subject matter jurisdiction.  On May 12, 2017, the court dismissed the case for lack of jurisdiction for failure to timely file the refund suit.  Prior discussion here.  The taxpayer appeals.
  • July 1, 2019:  The Western District of North Carolina follows Scripps in Bank of America Corp. v. United States, 2019 U.S. Dist. LEXIS 109238, 2019 WL 2745856 (W.D.N.C. 2019), and denies the motion to transfer the case to the Court of Federal Claims.  Prior discussion here.  The government appeals.
  • August 30, 2019:  In the Southern District of Florida, the magistrate judge’s report and recommendation in Paresky v. United States, 2019 U.S. Dist. Lexis 149629, 2019 WL 4888689 (S.D. Fla. 2019) follows Scripps.  The magistrate judge concludes that the court has subject matter jurisdiction but recommends dismissal in part for failure to file timely refund claims. Prior discussion here.

And then a break, with cases now holding that only the Court of Federal Claims, not district courts, have jurisdiction over these claims:

  • September 16, 2019: The Second Circuit reverses the S.D.N.Y., in Pfizer, Inc. v. United States, 939 F.3d 173 (2d Cir. 2019) and concludes there is no subject matter jurisdiction.  Prior discussion here.  The court transfers the case to the Court of Federal Claims, docket number 19-1803. Plaintiff files a motion for summary judgment on April 30, 2020.
  • October 7, 2019:  The District of Colorado agrees with Pfizer, in Estate of Culver v. United States, 2019 U.S. Dist. LEXIS 173235, 2019 WL 4930225 (D. Colo. 2019).  The court transfers the case to the Court of Federal Claims, docket number 19-1941.
  • October 21, 2019:  In the Southern District of Florida, the district court judge in Paresky v. United States declines to adopt the magistrate judge’s report and recommendation and follows Pfizer, dismissing the case for lack of subject matter jurisdiction.  Prior discussion here.  The taxpayers appeal.
  • July 2, 2020:  The Federal Circuit agrees with Pfizer and reverses the WDNC, in Bank of America Corp. v. United States. It remands the case to the WDNC, to sever some of the claims and transfer them to the Court of Federal Claims.

So now we have the Sixth Circuit holding that district courts have jurisdiction over such suits while the Second and Federal Circuits disagree, with one more circuit court considering the issue.  Mr. and Mrs. Paresky’s case is currently pending in the Eleventh Circuit, docket number 19-14589.  Appellants filed their primary brief on May 27, 2020.  The government’s brief is due on July 27, 2020.

When only one circuit court has ruled on a difficult issue, district courts – even in other circuits – tend to follow that decision.  But once another circuit court disagrees, the better analysis tends to win out and lower courts change direction.  It’s possible that the magistrate judge in Paresky, and the district court in Bank of America, would have reached a different conclusion if they were deciding after Pfizer.  My guess is that the Eleventh Circuit will agree with the Second and Federal Circuits on this issue.  This is still a small sample size, but I suspect the tide has turned decisively.

Caveat:  Bank of America lost in the Federal Circuit but has a strong incentive (see below) to seek review by the Supreme Court.  Similarly, the government may want a ruling by the Supreme Court to overturn Scripps once and for all.  With a circuit split, and if both parties ask the Supreme Court to hear the case – well, the Court hates tax cases but might take this one.  If so, all bets are off.

How did we get here?

Before I get into the court’s decision, a brief reminder why Bank of America, appealed from the Western District of North Carolina, wound up in the Federal Circuit instead of the Fourth Circuit. The government had moved to dismiss the case, or in the alternative to transfer it to the Court of Federal Claims, on the basis that the district court did not have jurisdiction for such cases. The district court denied both alternatives, as the court concluded it had jurisdiction. However, if a district court issues an interlocutory order “granting or denying, in whole or in part, a motion to transfer an action to the United States Court of Federal Claims,” a party can make an interlocutory appeal and the Federal Circuit has exclusive jurisdiction. 28 U.S.C. § 1292(d)(4). The government could have done the same in Pfizer, when the district court ruled against it on the first motion to dismiss for lack of subject matter jurisdiction, but it chose not to do so. In the second motion to dismiss, based on failure to timely file the refund suit, the government did not request transfer, so Pfizer’s appeal was to the Second Circuit.

Statutory interpretation

The jurisdictional provision at issue in these cases is 28 U.S.C. § 1346(a)(1). It has no dollar limitation. That’s the statute we rely on when filing tax refund suits, so I think of it as “tax refund jurisdiction.”  The taxpayers in these cases argued that it also covers stand-alone suits for overpayment interest, although technically those are not refund suits.  The alternative jurisdictional provision for district courts, the “little Tucker Act” at § 1346(a)(2), provides jurisdiction for any claim against the United States “founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department . . . .” but is limited to claims of $10,000 or less.  The comparable jurisdictional statute for the Court of Federal Claims, § 1491(a)(1), has no such limitation.  So, if § 1346(a)(1) covers stand-alone suits for overpayment interest, taxpayers can bring suit in either district court or the CFC.  If it doesn’t, and the claim exceeds $10,000, the only option is the CFC.

Here’s what § 1346(a)(1) says, with the relevant language italicized:

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

The language is very similar to Section 7422(a), which sets forth requirements for tax refund suits.  Because those requirements – exhaustion of administrative remedies and a shorter statute of limitations than for the little Tucker Act – have frequently been held not applicable to these stand-alone overpayment interest suits, the government argues that § 1346(a)(1) doesn’t apply to such suits either.

Overpayment interest doesn’t fall within the first two categories because it is neither tax nor penalty.  But Scripps interpreted the third category, “any sum alleged to have been excessive,” as broad enough to cover overpayment interest suits.  After all, the Supreme Court had stated in Flora v. United States, 362 U.S. 145, 149 (1960): “One obvious example of such a ‘sum’ is interest.”  Scripps concluded that the amount was “excessive” if you looked at how much the government retained rather than collected and, more importantly, focused on the entire balance of the account rather just individual components such as the overpayment interest.  (I provided an illustration of this last point here.)  The comparison to section 7422(a) was inapt because section 7422(a) includes a qualifying header (“No suit prior to filing claim for refund”); § 1346(a)(1) does not and therefore could include both refund suits and “non-refund” suits.

Both the Second Circuit and the Federal Circuit disagreed completely with that analysis.  The comment in Flora, in context, referred to underpayment interest (which is assessed and collected) rather than overpayment interest (which is paid out).  The structure of § 1346(a)(1), including the first two categories in the list, and the use of the present-perfect tense “have been” made it clear that it referred to amounts that had been previously paid to, or collected by, the IRS.  And the statutory language mattered much more than the header for section 7422(a) versus lack of such for § 1346(a)(1).

Legislative history

Both parties in Bank of America also pointed the court to legislative history in support of their positions.  In its opening brief, the government pointed out that the final version of the provision was understood by courts to establish a narrow exception to the $10,000 limitation for “little Tucker Act” claims – only for tax refund claims.  The government also focused on the Supreme Court’s discussions of the legislative history in Flora v. United States, 357 U.S. 63 (1958), and Flora v. United States, 362 U.S. 145 (1960).

Here is a summary of the arguments in the taxpayer’s brief: 

  • The predecessor statutes to § 1346(a)(1) were designed to eliminate several distinctions and inequities.  For example, the earlier provisions (a) for district court jurisdiction, requiring suing the Collector and could not brought after he died; and (b) for Court of Claims jurisdiction, did not allow for awarding interest.  Thus, in some instances, a taxpayer would have no way to recover overpayment interest.  In a floor statement introducing an amendment to the Revenue Act of 1921, a Senator noted those issues and stated that the amendment was intended to eliminate the problems.
  • The Assistant Chief Counsel of the Bureau of Internal Revenue represented, in a 1953 Senate subcommittee hearing, his opinion that the language of § 1346(a)(1) already covered stand-alone overpayment interest suits.
  • In connection with that same hearing, Treasury later provided by letter a list of several cases in district court involving stand-alone claims for interest.    

In its reply brief, the government took issue with the taxpayer’s arguments based on legislative history:

  • The Senator who introduced amendments to the Revenue Act of 1921 was concerned about tax refund claims, on which overpayment interest might be paid, rather than stand-alone claims for overpayment interest.
  • It was not entirely clear that the Assistant Chief Counsel’s statement at the 1953 Senate subcommittee hearing concerned stand-alone claims for overpayment interest.  In any event, a witness from the ABA testifying at the same hearing disagreed with the Assistant Chief Counsel’s opinion that the existing statute covered stand-alone claims. 
  • None of the 14 cases listed on the letter from Treasury of district court litigation concerned jurisdiction under § 1346(a)(1) for stand-alone claims of overpayment interest, the issue in Bank of America.  Only six cases involved overpayment interest at all, of which: (a) two declined to exercise jurisdiction; (b) two didn’t question jurisdiction; and (c) two were based on different jurisdictional provisions and involved claims under $10,000.

This brief summary doesn’t do the arguments justice, of course.  For those interested in more details, I suggest a review of the parties’ briefs, which provide a detailed history of the evolution of the jurisdictional provisions.  I was impressed by the thoroughness of both sides’ work, scratching and clawing for anything they could find or infer in support of their respective positions.  They did the best possible with what little was out there.

I count myself among those who consider legislative history relevant in interpreting ambiguous statutes, and a good tax lawyer (or judge) can find ambiguity in almost anything if they want to.  Even so, I considered these examples unlikely to persuade a court that had not already decided for other reasons.  I went back and looked at some of the original sources when reading the district court decision and they didn’t persuade me in either direction.  The Federal Circuit didn’t seem impressed either.

Impact on Bank of America

When I originally looked at the case, I thought that “most” of Bank of America’s claim would be eliminated if it lost in the Federal Circuit.  The third amended complaint was for $163 million, of which $141 million related to interest netting.  The interest netting claims seemed particularly vulnerable if Bank of America had to litigate in the CFC (see below), based on a cursory review of the complaint.  Now that I’ve reviewed the motion to dismiss more carefully, it appears that “most” overstated the potential impact on Bank of America, although it’s still significant.

The benefits of interest netting – the section 6621(d) adjustments to eliminate the interest rate differential – can be effected two ways.  The government can pay additional overpayment interest to bring that rate up to the underpayment interest rate, or it can refund underpayment interest to bring that rate down to the overpayment interest rate. 

Over $95 million of the benefit from interest netting came from years in which the adjustments were for reductions/refund of underpayment interest. A claim for refund of excessive underpayment interest clearly fits with § 1346(a)(1); under section 6601(e)(1), underpayment interest is treated as tax, except that it is not subject to deficiency procedures. 

Thus, there would be no basis for transferring those claims to the CFC.  (There were small amounts of overpayment interest in those years, presumably interest on the claimed refund of underpayment interest rather than directly from interest netting.  That overpayment interest would not be a disallowed stand-alone claim for overpayment interest; it would be permitted under ancillary jurisdiction.)  The government sought to transfer only $67 million of the total complaint amount to the CFC, of which only $44 million involved interest netting.  Assuming that the non-interest netting claims are not at a particular disadvantage in the CFC, Bank of America’s loss from the Federal Circuit’s decision may be only $44 million, or even less.  Well, to the taxpayer losing the claim, “only” is an inappropriate adverb; that’s still a lot of money.

Interest netting

Most taxpayers are perfectly willing to litigate interest cases in the CFC.  The CFC judges tend to have more experience with interest issues and most large interest cases are litigated there instead of district courts. In fact, Bank of America has another interest netting case pending there now. Taxpayers tend to bring substantial stand-alone interest cases in district court only to: (a) take advantage of favorable precedent in that circuit; or (b) avoid unfavorable precedent in the Federal Circuit.  Pfizer was an example of the former.  It wanted to rely on a favorable precedent, Doolin v. United States, 918 F.2d 15 (2d Cir. 1990).  It won’t necessarily lose its case elsewhere; it might persuade the CFC to reach the same decision as the Second Circuit did in Doolin.  Based on the complaint, I suspect Bank of America is an example of the latter, in this case trying to avoid an unfavorable precedent regarding interest netting, Wells Fargo & Co. v. United States, 827 F.3d 1026 (Fed. Cir. 2016).  (Prior discussion here.) 

Wells Fargo involved interest netting claims between separate corporations that had merged.  The Federal Circuit decided that, in such contexts, interest netting is only permitted if the period of overlap (an underpayment balance for one period and an overpayment balance for another period) began after the date of the merger. Here’s an illustration:

Company A had a $2.5 million underpayment balance for its 2008 tax year outstanding from 3/15/2009.  Company B had a $2 million overpayment balance for its 2011 tax year outstanding from 3/15/2012.  If the balances were still outstanding until paid/refunded on 12/1/2016, there was a $2 million overlap from 3/15/2012 (when the second balance began) until 12/1/2016 (when both balances ended).  During that overlap period, there was an interest rate differential; corporations earned from 1% to 4.5% less on overpayments than they paid on underpayments, and in this scenario the difference would more likely be 4.5% than 1%. 

If the companies merged in 2010, $2 million of the respective balances could be netted to avoid that differential, for the entire period from 3/15/2012 to 12/1/2016.  But if the companies merged in 2013, under Wells Fargo those balances could not be netted at all.  I think a better interpretation of the law would allow interest netting for part of the overlap period, starting from the date of the merger.  But the CFC will rule based on Wells Fargo, not based on my interpretation.

As noted above, Bank of America’s claims that will now wind up in the CFC include $44 million of interest netting benefits.  I don’t know if the entire $44 million will be denied based on Wells Fargo.  But (a) those claims involve Merrill Lynch’s tax years 1987, 1990, 1991, 1999, 2002, 2003, 2005, 2006, and 2007 tax years; and (b) Merrill Lynch merged with Bank of America on October 1, 2013.  I didn’t try to review the interest computations attached to the motion to dismiss, but I anticipate Bank of America stands to lose the vast majority of the $44 million.  Worth a cert petition to the Supreme Court?

Impact elsewhere?

The above discussion concerns how this case impacts Bank of America and more broadly other companies that might prefer to bring stand-alone overpayment interest suits in district court.  That doesn’t mean the impact of this line of cases is limited to overpayment interest.  Pfizer and Bank of America identified a certain type of claim that arises under the Internal Revenue Code but is not a tax refund claim for purposes of jurisdiction.  This distinction might affect not only the available forum, which is what I’ve been focusing on here, but also other issues. For example, a “non-refund claim” under the little Tucker Act will not be subject to the requirement to exhaust administrative remedies and will have a different statute of limitation.

Are there other examples of “non-refund claims” arising under the Code?There may well be, and Carl Smith pointed out one prominent recent example that cited Pfizer. On June 19, 2020, the district court of Maryland decided in R.V. v. Mnuchin, 2020 U.S. Dist. LEXIS 107420 (D. Md. 2020), that the government had waived its sovereign immunity with respect to the CARES Act economic impact payments (EIPs).  The plaintiffs claimed jurisdiction under, among others, the little Tucker Act, § 1346(a)(2).  That jurisdiction requires a separate “money-mandating” statute, for which the plaintiffs pointed to section 6428.  The government argued that section 6428 is a tax statute; any challenge to the denial of a credit falls within the jurisdiction of § 1346(a)(1) instead of § 1346(a)(2) and is subject to the restrictions of section 7422.  The plaintiffs’ failure to exhaust administrative remedies was fatal to their claim. 

The court dismissed the government’s motion to dismiss without prejudice.  It stated: “The Government argues that 26 U.S.C. § 6428 is not a money-mandating statute because it is a tax statute.  True.  But the two are not mutually exclusive.”  It cited Pfizer for that proposition.  To put it another way, a tax statute authorizes refund claims, but it also may authorize claims that are not “tax refund claims” for purposes of § 1346(a)(1) and not subject to section 7422 but are money-mandating provisions sufficient to support a Tucker Act claim.

The Advance Premium Tax Credit under the Affordable Care Act would likely be another “non-refund claim.” As with the EIPs, it is reconciled on the taxpayer’s tax return, but it is paid in advance pursuant to a clear money-mandating statute. Michelle Drumbl points out that the U.S. at one time had an advance earned income credit and other countries currently have similar advance credits. If Congress ever enacted her proposal for a transition to periodic payments rather than when the tax return is filed, that would likely also qualify as a “non-refund claim.”

What about refundable credits that are not paid in advance? That might be a harder argument to make; it’s not clear whether there is a money-mandating provision other than section 6402(a), working with section 6401(b)(1). But “hard” doesn’t always mean “impossible.” I haven’t researched enough to know whether a taxpayer has ever tried filing suit for payment of refundable credits based on the little Tucker Act instead of § 1346(a)(1). It might be the only route for recovery for a taxpayer who filed a return claiming a refund (based on a refundable credit) more than three years after the due date. The six-year statute of limitations for a little Tucker Act suit might avoid the problem of the “look back” limitation of section 6511(b)(2). It might be worth a try if you have a client with the right facts.

After all, ten months ago we weren’t sure the government would convince a court that stand-alone overpayment interest suits are “non-refund claims” for which district court jurisdiction is only available under the little Tucker Act. Now, the government has won in the Second and Federal Circuits and seems to have momentum heading into the Eleventh Circuit.

Postscript

While I was working on this post, Jack Townsend posted on his blog concerning the Federal Circuit’s decision in Bank of America.  Jack’s observations are always worth reading.

Filed Under: Federal Courts - Jurisdiction, Overpayment Interest Tagged With:
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