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

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

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

Setting the stage

There are two district court jurisdictional statutes at issue in these cases. This first is 28 U.S.C. § 1346(a)(1). It has no dollar limitation. That’s the statute we rely on when filing tax refund suits, so I will refer to it as “tax refund jurisdiction.” But I will keep that term in quotes; taxpayers sometimes argue successfully that this covers suits for overpayment interest, although technically those are not refund suits.

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

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

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

Brief recap and current status of Pfizer

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

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

The case is currently on appeal. Pfizer asked the court, if it affirms the decision below, to transfer the case to the Court of Federal Claims (CFC). That would allow the case to proceed, as suit was filed within the six-year general statute of limitations for Tucker Act claims, although the Second Circuit precedent Pfizer wanted to rely on would not be binding in the CFC. Keith and Carl filed an amicus brief arguing that even if the filing deadline in section 6532(a) applies, it is not jurisdictional and is subject to estoppel or equitable tolling arguments. At oral arguments on February 13, 2018, the Second Circuit panel asked the parties whether it could assume without deciding that claims for overpayment interest fell within the terms of § 1346(a)(1) and proceed to the statute of limitations issue. Roughly 18 months later, we’re still waiting for an answer.

Brief recap and current status of Paresky

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

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

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

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

Interest Computation and Something Else

Guest blogger Bob Probasco returns with a lesson on tax overpayments, taking us through a helpful comparison between overpayment rules and those applicable to wrongful liens and levies. It isn’t always simple to properly characterize a claim. Christine

At the end of June, the IRS released CCA 201926001, addressing a question regarding computation of overpayment interest. The fact pattern was a bit out of the ordinary, so I understand why a field attorney might want clarification. The answer that the interest specialist reached seems reasonable as a practical matter. However, there are some complications and issues that the CCA didn’t address or even acknowledge. The interest computation discussion in the CCA was fairly straightforward and might not warrant discussion here by itself; I found the other questions more intriguing.

The interest computations

The issue was stated as: “Whether interest is allowable on the refund of a remittance made by a non-liable spouse that the Service incorrectly applied to the liable spouse’s tax liability?” You can probably anticipate the fact pattern.

  • Husband and Wife 1, who divorced in Year 7, had joint tax liabilities for multiple earlier years.
  • Husband married Wife 2 in Year 9, when the joint tax liabilities of Husband and Wife 1 were still outstanding.
  • Husband and Wife 2 bought real property in Year 11.
  • The Service filed a Notice of Federal Tax Lien with respect to Husband’s joint tax liability, which attached to the real property that Husband and Wife 2 had purchased.
  • Husband and Wife 2 wanted to sell the property, so they sought a certificate of discharge of the lien, in return for payment equal to the value of the government’s interest in the property. They sold the property in Year 13.

So far, so good. But the IRS’s Conditional Commitment to Discharge (Letter 403) overstated the amount to be paid, as almost the full amount of the sales proceeds rather than only Husband’s half-interest. Alas, no one noticed and corrected the error in time, so the title company sent the full amount of the sale proceeds to the IRS. The IRS received and applied the proceeds against the joint tax liabilities for Years 1 and 2 of Husband and Wife 1, sometime after April 15th of Year 13.

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Later in Year 13, Wife 2 realized that her half-interest in the sale proceeds had been applied to tax balances for which she was not liable, and she filed a claim for refund. On the same date she filed the refund claim, she also filed a request for assistance with the Taxpayer Advocate Service.

The IRS agreed that Wife 2 was entitled to get the money back and prepared to issue a refund in Year 14. But before the IRS issued the refund, it determined that Husband and Wife 2 also had unpaid joint tax liabilities, for Years 12 and 13. So the IRS credited some of Wife 2’s money to those balances. As we all know, when a taxpayer makes an overpayment of her tax liability, the IRS has the authority under Section 6402(a) to offset it against any other outstanding tax liability, e.g., for another year, and only refund the amount (if any) left over. There apparently was still a remaining amount to be repaid to Wife 2, which had not yet been refunded.

Now we get to the advice provided in the CCA: how much overpayment interest should the IRS pay to Wife 2 on that money applied to Years 12 and 13, or refunded? That was a fairly straight-forward analysis. Because Wife 2 had no liability for Years 1 and 2, to which the sales proceeds were applied, she had an overpayment. Interest on an overpayment is allowable under Section 6611. Interest begins on the date of the overpayment, regardless of whether the overpayment is credited to another liability or refunded. Here, that was the date that the proceeds from the sale of the real property were received and applied to Husband and Wife 1’s tax liabilities, sometime after April 15th of Year 13.

For the portion of the overpayment that was credited to Husband and Wife 2’s liability for Year 12, interest stops on the due date of that return, or April 15th of Year 13. Because the date of the overpayment was after that date, there would be no overpayment interest on the amount applied to the liability for Year 12. But there would be overpayment interest on the amount applied to the liability for Year 13, for the period from the date of the overpayment to April 15th of Year 14. For the remainder of the overpayment, to be refunded to Wife 2, interest runs from the date of the overpayment to a date no more than 30 days before the date of the refund check.

Pretty straight-forward and you may be wondering why a CCA was needed. Or you may have noticed that the issue as stated wasn’t how to determine the amount of allowable interest, but whether interest was allowable. And perhaps you raised the same question I did:

Did Wife 2’s share of the sale proceeds, improperly applied to Husband and Wife 1’s joint tax liabilities, really result in an “overpayment”?

Overpayment or something else?

First things first. Why might it be important to know whether the amount at issue is classified as an overpayment? Three important Code sections that apply to overpayments come to mind. The person making the overpayment can bring suit to compel the IRS to refund it, with a particular statute of limitations and a requirement to first exhaust administrative remedies. The IRS can, instead of refunding the overpayment, credit all or a portion against outstanding tax liabilities for other periods by the same person. With certain exceptions, the government pays interest to the person who made the overpayment when refunding or crediting it.

The Code doesn’t expressly define what an overpayment is. Generally, it’s considered to arise when a taxpayer pays more than the correct amount of the tax liability. But Wife 2 falls into a category that is sometimes referred to as “persons other than taxpayers” or “third parties” – that is, persons who make payments (voluntarily or involuntarily) of other persons’ tax liabilities. In at least some circumstances, those payments are not treated the same way as overpayments for purposes of judicial review, offset, or interest.

If the IRS had levied against the sales proceeds, that would be a wrongful levy. Judicial review is available, either before or after property has been surrendered or sold and without the requirement to exhaust administrative remedies, through a suit in district court (Section 7426(a)(1)). Wrongful levy suits have to be brought within two years of the levy, but if the third party makes an administrative claim under Section 6343(b), the period is extended to the earlier of 12 months after the administrative claim was filed or six months from the date of disallowance. A wrongful levy suit, rather than a refund suit, is the exclusive judicial remedy. Sections 6343 and 7426 refer to the return of property or payment of a judgment, rather than refund of an overpayment. Sections 6343(c) and 7426(g) are specific interest provisions, separate from Section 6611 but applying the overpayment rate from Section 6621.

Of course, the IRS had not levied Wife 2’s property. The IRS merely required payment in return for a discharge of the lien, allowing Husband and Wife 2 to sell the real property. The situation was very similar to that in United States v. Williams, 514 U.S. 527 (1995), where the plaintiff was coerced to authorize payment from the sale proceeds in order to convey clear title. She later submitted a refund claim and, when it was denied, filed a refund suit. The Court concluded that the amount the plaintiff sought to recover was an overpayment and that she could do so by a refund suit. This holding was based largely on the fact that there was no other feasible judicial remedy.

But in the Internal Revenue Service Restructuring & Reform Act of 1998, Congress enacted Sections 6325(b)(4) and 7426(a)(4) to address the problem noted in Williams. The owner of the property can deposit money equal to the amount determined by the IRS as the value of the government’s interest in the property (or furnish an acceptable bond) and the IRS “shall” – instead of “may” as in Section 6325(b)(3) – discharge the lien. The IRS “shall” refund the deposit, with interest at the overpayment rate of Section 6621, to the extent that it determines either that the value of the government’s interest was lower than previously determined or that it can satisfy the outstanding liability from other property. And just in case the IRS doesn’t agree or is slow to respond, the owner of the property can file suit in district court, to re-determine the amount of the government’s interest in the property, within 120 days after the certificate of discharge is issued. The IRS has concluded that this is the judicial remedy for an allegedly wrongful lien; a refund suit, as in Williams, is no longer an option. Most courts that have considered the issue have agreed with the IRS; Munaco v. United States, 522 F.3d 651 (6th Cir. 2008) is a good example and cites others.

How do the above provisions related to wrongful levies and wrongful liens line up against the three key aspects of how the Code treats overpayments?

Judicial review

There is a much shorter period of time to file suit for wrongful levy or wrongful lien, than the statute of limitations for a refund suit, which arguably can stay open indefinitely if the refund claim is never disallowed. A refund suit is not available for wrongful levies and liens. It certainly makes sense to require action by the third party promptly. Once the IRS collects from the third party, collection actions against the person who is actually liable for the tax may cease. A challenge by the third party does not toll the statute of limitations for collection and if the collection from the third party is held invalid, the IRS will want to go back to the liable party.

However, in the fact pattern of the CCA, the shorter statute of limitations for a wrongful lien suit might not have been a constraint. Wife 2 did file Form 911, Request for Taxpayer Advocate Service Assistance. In addition to the salutary effect on IRS personnel of the possibility of a Taxpayer Assistance Order, under Section 7811(d) the request itself suspends any relevant statute of limitations pending any relief that TAS might order. This was recently addressed in a wrongful levy case, Rothkamm v. United States, 802 F.3d 699 (5th Cir. 2015). (Note, however, that tolling under section 7811(d) is not automatically tracked by the IRS, and the National Taxpayer Advocate has recommended repealing the provision.)

Offset against other tax liabilities

For wrongful levies, Section 6343 refers to the return of property, rather than refund of an overpayment, and does not mention offset against other tax liabilities. For wrongful liens, Section 6325(b)(4) refers to the refund of a “deposit” and again does not mention offset against other tax liabilities. (The term “deposit” is explicitly distinguished from the term “payment” in other contexts; the former must be returned, regardless of the statute of limitations for refunds, on request without requiring proof of an overpayment.) And Section 7426 refers to payment of judgements, again without any mention of crediting the judgement amount against other tax liabilities. None of these provisions references Section 6402(a). A definitive court ruling would be nice but even without it I think the best interpretation of the statutory framework is that there is no right to unilaterally offset recoveries from a wrongful levy or lien against other liabilities the taxpayer may have.

Not allowing the IRS to offset these remedies for wrongful levies or liens against a third party also makes sense. The existence of an overpayment by the party liable for the tax does not imply any error or wrongful action by the IRS; a wrongful levy or lien does. Further, offset could be abused by the IRS to avoid the consequences of such error or wrongful action as well as procedural safeguards for collection actions in those other years.

An example, albeit extreme, of such abuse in a different context is described in Kabbaby v. Richardson, 520 F.2d 334 (5th Cir. 1975). Local police arrested the plaintiff and found cocaine, a substantial amount of cash, and assorted weapons and pieces of jewelry in his car. The police notified the IRS, which issued a termination assessment and seized the property. The IRS later abated the assessment, presumably because of previous court decisions invaliding such assessments when the IRS did not issue a subsequent notice of deficiency. But the IRS refused to return the property because it was an “overpayment” and could be credited to the plaintiff’s unsatisfied tax liabilities for other years. The court rejected that argument. The termination assessment without appropriate factual foundation was an abuse of authority. Allowing the IRS to keep the property would give the IRS an advantage and defeat procedural safeguards. Some other courts have disagreed; these are not always sympathetic plaintiffs.

Interest

Interest is payable on recovery of a wrongful levy or deposit to challenge a wrongful lien, as well as on a judgement resulting from judicial review in district court. However, Sections 6325, 6343, and 7426 contain separate interest provisions – with references to the overpayment interest rate in Section 6621 – rather than simply stating that Section 6611 applies. The amounts may be the same but other interest provisions, such as “restricted interest” and interest netting, may not apply to interest paid pursuant to Sections 6325, 6343, and 7426.

Based on these differences in judicial review, authority to offset, and interest, I think there’s a very strong case that Wife 2’s share of the sale proceeds, paid by mutual mistake in order to discharge the lien, was not an overpayment.

If this was not an overpayment, what effect does that have?

Obviously, the fair result is that Wife 2 can recover her share of the sale proceeds. But if the IRS had resisted, it’s not entirely clear whether Wife 2 was legally entitled to any relief at all. She apparently didn’t use the process set forth in Section 6343(b)(4). When she and Husband sought a certificate of discharge, she didn’t request a substitution of value as a deposit to be held by the IRS pending a determination whether the value of the government’s interest in the property included her half-share. If she had noticed the error in time, she might have done that or even obtained a revised Letter 403. It appears that she and Husband instead made a payment under Section 6343(b)(2), with a later refund claim. If Sections 6343(b)(4) and 7426(a)(4) really are the exclusive remedies for a wrongful lien, the IRS might have been able to push back successfully. Perhaps a court would decide that a refund claim and suit under Williams should still be available, but it seems unlikely.

Assuming that the IRS did the right thing and agreed that she should get her share of the sale proceeds back, though, could the IRS unilaterally offset part of that against her and Husband’s tax liabilities Year 12 and 13? I’m not aware of any case law specifically on point but for the reasons described above I think Section 6402(a) doesn’t apply to such amounts and the IRS has no authority to make such offsets unilaterally. Husband and Wife 2 may have consented to that offset, because they wanted to resolve the liabilities or didn’t want to force the IRS to jump through the procedural hoops for a levy, but the CCA doesn’t mention anything about that. Other taxpayers might not want to give up the cash.

What about interest computation with respect to the credits to Husband and Wife 2’s tax liabilities for Years 12 and 13? The CCA’s answer is reasonable but how can you evaluate whether it’s legally correct? Section 6325(b)(4)(B) doesn’t provide the answer because it also doesn’t provide for offset against other tax liabilities.

Conclusion

Tax law is not always clear – as Bayless Manning ponders in Hyperlexis and the Law of Conservation of Ambiguity: Thoughts on Section 385, 36 Tax Law. 9 (1982):

Consider the United States Constitution. The Constitution is open-ended, generalized and telescopic in character. What has it spawned? Pervasive ambiguity and unending litigation.

Contrast the extreme counter-model of law, the Internal Revenue Code and its festooned vines of regulations. The Code and regulations are particularized, elaborated and microscopic in character. What have they spawned? Pervasive ambiguity and unending litigation.

I might have reached the same answer as in the CCA. Sometimes a reasonable answer based on analogy is the best that can be achieved. The final result seems fair.

Sixth Circuit Follows Second on Overpayment Interest for Not-for-Profit Corps

In late April of this year, I wrote a post on the Second Circuit case, Maimondies, where the Court determined if a not-for-profit corporation that was exempt from income tax under Section 501(c)(3) was a “corporation” for overpayment and underpayment interest rates.  The same issue was decided by the Sixth Circuit in August in United States v. Detroit Medical Center.

The issue in Detroit Medical is that “corporations” under Section 6621(a)(1) receive interest at a lower rate  that non-corporations on overpayments of tax.  The not-for-profit corporation had an overpayment of employment taxes paid on medical residents (exact same issue as Maimondies) and believed it should receive interest at the non-corporate rate.  Detroit Medical’s argument is based on a blend of policy arguments and statutory construction.   The IRS disagreed, arguing a corporation is a corporation, profit or not.  Here is the issue as stated by the Court:

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Consider our task today. The question at hand sounds simple enough: Should a nonprofit corporation be treated like a for-profit corporation when it comes to the interest it receives on overpaid taxes? Now consider the question in the context of the Internal Revenue Code:

(a) General rule:

(1) Overpayment rate. The overpayment rate established under this section shall be the sum of—

(A) the Federal short-term rate determined under subsection (b), plus

(B) 3 percentage points (2 percentage points in the case of a corporation).

To the extent that an overpayment of tax by a corporation for any taxable period (as defined in subsection (c)(3), applied by substituting “overpayment” for “underpayment”) exceeds $10,000, subparagraph (B) shall be applied by substituting “0.5 percentage point” for “2 percentage points.”

(2) Underpayment rate. The underpayment rate established under this section shall be the sum of—

(A) the Federal short-term rate determined under subsection (b), plus

(B) 3 percentage points.

. . .

(c) Increase in underpayment rate for large corporate underpayments

(1) In general. For purposes of determining the amount of interest payable under section 6601 on any large corporate underpayment for periods after the applicable date, paragraph (2) of subsection (a) shall be applied by substituting “5 percentage points” for “3 percentage points”.

. . .

(3) Large corporate underpayment. For purposes of this subsection—

(A) In general The term “large corporate underpayment” means any underpayment of a tax by a C corporation for any taxable period if the amount of such underpayment for such period exceeds $100,000.

(B) Taxable period. For purposes of subparagraph (A), the term “taxable period” means— (i) in the case of any tax imposed by subtitle A, the taxable year, or (ii) in the case of any other tax, the period to which the underpayment relates.

What starts as a basic question gets less basic the more one reads. Yes, this is a tax case. Some complexities—different rules for overpayments and underpayments, different interest rates for different taxpayers, some exceptions to some rules—come with the territory. But the first sign that the author of this provision was not thinking of his readers appears in the parenthetical of the flush paragraph: “To the extent that an overpayment of tax by a corporation for any taxable period (as defined in subsection (c)(3), applied by substituting ‘overpayment’ for ‘underpayment’) exceeds $10,000, subparagraph (B) shall be applied by substituting ‘0.5 percentage point’ for ‘2 percentage points.’” The meaning of this exception turns on a cross reference to another subsection that applies to the opposite form of payment mentioned in the first subsection but only for “C corporation[s],” not “corporations” in general.

The Sixth takes a strict statutory construction look at the statute, first determining if the entity is a “corporation”, finding if the statute does not specifically define a term fully then Congress intends to adopt its customary meaning.  The Court found “corporation” generally includes not-for-profit corporations, looking to Chief Justice Marshall 1819 holding in Trustees of Dartmouth College v. Woodward.  The Second Circuit had cited to this case, and, not to be outdone, the Sixth Circuit decided to look even further back through legal history, citing to the 1612 holding in The Case of Sutton’s Hospital where the nonprofit was treated as a corporation.  And, to the writings of William Blackstone in 1753, who listed three general types of corporations, including charitable or “eleemosynary” as he termed them.  The Court then looks to various places in the Code where charitable entities are referred to as corporations, and various other everyday uses of the term.

Finding the entity was clearly a “corporation”, the Court then looked to the hanging language and the reference to (c)(3).  There the Court held that the parenthetical modified only the taxable period, and not the remainder of the paragraph, so the c-corporation language did not modify (a)(1) to only apply to c-corporations.  The Sixth Circuit provides a lengthy discussion about why this is the correct statutory interpretation, which is similar to that in the Second Circuit holding.

The Court does note that this is a strange statutory design, to have the nonprofit receiving less interest than Warren Buffett, musing that perhaps Congress had not thought it through because nonprofits don’t pay income tax.

In the final paragraph, the Court does note that it is in agreement with the Second Circuit (the first reference to the case).  This is probably on appeal in other circuits at this point, as it appears there were a lot of nonprofit hospitals in the same position following Mayo.  As the Tax Court has previously held that the S-corporations were not subject to the lower rate based on the same provisions, there is at least some potential for another circuit to hold differently regarding not-for-profits, providing a split.  We shall see.

Ford v US: Supreme Court Weighs in on Lower Court Jurisdiction in Interest Disputes

Yesterday, the Supreme Court granted cert and remanded the case of Ford v US back to the Sixth Circuit.  The case on the merits involves the question as to when Ford is entitled to receive overpayment interest on about $875 million of deposits it made that it subsequently requested the IRS treat as advance payments.  Later, Ford and IRS both agreed that Ford overpaid its taxes and Ford received a refund of the overpaid amounts. IRS and Ford disagreed on when the payments should generate overpayment interest. I will briefly discuss the interesting jurisdictional issue that the Court raised, as it brings into question whether the case should have been brought originally in the Court of Federal Claims, and not a district court.

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Ford and the US disputed when the interest should have run on its overpayment under Section 6611(b)—Ford said the date should be when it first remitted its deposits; the US said interest ran only from when Ford requested that the deposits be treated as advance payments of tax.

The Sixth Circuit agreed with the government’s interpretation. One interesting part of the case is that the Sixth Circuit decided the case, in part, on the basis that Section 6611(b) was a waiver of sovereign immunity, and those waivers should be strictly construed.

In its cert petition, Ford argued that the Sixth Circuit impermissibly framed Section 6611(b) as the applicable provision waiving sovereign immunity. Instead, Ford argued 28 USC 1346(a)(1) was the provision waiving sovereign immunity; 6611(b) was a substantive provision that was entitled to no special governmental deference. The reason Ford believed this was important is that it opened the door to a construction of Section 6611(b) that was not tethered to the principle that provisions waiving sovereign immunity are to be construed strictly in favor of the government.

In its response to the cert petition, DOJ argued for the first time that 28 USC 1346 (giving concurrent jurisdiction to the court of federal claims and district courts) was not the correct statute conferring jurisdiction on the lower courts. I will repeat the government’s position below as set out in its response in opposition to the cert petition:

Petitioner asserts (Pet. 17 n.1) that Section 1346(a)(1) itself provides the requisite “express congressional consent to the award of interest separate from a general waiver of immunity to suit.” Shaw, 478 U.S. at 314. Section 1346(a)(1) grants jurisdiction to district courts (concurrent with the Court of Federal Claims) over “[a]ny civil action against the United States for the recovery of *                  *                  * any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.” 28 U.S.C. 1346(a)(1). That language does not literally encompass (and, a fortiori, does not unambiguously authorize) petitioner’s current suit. Petitioner does not seek to recoup any prior payment made to the government that was “excessive” or “wrongfully collected,” but instead seeks additional interest on an overpayment that has already been refunded.

As explained above, however, the term “sum” in Section 1346(a)(1) is modified by the phrase “excessive or in any manner wrongfully collected under the internal- revenue laws.” That phrase might encompass interest that the taxpayer has paid over to the IRS and seeks to recoup, as when the IRS assesses additional tax and interest, and the taxpayer pays the full assessment and then sues for a refund.

The interest that petitioner seeks here, however, was never in petitioner’s possession, and petitioner does not assert that it is either “excessive” or “wrongfully collected.” Thus, even apart from the fact that Section 1346(a)(1) does not specifically mention interest, the provision does not literally authorize petitioner’s current suit.

In a footnote (note 9), the government suggested the result that the Supreme Court took:

“[b] ecause binding Sixth Circuit precedent held that Section 1346(a)(1) vests district courts with jurisdiction over suits like this one, the government did not argue below that the district court lacked jurisdiction over this case….This Court, however, obviously would not be bound by that circuit precedent.”

Earlier, in its response (n. 3), DOJ stated that it believed the Tucker Act controlled. The Tucker Act is found at 28 U.S.C. 1491(a), and is a general statutory provision providing for waiver of sovereign immunity on certain claims, and which vests jurisdiction in the Court of Federal Claims.

Since the parties in the lower courts did not address whether the Tucker Act, and not 28 USC 1346, formed the basis for waiver of sovereign immunity, the Supreme Court remanded the case back to the Sixth Circuit. The Sixth Circuit will now directly consider the jurisdictional issue. In either case, I believe Ford is correct that conflating 6611(b) with either of the two provisions waiving sovereign immunity is an error, and the courts will likely consider the merits as to when interest is due apart from statutory construction principles tied to sovereign immunity.

As an aside, the possibility of Ford decreasing lower court diversity through funneling these types of cases exclusively to the Court of Federal Claims, rather than the myriad district courts, ties in nicely with Keith’s prior post on the Golsen rule. Jack Townsend too takes up the issue of specialized court review of tax cases, with an excellent post linking articles that have discussed the issue.

Later this week, we will post as to the merits of the parties’ claims on when overpayment interest was due to Ford.

 

 

 

 

It May Actually Pay (More Interest) To Be Correct When Filing.

I am doing some work with Les on Chapter 6 of Saltzman and Book on overpayment interest.  I was familiar with the 45 day grace period for the Service on overpayment interest under Section 6611(e), and I was also familiar with the notion that the Service could cease paying interest some time before cutting the check for the taxpayer under Section 6611(b).  I was surprised to see how the provisions work together when the Service issues a refund based on Service adjustments, not based on taxpayer calculations or claims.

Section 6611(b)(2) states that interest will be paid “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…”  This allows the Service to cease paying interest while the check is being written and placed in the mail.

When a refund is due to a taxpayer and is reflected on the initial return, the language of the Section 6611(e)(1) indicates, “if any overpayment of tax imposed by this title is refunded within 45 days after the last day prescribed for filing the return of such tax…or, in the case of a return filed after such last date, is refunded within 45 days after the date the return is filed, no interest shall be allowed…”    For amended returns and claims for credits that result in refunds, there is a similar rule under Section 6611(e)(2), stating, “[if] such overpayment is refunded within 45 days after such claim is filed, no interest shall be allowed on such overpayment from the date the claim is filed until the day the refund is made.”  The rule is simple, if the Service issues the refund promptly on an initial return, no interest is due.  For an amended return, if the refund is paid within 45 days of the taxpayer filing the amended return, no interest is due during that 45 day period.  If the refund is paid on the 46th day, interest is due during the 45 day period, but the Service might be able to use Section 6611(b)(2) to reduce the amount of days interest must be paid.

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When the Service, however, determines there is an overpayment and issues a refund, the Code is drafted differently.  Section 6611(e)(3) provides interest is reduced by an amount that would have been accrued for 45 days regardless when the refund occurs, and states, “interest on such overpayment shall be computed by subtracting 45 days from the number of days interest would otherwise be allowed with respect to such overpayment.”  Here, it does not matter when the Service issues the refund; the Service is simply allowed to reduce the interest by the amount due for 45 days. This is, arguably, less of an incentive to promptly issue the refund.

I’m not certain the policy reason behind this difference.  Perhaps it is because knowing exactly when the Service makes its adjustment would be difficult, or Congress wanted to be sure the Service had sufficient time to thoroughly review the matter.  Maybe it is just a reward for finding the error.  The Joint Committee report did not provide any insight.  Both subsections (e)(2) and (e)(3) were enacted at the same time, and the Committee report simply indicates the Service should be entitled to the same 45 day period as with initial returns.  The full language is found at the bottom of this post.

Without giving it much thought, I assumed that the Service’s ability to stop interest under Section 6611(b)(2) ran at the same time as the 45 day interest holiday under Section 6611(e)(3), but the IRS takes the position that the two provisions run consecutively not concurrently.  In internal guidance, the Service indicated that “would otherwise be allowed” under Section 6611(e)(3) was a reference to, or at least included, Section 6611(b)(2).  See SCA 199917002 (Oct. 21, 1998). The concept is that the interest otherwise allowed would be reduced by Section 6611(b)(3), which I believe is thirteen days for individuals and nine for businesses.  These are the time frames of less than 30 days the Service has selected under its authority found in Section 6611(b)(3).   The idea that the two periods run consecutively is also reflected in the Manual, although without the reasoning, at IRM 20.2.4.7.5.5(5).

The Committee Report is again not instructive in the reasoning for the difference.  Perhaps more in depth research of the history would provide more insight.  Saltzman and Book Chapter 6, which deals with interest, only highlighted that the interest was reduced by 45 days.  Bittker and Lokken, Section 114.1, note 45 highlights Section 6611(e)(3), and states “[p]resumably, the latter rule means that the overpayment bears no interest for the 45 days preceding the date of the refund.”  This understates the amount of time the Service believes it does not have to pay interest. I do not think the BNA portfolio touches on the topic.

It seems strange to have two separate policies in largely the same case.  Although at first my knee-jerk reaction was that the Service was overreaching, from reviewing the statute, the Service position seems correct.  So, no call to arms or reason to challenge the statute, but an interesting anomaly which must come up somewhat frequently.

Here is the majority of the committee report from the 1993 changes to Section 6611, which enacted (e)(2) and (e)(3):

Present Law.

No interest is paid by the Government on a refund arising from an original income tax return if the refund is issued by the 45th day after the later of the due date for the return (determined without regard to any extensions) or the date the return is filed (sec. 6611(e)).

There is no parallel rule for refunds of taxes other than income taxes (i.e., employment, excise, and estate and gift taxes), for refunds of any type of tax arising from amended returns, or for claims for refunds of any type of tax.

If a taxpayer files a timely original return with respect to any type of tax and later files an amended return claiming a refund, and if the IRS determines that the taxpayer is due a refund on the basis of the amended return, the IRS will pay the refund with interest computed from the due date of the original return.

Reasons for Change.

The committee believes that it is inappropriate for the payment of interest on tax refunds to be determined by the type of tax involved; all types of taxes should be treated similarly. The committee further believes that it is appropriate to alter the interest rules to provide a 45-day processing period with respect to amended returns, claims for refund and IRS-initiated adjustments.

Explanation of Provision.

No interest is to be paid by the Government on a refund arising from any type of original tax return if the refund is issued by the 45th day after the later of the due date for the return (determined without regard to any extensions) or the date the return is filed.

A parallel rule applies to amended returns and claims for refunds: if the refund is issued by the 45th day after the date the amended return or claim for refund is filed, no interest is to be paid by the Government for that period of up to 45 days (interest would continue to be paid for the period from the due date of the return to the date the amended return or claim for refund is filed). If the IRS does not issue the refund by the 45th day after the date the amended return or claim for refund is filed, interest would be paid (as under present law) for the period from the due date of the original return to the date the IRS pays the refund.

A parallel rule also applies to IRS-initiated adjustments (whether due to computational adjustments or audit adjustments). With respect to these adjustments, the IRS is to pay interest for 45 fewer days than it otherwise would.