Refund Claim Time Limits Create an Unwelcome Barrier

Today’s post is from occasional guest blogger Marilyn Ames, a retired Chief Counsel attorney. Marilyn is a Contributing Author who works with me on Saltzman and Book, IRS Practice & Procedure. She and I recently substantially revised the chapter on statute of limitations relating to refund claims, one of the trickiest areas in tax procedure. We also have just completed the last treatise update of the 2020 calendar year, and in that update we came across the sad case of Koopman v United States, which, as Marilyn discusses below, highlights how the rules in Section 6511 can lead to some harsh results. Les

For even the most experienced tax lawyers, one of the most confusing parts of the Internal Revenue Code is Section 6511, which sets out the statute of limitations for refund claims. For most claims, the requirements for filing a timely refund claim are contained in Section 6511(a) and (b), which consists of two parts. First, Section 6511(a) requires the claim for the refund to be filed with a period of three years from the time the return was filed or two years from the time the tax was paid. However, this is only the first hurdle that a taxpayer must successfully cross in order to get a refund. Section 6511(b) then provides that the amount of the refund is limited to the tax paid within the three-year period immediately before the claim is filed if the taxpayer filed the claim within three years from filing the return, as set out in section 6511(a). If the taxpayer had an extension to file the return, that period is added to the three-year period of subsection 6511(b) for determining the amount of the claim allowed. If the claim was filed within subsection (a)’s two-year period, then the refund is limited to the tax paid within the two years immediately prior to the claim. The two-year rule allows taxpayers to file a claim for refund if the taxpayer pays the tax more than three years after filing the return, and then wishes to challenge some aspect of the tax within two years of the payment. The subsection (b) limitations are often referred to as the “look-back” rules. Because of the look-back rules, taxpayers can file a claim for refund that is timely, but still be barred from receiving any part of the refund. The Supreme Court determined in United States v. Clintwood Elkhorn Mining Co. (553 US 1 (2008)) that taxpayers must meet the Section 6511 requirements in order for the court to have jurisdiction to hear a refund suit. (It should be noted that Section 6511 has a long list of exceptions to the Section 6511(a) and (b) requirements that apply in special cases.)

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These two requirements work together in a sometimes-Byzantine way that can create results that seem unfair to taxpayers.  The recent case of Koopman v. United States decided by the Court of Federal Claims in September of this year, illustrates the difficulties a taxpayer can encounter when trying to meet the requirements of both subsections (a) and (b) of Section 6511.  The taxpayer, William Koopman, retired from United Airlines in 2001. When he retired, he was covered by United’s non-qualified deferred compensation plan. Because of the special timing rule for FICA taxes, Mr. Koopman was required to pay the relevant portion of FICA on the present value of his deferred compensation in 2001, the year he retired, although he was to receive his benefits under United’s plan from 2001 through 2006. Unfortunately for Mr. Koopman, United filed a Chapter 11 bankruptcy in 2002, and he only received $248,293 of his deferred compensation instead of the $415,025.91 on which he paid FICA tax.  Instead of cash, he eventually received common stock in partial compensation, with the last distribution of the stock occurring in April of 2007.  

Mr. Koopman, unhappy he had paid FICA taxes on compensation he did not receive, filed a claim for refund in August of 2007 seeking a refund of the FICA taxes paid on the difference between the amount he actually received as deferred compensation and the amount on which he paid the tax. He subsequently filed suit in the Court of Federal Claims, and the United States filed a motion for lack of jurisdiction based on Mr. Koopman’s failure to meet the requirements of section 6511. Although Mr. Koopman was seeking a refund of only $2,416, he was not the only unhappy former United employee; the court notes that he had a co-plaintiff and that there are other cases involving the same issue.  

In ruling on the government’s motion to dismiss for lack of jurisdiction, the court held that under the deemed paid rules of Section 6513(c), United’s quarterly returns for 2001 were deemed filed and the FICA tax included on the returns was deemed paid on April 15, 2002.

Under Section 6511(a), Mr. Koopman only had until April 15, 2005 –three years after the returns were filed—to file a timely refund claim.  He missed that date by over two years.  Additionally, the court determined, under the look-back rules, the taxes were paid no later than April 29, 2004, as United had transferred credits to its FICA taxes for 2001 as late as April 29, 2002. Under Section 6511(b), no amount was paid within either the three-year or two-year periods looking back from the filing of the claim. Accordingly, because neither the three-year or two-year rule of Section 6511(a) was met, the court held it did not have jurisdiction over Mr. Koopman’s refund suit.

Mr. Koopman, pointing out the unfairness of this due to the litigation in the United bankruptcy that had prevented the final distribution being made to him any earlier, raised several arguments to try and overcome the barriers of Section 6511.  The court quickly disposed of his argument that Section 6511 did not apply to FICA taxes, as the statute expressly provides that it applies to any tax imposed by the Internal Revenue Code.  The court then rejected his argument that the statute of limitations should be equitably tolled, as the final determination that United was not going to pay him the full amount of the deferred compensation was made long after the statute of limitations on filing a refund claim expired.  Based on precedent, the court concluded that there is no equitable tolling of the refund statute of limitations as general principles of equity may not override the statutory requirements.  Mr. Koopman also argued that the statute of limitations should not begin running until the taxpayer has an opportunity to learn that the tax has been paid in error.  The court also rejected this argument, based on the precedent of another Supreme Court case, United States v. Dalm (494 US 596 (1990)). Although Mr. Koopman argued that application of Section 6511(a)’s time periods to his situation was unconstitutional under the due process clause, the court concluded that the United States can only be sued in its own courts under the express authorization given by Congress.  

Although situations such as Mr. Koopman’s seem to cry out for a remedy, Mr. Koopman could have acted earlier to protect his rights.  United filed bankruptcy in 2002, which should have been a red flag to Mr. Koopman that he was not going to receive all his deferred compensation.  He could have filed a protective claim for refund any time before April 15, 2005 that would have been timely, and then waited for the result of the bankruptcy litigation that was delaying a final determination as to his treatment.  The Internal Revenue Service is not only familiar with protective refund claims, but in some cases, reminds taxpayers who may be affected by ongoing litigation to file such a claim.  Earlier this year, the IRS issued a notice that the due date for filing a protective claim for the 2016 tax year for individual tax payments had been postponed until July 15, 2020, with an emphasis that this included claims involving the Affordable Care Act litigation.  The protective claim procedure allows tax practitioners to protect taxpayers whose rights may be affected by current litigation or expected changes in the law from being caught up in the Draconian maze of Section 6511 without a right to recourse if they wait for a final outcome.

Claiming a Refund Without Signing the Return

In the refund case of Gregory v. United States, No. 1:19-cv-00386 (Ct. Cl. 2020) the Court of Federal Claims denies the refund claim of a couple because they did not sign the amended return.  The issue of signatures has become more important during the pandemic because of the difficulties of meeting in person.  For the Gregorys the issue probably involved distance because they were working the Australian outback.  Still, the case shows that an actual signature can be an important step in making a request to the IRS.

The outcome for the Gregorys may change for others in their situation in the future.  On August 17, 2020, in IR-2020-182, the IRS announced that ” [m]arking a major milestone in tax administration, the Internal Revenue Service announced today that taxpayers can now submit Form 1040-X electronically with commercial tax-filing software.”  Read on and find out what happened to the Gregorys when electronic filing of amended returns was unavailable.

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The Gregorys are U.S. citizens but during the period at issue they worked as defense contractors at a facility near Alice Springs, Australia starting in 2015.  They timely filed their original 2015 return claiming a small refund.  The IRS sent them a notice of adjustment seeking to assess an additional liability.  I suspect the inquiry caused the Gregorys to ask around about their taxes.  This was their first year in Australia on this contract.  If it was their first year filing a non-resident return, they had many things to learn.  Over the course of the next couple of years they started learning them and they hired an accounting firm to review their return.  That firm determined that they had overpaid their taxes by more than $20,000 and prepared an amended return claiming the exclusion for foreign earned income and the exclusion for employer provided housing.  The amended return was signed by an employee of the preparer of the amended return and not by the Gregorys.

The IRS reviewed the amended return and allowed the refund claim but for $1,039 related to the housing exclusion.  They received a check and no doubt happily paid the preparer of their amended return for setting them on the right path in dealing with the special issues raised when working overseas.  For reasons that do not make economic sense to me, the Gregorys decided to file suit to recover the relatively small disallowed amount.  Instead of filing in district court, they filed in the Court of Federal Claims, an alternate forum for refund suits.

The IRS moved to dismiss the case arguing that the Gregorys did not sign the refund claim making the claim invalid.  The Gregorys countered that the IRS accepted the refund claim and paid them a refund of most of the amount claimed and should not, after doing so, raise the issue of valid signature.

The Court of Federal Claims went through the test of what a taxpayer must do in order to file a valid claim and obtain jurisdiction in a refund suit.  First, a taxpayer must meet the Flora full payment rule.  Second, a taxpayer must file a claim.  Third, the taxpayer must provide “the amount, date, and place of each payment to be refunded, as well as a copy of the refund claim when filing suit in the Court of Federal Claims.”  The Gregorys problem stems from the second requirement – a valid claim.

The court then walked through what makes a valid claim stating, inter alia, that it “must be verified by a written declaration that it is made under the penalties of perjury.”  The court explained why having it signed under penalties of perjury is important.  It also referred to the possibility of having the return signed by someone holding a power of attorney if the POA is attached to the return.  Here, it was not.

Then the court addressed the waiver doctrine raised by the taxpayers in their defense.  The court acknowledged that the IRS can waive compliance with its own regulatory requirements but cannot waive compliance with statutory requirements.  IRC 6061 requires “any return, statement or other document required to be made under any provision of the internal revenue laws or regulations shall be signed in accordance with forms or regulations prescribed by the Secretary.”  IRC 6065 provides “[e]xcept as otherwise prescribed by the Secretary, any return, declaration, statement, or other document required to be made under any provision of the internal revenue laws or regulations shall contain or be verified by a written declaration that is made under the penalties of perjury.”  Regulation 301.6402-2(c) allows for someone other than the taxpayer to sign under penalties of perjury only if a POA form accompanies the return.

The IRS argued that in partially allowing the refund claim it waived the regulation requiring the attachment of the POA but that to the extent it did not agree with the claim, it did not, and could not waive the signature requirement in litigation by allowing a part of the claim.  It pointed out the taxpayers’ argument could allow individuals to avoid the penalties of perjury requirement altogether.  The court agreed and dismissed the case.

Signature issues are becoming more and more important.  Electronic signatures are becoming more prevalent.  We now allow remote notarization in many states.  Individuals in many assisted living facilities that have locked down have no practical means of physically signing documents and often do not have computer capabilities.  Getting signatures or some type of verification on documents that allows the government or the interested party to know the validity of the approval while at the same time addressing the practical difficulties created by the pandemic, requires careful attention.

While the IRS allows individuals to file tax returns electronically, it has not historically allowed the filing of amended returns electronically requiring individuals like the Gregorys who live thousands of miles from their preparer to make arrangements to meet the signature requirements.  I don’t fault the IRS for wanting documents signed under penalties of perjury and requiring proof that the person submitting the claim is really the taxpayer.  Electronic signature tools exist.  New rules are coming out. 

The IRS issued a memo on March 27, 2020 that provides a temporary deviation from IRM signature procedures. The memo allows IRS employees on the collection side to accept images of signatures and e-signatures on a number of documents, including SOL assessment/collection extensions, closing statements, POAs, and generally any document collected “outside of standard filing procedures.”  The Tax Court issued a press release on August 6, 2020 which announces that electronically-filed stipulations with digital signatures will be accepted by the Court.  In Massachusetts, the Supreme Judicial Court issued a rule that authorizes e-signatures for all documents filed with Mass. courts. Numerous federal district courts have issued new rules accepting e-signatures, which can be found on this page.

Maybe next time the Gregorys can move forward in a case like this with the friendlier e-file rules, which could allow them to work with their accountant from thousands of miles away and still file a valid amended return.  I remain curious about their decision to sue for such a small amount and wonder about the decision dynamic that led to this case in a refund posture.

Exhaustion Can Be Exhausting

For taxpayers seeking a refund in federal district court or the Court of Federal Claims, it is black letter law that those courts only have jurisdiction if taxpayers timely file a proper refund claim with the IRS. In addition to filing the claim, to get into court taxpayers must either wait six months or file after receiving a claim disallowance. The disallowance (if issued) triggers a back-end limitation of two years to bring the suit.

Trakhter v US, a recent case from federal district court in California, highlights a number of the ways taxpayers may fail to satisfy the refund claim pre-requisites to get in court. 

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The case involved an audit that included a bank deposit analysis that resulted in IRS claiming the taxpayers Lenny Trakhter and Natalya Malakhova underreported over $350,000 in income from their construction company on their 2008 return. While the facts are skimpy in the opinion, IRS issued a notice of deficiency and the taxpayers did not file a Tax Court petition. It resulted in an assessment and ultimately an April 5, 2018 IRS levy of over $160,000.

In April of 2019, the taxpayers filed a request for audit reconsideration. After a few months passed with no word from the IRS, taxpayers’ counsel contacted IRS, which told counsel that it had no record of receiving the reconsideration. The taxpayers’ counsel resubmitted the audit reconsideration in July of 2019.

Still having not heard about the audit reconsideration, in February of 2020, counsel submitted a Form 843, Claim for Refund and Request for Abatement. In April of 2020, still having heard nothing from the IRS on the audit reconsideration or the Form 843, counsel filed a complaint in federal court seeking a refund. The government promptly filed a motion to dismiss for lack of jurisdiction.

The court granted the motion to dismiss. First, it held that the taxpayers failed to wait the required six months before filing suit. In reaching that conclusion, the opinion noted that the complaint was filed less than two months from the filing of the Form 843. The opinion highlights the relevant dates for the six-month rule.  Even if six months had elapsed at the time the court entertains the motion to dismiss, the key time check is at the complaint’s filing. In addition, the opinion notes that the taxpayers failed to file the correct form for the refund claim, which under the regulations is a Form 1040X and not a Form 843 when requesting a refund of individual income taxes.

In addition to filing the wrong form, the opinion noted that the form was not properly signed. The counsel submitted the Form 843 with an accompanying letter and POA. The regulations require that either the taxpayer or counsel sign the request under penalties of perjury. The mere inclusion of a POA with the claim, even if properly executed, “does not fulfill the penalty of perjury requirement” for the claim itself.

The oversights led to the court’s dismissing the lawsuit. I suspect at this point counsel will submit, if it has not already, a properly executed Form 1040X. What about the statute of limitation requirement that the taxpayers submit a refund claim within two years of the tax payment? After all, the levy was in April of 2018.  I suspect at this point the taxpayers would be able to argue that their prior submissions were part of an informal claim for refund, and the now properly completed 1040X would perfect the informal claim, which while not in proper form, was at least submitted before the two-year period elapsed. In the absence of the IRS denying the now perfected refund claim, taxpayers will have to wait six-months after submitting the 1040X and try again. Since the court’s dismissal is without prejudice, the taxpayers should eventually be able to get their day in court, though not nearly as quickly as they likely expected.

Federal Circuit Panel Calls For Reconsidering the Court’s Precedent Holding Refund Claim Filing and Timing Requirements Jurisdictional to a Refund Suit

In posts too numerous to cite, I have been calling for the courts to reexamine their prior precedents calling many tax filing deadlines and administrative exhaustion requirements jurisdictional.  In non-tax opinions issued by the Supreme Court since 2004, the Court has changed its precedent and held that “claims processing rules” that merely move litigation along are now almost never jurisdictional.  See, e,g. United States v. Wong, 575 U.S. 402 (2015) (Federal Tort Claims Act suit filing deadlines in agency and courts are not jurisdictional and are subject to equitable tolling); Fort Bend County v. Davis, 139 S. Ct. 1843 (2019) (Title VII charge filing requirement is not jurisdictional) (see here for my thoughts on the implications of Fort Bend to the tax world).  Now, a panel of the Federal Circuit in a pro se tax protester case, Walby v. United States, 2020 U.S. App. LEXIS 13711 (Apr. 29, 2020), has joined a panel of the Seventh Circuit in Gillepsie v. United States, 670 F. App’x 393, 394–95 (7th Cir. 2016), in questioning their Circuit’s precedent holding that the administrative tax refund claim filing requirement at section 7422(a) is a jurisdictional requirement to the brining of a refund suit.  Further, the Federal Circuit panel in the Walby opinion stated it believes that the filing deadlines for tax refund administrative claims at section 6511(a) are no longer jurisdictional, also calling for overturning its Circuit’s precedent.

It will take an en banc Federal Circuit opinion to overrule the Circuit’s prior precedents, so the panels’ opinion in Walby doesn’t change that court’s precedents, yet.  But, it certainly makes it likely that the issues will reach an en banc panel soon.

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What is perhaps most surprising about the Walby panel’s statements is that the opinion below did not raise these concerns about recent Supreme Court opinions, but simply followed the Federal Circuit precedents holding that sections 6511(a)’s and 7422(a)’s requirements are jurisdictional.  Further, the DOJ brief in Walby in the Federal Circuit did not discuss the potential impact of the recent Supreme Court case law on this question, but merely cited prior Federal Circuit precedent.  And the pro se taxpayer, of course, did not complain about the Circuit precedents.  So, the panel on its own chose to research these issues and make its statement in a published opinion.

Here is what the Federal Circuit panel wrote in Walby on these issues:

In Walby’s case, her 2014 claims were deemed paid on April 15, 2015 because withheld income taxes are deemed to have been paid on April 15th of the following year. I.R.C. § 6513(b). To be timely, her administrative refund claim should have been filed with the IRS by April 15, 2017. But Walby did not file her refund claim until December 22, 2017. Walby’s 2014 refund claim was, therefore, untimely and the Claims Court properly dismissed that claim.

There is one aspect of the court’s conclusion regarding this claim, however, that warrants additional examination. The Claims Court concluded that, because Walby’s 2014 administrative refund claim was untimely, pursuant to 26 U.S.C. § 7422(a), it lacked subject matter jurisdiction over that claim. Although this conclusion is correct under our existing case law, see, e.g.Stephens v. United States, 884 F.3d 1151, 1156 (Fed. Cir. 2018), it may be time to reexamine that case law in light of the Supreme Court’s clarification that so-called “statutory standing” defects — i.e., whether a party can sue under a given statute — do not implicate a court’s subject matter jurisdiction. Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 128 n.4 (2014)see also Lone Star Silicon Innovations LLC v. Nanya Tech. Corp., 925 F.3d 1225, 1235 (Fed. Cir. 2019) (recognizing that, following Lexmark, it is incorrect to classify “so-called” statutory-standing defects as jurisdictional).

The Tucker Act grants the Claims Court jurisdiction to render judgment “upon any claim against the United States founded either upon the Constitution, or any Act of Congress . . . in cases not sounding in tort.” 28 U.S.C. § 1491(a)(1). Additionally, 28 U.S.C. § 1346(a) provides that the Claims Court shall have original jurisdiction (concurrent with the district courts) of “[a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected.” As such, Walby’s failure to meet the § 7422(a) statutory requirement of a timely administrative claim for her 2014 tax claim would not seem to implicate the Claims Court’s subject matter jurisdiction; rather, it appears to be a simple failure to meet the statutory precondition to maintain a suit against the government with respect to those taxes.

The Supreme Court has not addressed § 7422(a) following Lexmark. We note, however, that the Court’s most recent discussion of § 7422(a) does not describe it as “jurisdictional.” See Clintwood Elkhorn Mining Co., 553 U.S. 1 at 4–5, 11–12. And, although our court has continued to refer to this statute as jurisdictional following Lexmark, we have not yet addressed the implications of that case and the many Supreme Court cases applying it.2

In view of the Supreme Court’s guidance in Lexmark, it may be improper to continue to refer to the administrative exhaustion requirements of § 7422(a) and § 6511 as “jurisdictional prerequisites.” That these provisions concern the United States’ consent to be sued would not seem to change this conclusion. The Supreme Court has “made plain that most time bars are nonjurisdictional.” United States v. Kwai Fun Wong, 575 U.S. 402, 410 (2015). In Kwai Fun, the Court held that the time bar in the Federal Tort Claims Act is nonjurisdictional. In doing so, it rejected the Government’s argument that, because that time bar is a precondition to the FTCA’s waiver of sovereign immunity, the time bar must be jurisdictional. As it had in Lexmark, the Court distinguished jurisdictional statutes from “quintessential claim-processing rules which seek to promote the orderly progress of litigation, but do not deprive a court of authority to hear a case.” Id. (internal quotation marks omitted). It did not except statutes that implicate the government’s waiver of sovereign immunity from that distinction.

In reaching this conclusion, the Court relied on Arbaugh v. Y&H Corp., where, finding Title VII’s numerical employee threshold nonjurisdictional, the Supreme Court stated:

“If the Legislature clearly states that a threshold limitation on a statute’s scope shall count as jurisdictional, then courts and litigants will be duly instructed and will not be left to wrestle with the issue. But when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character.”

546 U.S. 500, 515–16 (2006). This “clear statement” rule “does not mean Congress must incant magic words. But traditional tools of statutory construction must plainly show that Congress imbued a procedural bar with jurisdictional consequences.” Kwai Fun, 575 U.S. at 410 (internal quotation marks omitted). There is no such clear statement apparent in the statutes at issue here, 28 U.S.C. § 7422(a) and § 6511(a).3 Other courts also have begun to question whether the time limits and administrative exhaustion requirements in these and other tax provisions should continue to be deemed jurisdictional. See Gillespie v. United States, 670 F. App’x 393, 394–95 (7th Cir. 2016) (whether § 7422(a) is jurisdictional); Bullock v. I.R.S, 602 F. App’x 58, 60 n.3 (3d Cir. 2015) (whether I.R.C. § 7433 is jurisdictional). As to at least one administrative exhaustion requirement, one court has held that it should not be deemed jurisdictional. See Gray v. United States, 723 F.3d 795, 798 (7th Cir. 2013) (I.R.C. § 7433 “contains no language suggesting that Congress intended to strip federal courts of jurisdiction when plaintiffs do not exhaust administrative remedies”); cf. Duggan v. Comm’r of Internal Revenue, 879 F.3d 1029, 1034 (9th Cir. 2018) (I.R.C. § 6630(d)(1)‘s 30-day filing deadline “expressly contemplates the Tax Court’s jurisdiction . . . the filing deadline is given in the same breath as the grant of jurisdiction.”).

Accordingly, although the Claims Court properly dismissed Walby’s 2014 refund claim because she did not meet the prerequisite for bringing such a claim, we think that, under LexmarkArbaugh, and their progeny, the court likely did not lack subject matter jurisdiction over this claim.

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2. See, e.g., Stephens v. United States, 884 F.3d 1151, 1156 (Fed. Cir. 2018); see also Ellis v. United States, 796 F. App’x 749, 750 (Fed. Cir. 2020); Langley v. United States, 716 F. App’x 960, 963 (Fed. Cir. 2017).

3. We are mindful of the Supreme Court’s pre-Lexmark jurisprudence concerning § 7422(a). In United States v. Dalm, the Court held that the district court lacked jurisdiction over gift tax refund suit because “[d]espite its spacious terms, § 1346(a)(1) must be read in conformity with [§ 7422(a) and § 6511(a)] which qualify a taxpayer’s right to bring a refund suit upon compliance with certain conditions.” 494 U.S. 596, 601 (1990). The Court referred to the statutes as “controlling jurisdictional statutes.” Id. at 611. But this view was a departure from the Court’s prior commentary on a predecessor to § 7422(a), recognizing that it “was not a jurisdictional statute at all; it simply specified that suits for recovery of taxes, penalties, or sums could not be maintained until after a claim for refund had been submitted.” Flora v. United States, 362 U.S. 145 (1960).

If you would like to read a little of the Gillespie opinion of the Seventh Circuit, see my post on it here.  It was the statements within Gillespie questioning whether section 7422(a)’s claim-filing requirement is still jurisdictional that the DOJ cited for its decision, post-oral argument, in Tilden v. Commissioner, 846 F.3d 882 (7th Cir. 2017), to file a memorandum of law arguing that the section 6213(a) Tax Court deficiency jurisdiction filing deadline is still jurisdictional – a point with which the Seventh Circuit in Tilden agreed, despite Gillepsie.  See my post on Tilden here.  Of course, as I have noted before, the Harvard tax clinic continues to litigate the issues under section 6213(a) of whether the filing deadlines are still jurisdictional or subject to equitable tolling; companion cases on that issue are currently pending in the Ninth Circuit (and have been pending for over 6 months after oral argument there).

Observations

For most refund suit plaintiffs, it will make little difference whether the section 6511(a) and 7422(a) requirements are jurisdictional, since no one expects the Supreme Court to overturn its ruling in United States v. Brockamp, 519 U.S. 347 (1997), that the filing deadline of section 6511(a) is, in any case, not subject to equitable tolling.  So, who might benefit from making these two requirements nonjurisdictional?  Well, there are always a small number of cases where the DOJ could make an argument that the refund claim filing deadline was missed or that a refund claim was not in proper form, but the DOJ either chose not to raise those issues or just missed that the DOJ had potential arguments under those provisions.  Under current law, treating the requirements as jurisdictional, courts should step in in such cases and police their jurisdiction by raising issues not raised by the DOJ.  But, if the claim filing requirement and claim filing deadline are not jurisdictional to a refund suit, then, in such cases, the court will no longer worry about the issues if the DOJ never raises them.  Non-jurisdictional conditions of suit are merely affirmative defenses.  If the DOJ doesn’t raise an affirmative defense (either accidentally or knowingly), it simply forfeits or waives the defense.  Indeed, if the DOJ wanted to expeditiously litigate a test case brought by a plaintiff who hadn’t yet filed a refund claim, if the claim filing requirements is no longer jurisdictional, the DOJ could choose to waive any argument that a claim should have been filed before suit was brought.

Offset – Whose Funds Does the IRS Hold

In the recent case of Laird v. United States,  (5th Cir. 2019) the court addressed the issue of whether the IRS could offset an overpayment resulting from an attempted designated payment.  The Fifth Circuit distinguished earlier circuit precedent that the IRS could offset extra money that a taxpayer sent by creating a rule that the IRS can only do so when it applies the extra money to the tax account of the person remitting the money.  The rule makes sense but here the facts get muddy.

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If you have never represented someone who might have the trust fund recovery penalty (TFRP) assessed against them, you might wonder why one taxpayer would pay the taxes of another.  Sure, there are many good and generous people in the world and we are in the giving season, but still, the payment of someone else’s taxes is not a customary holiday gift nor an ordinary act at any time of the year.  The picture becomes clearer when the TFRP enters the picture.  Let’s look at a typical fact pattern.

Corporation A builds buildings.  It has 20 employees.  Business has been slow, but it expects a turnaround at any time.  Corporation A has a cash flow problem.  To get it through the lean times, it looks for ways to conserve cash.  One way it decides to do this is to pay its employees their salaries, otherwise they will walk, but to hold off on paying the IRS the withheld taxes and the employer’s share of FICA.  Corporation A anticipates that it will soon have a contract that will allow it to make the tax payments and has no intention of stiffing the IRS.  Unfortunately, the business downturn lasts longer than it anticipates, and some of its accounts do not pay on time.  The unpaid taxes build up for several months at which time a friendly revenue officer appears at the door of Corporation A to demand payment, or levies will occur and the responsible officers will have the TFRP assessed against them pursuant to IRC 6672.

An officer of Corporation A, Bob, decides that the best thing to do in order to avoid the consequences of non-payment of the taxes is to pay them himself.  He sends the IRS a check for the unpaid taxes and designates on the check how the funds should be applied.  Unfortunately, he miscalculates the amount of debt that brought the revenue officer to the door of Corporation A and he sends a check for too much.  While it does not happen too often that a corporate officer sends in too much in this situation, it does happen, and it did happen in the Laird case.

The IRS knew what to do with the extra money.  It applied the funds to another debt of Corporation A which had not yet reached the hands of the revenue officer or it applied the debt to the non-trust fund portion of Corporation A’s outstanding liability.  Bob did not intend to pay the non-trust fund portion of Corporation A’s debt because he had no personal liability for this debt.  He only sought to pay the trust fund portion.  He requests that the IRS return to him that portion of the check which overpaid the liability he sought to satisfy.  The IRS argued that it had the right to offset this money against other debts of Corporation A.

In the case of United States v. Ryan, (11th Cir. 1995), the Eleventh Circuit answered the question in this case by holding that the IRS could keep the extra amount of a check sent in with a specific designation; however, in Ryan the taxpayer sending the check was the same taxpayer who owed the money.  In Laird the person sending in the money, like Bob, is not the taxpayer.  The entity, like Corporation A, is the taxpayer.  The Fifth Circuit holds that this distinction makes a difference.  Here, it holds that the individual (Bob) may require the excess amount be returned to him.  In the case, however, these facts were unclear.  The Fifth Circuit could not tell the true source of the funds.  So, it remanded the case to the district court for a determination of the true payor of the funds.  If the IRS can show that the corporation really paid the funds instead of the individual, then the IRS will be allowed to offset the funds.  If the individual can show that the money was his, then the IRS must return the money to him.

Cracks in the Flora Rule? Definition of a “Tax” and the New World of Refundable Credits

This year, the Notre Dame Tax Clinic litigated a case in the U.S. District Court for the Northern District of Indiana, which sought a refund of taxes claimed on our clients’ amended tax return. Alexander Ingoglia, a 3L at the Notre Dame Law School and a student in the Clinic, worked on this case last spring, and composed our response to the government’s motion to dismiss for lack of jurisdiction. Alex describes the case and the cracks it might show in the Flora rule.  – Patrick  

In 1960, the United States Supreme Court decided United States v. Flora and established the full-payment rule.  The rule requires plaintiffs to pay their entire tax deficiency before obtaining jurisdiction to sue the government for a tax refund in federal district court or the Court of Federal Claims.  However, we encountered a case in the Notre Dame Tax Clinic this year that presented facts that challenged the Flora rule.  While the case came to an end before the court considered its jurisdiction with respect to the facts, several unique facts established a credible distinction from Flora’s full-payment rule.  As a student attorney in the clinic, I had the opportunity to research Flora’s progeny and the statutory meaning behind the underlying jurisdictional hurdle while representing our client.

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Factual and Legal Background

Our clients, Mr. and Mrs. Burns, originally filed a timely 2014 tax return, which properly claimed their two grandchildren as dependents.  The Burns’ tax return preparer, however, failed to claim the Burns’ deserved Child Tax Credit (“CTC”) and Earned Income Tax Credit (“EITC”) with respect to the grandchildren.  Pursuant to the Burns’ 2014 tax return, the couple received a $617 tax refund.

When the Burns switched tax preparers, their new preparer realized the mistake and filed an amended return on their behalf in April 2016.  At the time the Burns filed their amended return, they owed no taxes to the IRS.  The Burns reported a $1,889 decrease in adjusted gross income and claimed the EITC and CTC in the amounts of $5,430 and $1,588, respectively.  The Burns’ new tax preparer also noticed a $70 understatement in the Burns’ self-employment tax and reported the increase on the amended return.  In total, the Burns sought to receive a $6,948 refund after combining the additional credits with the increased self-employment tax assessment.

The IRS received the return, but rather than sending the Burns their nearly $7,000 refund, the IRS only assessed the additional $70 self-employment tax.  The IRS sent nothing denying the credits or even a request for additional information to substantiate the claimed credits. The Burns never received a right to challenge the denial of credits administratively or otherwise.

The Notre Dame Tax Clinic filed a complaint in district court on the Burns’ behalf.  The complaint stated that the Burns timely claimed a refund in their 2014 tax return, but that they never received any indication that their claims were insufficient or denied.  Instead, the claimed credits were selectively ignored while the IRS recognized the increased self-employment tax in the same 1040X.  The complaint sought relief in the form of the Burns’ $6,948 refund.

In response, the Department of Justice (“DOJ”) filed a Motion to Dismiss for lack of jurisdiction.  The DOJ asserted that the district court lacked jurisdiction to hear the case, pursuant to 28 U.S.C. § 1346(a)(1), which states that the district courts have original jurisdiction over civil actions “for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected . . . .”  This section serves as a limited waiver of sovereign immunity, allowing plaintiffs to sue the government in federal court. 

Although the section allows plaintiffs to sue the government to obtain their allegedly deserved refunds, the Supreme Court interpreted the limited waiver to include a “pay first and litigate later” requirement.  Flora v. United States, 362 U.S. 145 (1960).  Without a plaintiff fulfilling the “pay first and litigate later” requirement, the district court lacks jurisdiction to hear the case.  The Seventh Circuit reiterated the full payment rule, holding that “[f]ull payment is a jurisdictional prerequisite imposed by Congress.”  Univ. of Chicago v. United States, 547 F.3d 773, 785 (7th Cir. 2008) (citing Flora, 362 U.S. 64–65, 75, 78).  This interpretation of 28 U.S.C. § 1346(a)(1) prevents taxpayers from paying only a small portion of their tax bill to obtain district court jurisdiction. 

Of course, § 1346(a)(1) only dictates jurisdiction in the District Courts and the Court of Federal Claims.  Taxpayers retain the ability to bring cases in tax court without full payment (or any payment) of an alleged tax liability.  However, to sue for a refund in district court, Supreme Court and lower courts’ precedent has long held that a plaintiff must fully pay their tax bill before utilizing the limited waiver of sovereign immunity in § 1346(a)(1). What “fully pay” means, though, is not always clear.

In Flora, the case that established the full payment rule, the facts were simple.  The petitioner claimed ordinary losses.  The Commissioner treated the reported losses as capital, resulting in a $28,908.60 deficiency.  The petitioner paid $5,058.54 of the alleged deficiency and filed a refund claim for that amount with the IRS.  Once denied, the petitioner sued in district court for a refund of the $5,058.54 and a judgment abating the remainder of the assessment.  Recognizing a circuit split and a need for uniform treatment of similar district court suits, the Supreme Court agreed to hear the case.  In the interest of saving “the harmony of our carefully structured . . . system of tax litigation,” the Court ruled that in order to obtain jurisdiction, a tax liability must be fully paid before commencing a refund suit in district court.  The petitioner lost because he had paid only the $5,058.54 portion of the $28,908.60 deficiency.

Flora, at its core, is a decision about statutory interpretation.  Faced with ambiguous language, the Court resorted to legislative history to determine the meaning of “any internal-revenue tax.” 28 U.S.C. § 1346(a)(1).  That history, the Court determined, made it more likely that Congress intended the language to mean that the entirety of a tax must be paid for jurisdiction to arise.  In Flora’s case, this meant paying the entire deficiency assessment relevant to the dispute at hand.

The Burns’ case presented complicated facts.  At the time the Burns filed their 1040X, they owed nothing to the IRS.  In fact, they already collected a refund when originally filing the return.  While the Burns reported a $70 self-employment tax on their amended return, the nearly $7,000 in credits drowned the small self-assessment.  The IRS failed to deny the claimed credits or request additional documentation.  Instead, the IRS ignored the credits, assessed the $70 self-employment tax, and hid behind Flora to attempt to dismiss the refund suit, despite failing to deny or request additional information pertaining to the credits that swallowed the assessment.

The Clinic filed a response to the DOJ’s Motion to Dismiss.  The response differentiated the Burns’ case from Flora and its subsequent progeny on two bases: first, the Burns solely disputed the denial of rightfully claimed credits of the “tax” imposed under IRC § 1.  They did not dispute the unpaid self-employment tax assessment under § 1401.  Second, the Burns had already fully paid the $70 self-employment tax with their $7,000 of deemed refundable credits.

The First Distinction: The Owed Tax and the Refundable Tax are Different “Taxes” under § 1346(a)(1)

Our response argued that the statute’s use of the words “any internal-revenue tax” allows a petitioner to file a refund suit for one type of “internal-revenue tax,” while owing another type of “internal-revenue tax.”  Our argument pointed to several different types of internal-revenue taxes throughout Title 26 of the United States Code, such as §§ 1 (individual income tax), 11 (corporate income tax), 59A (base erosion and anti-abuse tax), etc. Similarly, Flora and the language of § 1346(a)(1) does not bar tax refund suits for a given year where a taxpayer has fully paid one tax period, but owes the government on another tax period.  By the same logic, the statutory language should not bar a petitioner from refund suits where the taxpayer has fully paid one “internal-revenue tax,” but not a separate, undisputed tax. 

Looking first to the text of 28 U.S.C. § 1346(a)(1), we argued that “[t]he term ‘any’ should be given [a] broad construction under the settled rule that a statute must, if possible, be construed in such fashion that every word has some operative effect.” Jove Eng’g, Inc. v. I.R.S., 92 F.3d 1539, 1554 (11th Cir. 1996) (citing United States v. Nordic Village, 503 U.S. 30, 36 (1992) (internal citations omitted)).  Assuming a broad construction of the term “any,” we contended that the contested credits were analytically distinct from the uncontested self-employment taxes.  The two taxes come from different chapters in Title 26 of the United States Code (“IRC”), with separate analyses and calculations.  The CTC and EITC fall under Chapter 1, whereas the self-employment tax falls under Chapter 2.

Flora, on the other hand, completely concerned an IRC § 1 tax.  Flora and its progeny do not contemplate jurisdiction when the petitioner challenges an entirely separate tax than the one creating the alleged deficiency.  Further, the tax creating the alleged deficiency would be eliminated if the Burns succeeded in their case and received their refundable CTC and EITC.  In Flora, the petitioner only paid a portion of his § 1 taxes, then sought a refund for those § 1 taxes paid, with a large § 1 tax deficiency outstanding.  The Burns paid the entirety of the § 1 tax disputed in the lawsuit, which was statutorily distinct from the unpaid, undisputed § 1401 (self-employment) taxes.

We focused primarily on two cases to deliver this point.  The first, Moe v. United States, No. CS-96-0672-WFN, 1997 WL 669955 (E.D. Wash. June 30, 1997), directly took on this distinction, stating that requiring payment of both § 1 and § 1401 taxes “places form over substance,” when the taxes pertinent to the disputed issue were paid.  In Moe, the taxpayer sought a refund with respect to his § 1401 (self-employment) taxes, while he owed taxes under § 1.  While the court granted the defendant’s motion to dismiss on other grounds, it clearly found the plaintiff’s argument persuasive, stating “[p]laintiff[s] should arguably not be required to prepay the uncontested income tax portion of her 1991 tax deficiency in order to litigate the contested 1991 self-employment tax.”  We also relied on Shore v. United States, 9 F.3d 1524 (Fed. Cir. 1993), which allowed the Court of Federal Claims to hear a refund suit even though interest on the underlying tax had not been paid.  The Shore court reasoned that because the interest was not itself disputed in the refund claim or in court, it need not be fully paid prior to filing suit.

The Burns never owed tax under § 1 for 2014.  They claimed refundable credits, causing an overpayment, which they claimed as a refund.  They were never audited or received a deficiency assessment.  Indeed, they never became subject to a tax assessment until the Government ignored their claimed refundable credits in the amended return.  While the Burns owed a tax under § 1401, this was a separate “internal-revenue tax,” which the Burns did not dispute in court.  We argued that, following the statutory interpretation in cases such as Moe and Shore, the Burns passed the statutory hurdles to jurisdiction.

Second Distinction: The Refundable Credits Claimed on the Amended Return Exceed the Tax Reported on the Return

The gist of this distinction is simple: there is no deficiency that needs to be fully paid because the credits claimed outweigh the increased self-employment assessment.  Flora preceded refundable credits in general, let alone the specific CTC and EITC at issue in the Burns’ case.  Thus, Flora could not contemplate the facts in the Burns case.  However, such refundable credits should, reasonably construed, constitute payments of tax that can, in circumstances such as in this case, provide jurisdiction for a District Court to adjudicate a substantive dispute as to the taxpayer’s entitlement to those credits.

In our response, we analogized the refundable EITC and CTC to withholding credits.  By example, we described a situation where a taxpayer neglects to include a W-2 in their tax return, notices it, then attempts to file an amended return to correct the error. If the W-2 produced additional tax of $150, but reported withholdings of $200, the Government surely could not assess the $150 tax, ignore the $200 withholding, and seek dismissal of a refund suit because the taxpayer failed to fully pay the associated tax assessment.  In that example, the government already has $50 owed to the folks amending their return.  Similarly, the government already owed nearly $7,000 to the Burns.  How could the government seek dismissal based on a $70 self-employment assessment when the government owes that same taxpayer nearly $7,000 for the same tax period?  We argued that the withholding credits and the credits in our case were analogous, and thus considering these claimed refundable credits, the tax was fully paid.

Conclusion

After the court received our response, the DOJ contacted us to offer a compromise.  The DOJ proposed a stay in the case while the IRS investigated the authenticity of the claimed credits.  The Burns agreed, and the IRS ultimately agreed that the Burns qualified for the claimed CTC and EITC.  The IRS’s issuance of the refund marked the end of the Burns’ district court case, leaving the unique distinctions in the case unaddressed.  The Burns case demonstrates the ambiguity that remains nearly 60 years after the Supreme Court interpreted 28 U.S.C. § 1346(a)(1) to require full payment in order to establish district court jurisdiction with respect to tax refund claims.

First Circuit Sustains Denial of Financial Disability Claim

On September 16, 2019, the First Circuit affirmed the decision of the district court denying a claim for refund a son filed for his father’s estate after the normal statute of limitations for claiming a refund had expired.  The decision, Stauffer v. Internal Revenue Service, No. 18-2105, finds that Mr. Stauffer’s son held a durable power of attorney and that, because of that POA, the estate cannot avail itself of the benefit of the statute suspension provided in IRC 6511(h).  We have previously written about this case here and in three prior posts linked therein.  Despite the unfavorable outcome at the Circuit level, this case did move the needle on financial disability cases by resulting in a favorable ruling early in the litigation regarding the need to obtain an expert opinion from certain types of professionals, as required by Rev. Proc. 99-21.

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The facts as determined by the court are relatively straightforward.  Father gives son a durable power of attorney (POA)(Sometimes referred to herein as a DPA).  Son and father have a falling out.  Son tells father he will no longer serve as the POA.  Son drafts revocation of POA but fails to send out the revocation.  Father and son later reconcile shortly before father’s death.  Son becomes executor and discovers that his father has not filed returns for several years prior to death.  As is common in unfiled return cases, some of the years involved refunds and at least one involved a reasonably substantial liability that would have been paid by the refunds on the now overly delinquent returns.

The estate did well in the early stages of the case when the IRS tried to rely on its Revenue Procedure in arguing that the estate did not obtain an opinion from the right type of professional.  The magistrate judge ruled against the IRS and allowed the opinion of a professional who had worked with the decedent for several years prior to his death, even though it was not the type of professional described by the Revenue Procedure. However, the IRS then changed tactics to begin arguing that the son did not properly revoke the POA.  The statute does not allow a suspension when a competent POA exists, under the theory that the competent POA could/should file the return on time even if the taxpayer had disabilities preventing that from happening.  The district court bought the IRS argument regarding the POA, and the First Circuit does as well.

In the First Circuit the estate made two arguments.  First, it attacked the factual finding that Hoff never renounced the POA.  Second, it disputed the court’s legal conclusion that the POA qualified Hoff as a person authorized to act on behalf of Carlton in financial matters for the purposes of I.R.C. § 6511(h)(2)(B).  With respect to the legal argument, the court stated:

The Estate urges us to adopt a reading of § 6511(h)(2)(B) under which a person will be considered “authorized to act on behalf of [a financially disabled taxpayer] in financial matters” only if he or she has: (1) authority to file the financially disabled taxpayer’s tax returns; (2) a duty to file the financially disabled taxpayer’s tax returns; and (3) actual or constructive knowledge that the tax returns for a particular year have to be filed on behalf of the disabled taxpayer. The Estate claims that, because Hoff did not meet these three purported requirements, the statute of limitations for the filing of Carlton’s tax refund should have remained suspended through his death in October 2012 due to his financial disability.

The First Circuit found that:

The DPA explicitly granted him the authority to file Carlton’s tax returns, as well as any other tax-related claim before the IRS. Thus, ever mindful of the principles that guide our interpretation of a statute, we turn to the Estate’s purported “duty” and “actual or constructive knowledge” requirements for a person to qualify as “authorized to act on behalf of [a financially disabled taxpayer] in financial matters” under § 6511(h)(2)(B)….
 
Here, the key word for our analysis of § 6511(h)(2)(B)is “authorized.” By urging us to adopt the “duty” and “constructive knowledge” requirements, the Estate asks us to interpret the term “authorized” in § 6511(h)(2)(B) beyond its plain and unambiguous meaning. And this we cannot do. The Estate’s proposed definition of “authorized” finds no support in § 6511(h)(2)(B)’s plain language or its statutory context.  

The court then looked at the word ‘authority’ to find the correct definition.  In doing so it found:

None of the above definitions imply that the existence of a “duty” is a requisite for a person’s authority. To the contrary, the provided definitions illustrate that one who acts with “authority” has been bestowed with the power to perform an action on another’s behalf. By contrast, a duty imposes an obligation to perform a certain act.10 While there are duties that flow from grants of authority (e.g., those of loyalty and care in agency law), the relevant question here is whether in this context, definitionally speaking, one who is “authorized” to take a certain course of action should be understood narrowly to mean only one who has an affirmative obligation to take such action….
 
Therefore, we hold that a person may be considered “authorized to act on behalf of [a financially disabled taxpayer] in financial matters” for purposes of § 6511(h)(2)(B) even if he has no affirmative obligation to act on the taxpayer’s behalf.

Next it turned to constructive knowledge to address the estate’s argument that the POA needed to know of the duty to file a tax return.  Here it said:

The Estate’s argument in support of an “actual or constructive knowledge” requirement is even less persuasive. The statute’s plain language does not include any term into which such a requirement can plausibly be read, nor does the Estate point to any contextual basis (e.g., provisions of the whole law) from which it can be inferred. Thus, we also hold that, for purposes of § 6511(h)(2)(B), a person “authorized to act on behalf of [a financially disabled taxpayer] in financial matters” is not required to have actual or constructive knowledge of the need to file tax returns in a specific year.

After knocking out the legal argument concerning the POA, the court then determined that the estate failed to prove that the son revoked the POA.  In doing so it relied on both the standard of proof imposed upon the estate to upset the factual decision of the district court and Pennsylvania law, which was the state law governing the POA.

The Stauffer decision provides a disappointment for those of us buoyed by the initial success of the estate in pushing back on the harshness of the Revenue Procedure.  Nothing in the First Circuit’s decision undercuts the good points made by the magistrate concerning the Revenue Procedure.  The First Circuit does add clarity to the issue of the type of POA that can cause a taxpayer to lose the protection of the financial disability provisions.  It also provides clarity on what an individual appointed as a POA must do to revoke the POA at a point when the individual no longer wishes to serve.  Many of the financial disability cases involve pro se individuals who do not do a good job of advocating for their position.  The estate here was well represented at each stage.  Unfortunately, that did not save the estate, even if it did produce a favorable opinion concerning the restrictions in the Revenue Procedure regarding an appropriate expert.

Overpayment Interest – Is the Tide Turning?, Part Two

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

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

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

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

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What is happening with Bank of America?

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

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

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

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

Is there a Supreme Court visit in the future?

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

A comment on underlying policy

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

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

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

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

And a final comment on CFC jurisdiction

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

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

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