Informal Refund Claim Allowed

In Johnson v. United States, No. 2:19-cv-01561 (E.D. Cal. 2021) the district court finds that taxpayers’ correspondence with the case advocate in the Local Taxpayer Advocate’s (LTA) office provided a sufficient basis for determining that an informal claim existed.  The taxpayers sought to have the correspondence serve as an informal claim for both 2009 and 2010; however, the court only found that it served as an informal claim for 2009. Some recent posts we have written on the informal claim doctrine can be found here and here.

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Taxpayers seeking a refund must file a claim within the time frames set out in IRC 6511.  The Johnsons did not file a formal refund claim for 2009 and 2010 before the time for filing a claim expired.  For some time, however, they worked with the local LTA office in an effort to resolve a number of account discrepancies.  One piece of correspondence with the LTA office focused on 2009.  The discussions about the situation and related correspondence gave the district court comfort in determining that taxpayers had put the IRS on notice of their claim for 2009.  These informal claim cases require scrutiny of the facts surrounding taxpayers’ interaction with the IRS.  The claim process exists to provide the IRS with an opportunity to consider a taxpayer’s request before litigation begins. The court framed the arguments of the parties:

The Government argues the January 28, 2015 fax is insufficient for an informal claim for a tax refund because Plaintiffs have not met the statutory requirements to invoke this Court’s jurisdiction. The Government contends Plaintiffs fail to allege their counsel requested a refund of any specific amount for the 2010 tax year, the January 28, 2015 fax is regarding the 2009 tax year but is not signed under penalty of perjury, and Plaintiffs’ conversations with TAS do not sufficiently inform the IRS of the factual basis for their tax refunds for 2009 and 2010. The Government maintains Plaintiffs’ failure to do either “deprives this Court of subject matter jurisdiction to hear the lawsuit.”

In opposition, Plaintiffs appear to argue the January 28, 2015 fax meets the requirements for the informal claim doctrine because the claim was submitted to Arndt (the case advocate in the LTA office who was working on the case), the amounts listed by year were specific, the TAS is a part of the IRS that works with all of the agency’s components, and Arndt was specifically working with account services to attempt to resolve Plaintiffs’ case.

We wrote a few years ago about a 9th Circuit case, the controlling circuit here, in which the taxpayer filed an informal claim by making an injured spouse request.  I was a little surprised that the court in the Johnson’s case did not cite to the Palomares case but it did cite to numerous other cases involving the informal claim doctrine.

Courts have held that an “informal claim” is sufficient to meet the requirements of 26 U.S.C. §§ 6511 and 7422(a) and generally have allowed the taxpayer to file suit for a tax refund if the claim: (1) gives notice to the Commissioner of the IRS that the taxpayer is asserting a right to a credit or refund; (2) states the legal and factual basis for the claim or at least indicate the grounds for the claim; and (3) must be in writing or have a written component. Rhodes v. United States, 552 F. Supp. 489, 492 (D. Or. 1982) (“[T]he focus is on the claim as a whole, not merely the written component . . . the only essential is that there be available sufficient information as to the tax and the year to enable the [IRS] to commence, if it wishes, an examination of the claim.” (citing American Radiator & Std. San. Corp. v. United States, 318 F.2d 915, 920 (Fed. Cl. 1963))); Glodowski v. United States, No. CV-N-89-414-HDM, 1990 WL 54831, at *1-2 (D. Nev. Feb. 23, 1990), aff’d, 928 F.2d 1136 (9th Cir. 1991) (finding Plaintiff’s letter to the IRS requesting the return of his money insufficient for an informal written claim as it “appears to be a general indictment of the tax system” and lacks “specific allegations which alert the IRS to commence an examination into a claim for refund”); Roman v. United States, No. C 94-3269 TEH, 1995 WL 463669, at *3 (N.D. Cal. July 27, 1995) (finding plaintiff’s attempt, without explanation, to offset the alleged 1985 overpayment against her 1986 tax return was insufficient to inform the IRS she sought a refund for the payment made in 1985). “There are no hard and fast rules for determining the sufficiency of an informal claim, and each case must be decided on its own facts with a view towards determining whether under those facts the Commissioner knew, or should have known, that a claim was being made.” Schlachte v. U.S., No. C 07-6446 PJH, 2008 WL 3977901, at *5 (N.D. Cal. Aug. 26, 2008) (internal quotations and citation omitted).

Here, the court finds that the letter the taxpayers sent to the LTA meets the requirements for an informal claim because

The letter also notes Plaintiffs “are plagued by phantom interest and penalty charges for 2009” after they “in good faith, borrowed money and paid off all outstanding balances due” and that “the penalties and interest assessed against Gail Johnson and entered on her 2009 [Individual Master File] have no basis in any late balance due.” (Id. at 2-3.) The Court finds this language is sufficient to put the Government on notice of Plaintiffs’ claim for a refund, sufficiently states the legal and factual basis for the claim, and has a written component.

Because the taxpayers only mentioned 2009 in the critical letter and not 2010, the court only finds they made an informal claim for 2009 and not for 2010. 

These cases are difficult for taxpayers to win but the win here and in cases such as Palomares point to the possibility.  Persons seeking to make an informal claim argument must examine their contacts with the IRS looking for contacts which can support an argument that they have adequately apprised the IRS of the period and the problem.  No one wants to rely on the informal claim doctrine to win their case.  Always pay attention to the rules governing the timing of claims but if a failure has occurred don’t overlook the possibility of making this argument.

Credit Carry Forward as Timely Refund Claim

In Libitzky v. United States, No. 3:18-cv-00792 (N. D. Cal. 2021) the district court dismisses cross motions for summary judgment in a refund suit and pushes the case forward for a determination by a jury.  The parties agree that the Libitzkys overpaid their 2011 liability by almost $700,000.  They disagree on the issue of whether the Libitzkys timely filed a claim for refund seeking return of their money.  The court finds the filing of a timely refund claim jurisdictional, a determination at odds with at least one other court.  The court also finds that the possibility exists that the forms filed by the Libitzkys requesting a carryover of their 2011 refund could meet the requirements of an informal claim.  A jury will decide the issue.  The case raises interesting issues regarding both jurisdiction and informal claims.

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The Libitzkys were investors in real estate and did well.  They regularly had income tax liability in the half million dollar range.  Because of the way their investment income fluctuated, making a precise determination of the amount of estimated payments they should pay difficult, they elected each year to roll over their tax refunds to apply the refunds against the estimated tax payments for the subsequent year.  This practice regularly created large refunds for them which they left with the IRS.

Something happened with respect to their 2011 return.  They unquestionably seem to have prepared the return on time in their usual manner.  They requested an extension, sending it by certified mail on April 17, 2012.  The extension estimated a tax liability of about $1.5 million, stated they had made payments of about $1.2 million and included a check for about $300,000.  The taxpayers believe they timely filed their 2011 return before the extended due date but acknowledged that they had no mail receipt showing that they did so.  The return, which may or may not have been filed, showed an overpayment of $692,690 with a request that this amount be applied to their 2012 taxes as per their usual practice.

In 2013, they requested an extension of time to file their 2012 return, estimated a liability of about $500,000 and stated they had made payments already of about $1.15 million.  They did not get around to filing the 2012 return until February 6, 2015.  The filed return reflected almost the same liability and payment amounts as they stated when requesting the extension.  The payment amounts included $692,690 from their 2011 overpayment.  The 2012 return reported an overpayment of $645,119 which they elected to apply to their 2013 estimated taxes.

They filed their 2013 return in December 2014, showing tax owed of about $1 million and payments of $1.12 million which included the $645,119 credit forwarded from the 2012 overpayment.  On December 15, 2014, the IRS sent the taxpayers a notice stating that they owed $577,924.18 based on changes to their 2013 form.  This started a back and forth which led to the discovery that the 2011 return had never been filed. 

On January 20, 2016, a Revenue Officer (RO) showed up at their property (the opinion skips over that the IRS must have sent a series of collection notices including a Collection Due Process (CDP) notice that the Libitskys did not pursue).  On that date, they gave the RO a signed copy of the 2011 return.  The court states that the “Libitzkys’ 2011 return was deemed filed on January 20, 2016”, showing the tax and payments resulting in an overpayment of $692,690.  (Note that handing a signed return to an RO or a revenue agent does not always result in the IRS treating the return as filed.  This is at issue in a case currently before the 9th Circuit – Seaview Trading, LLC, AGK Inve v. CIR, No: 20-72416.)

On April 20, 2016, the IRS issued a letter to the Libitzkys informing them that their claim for the $692,690 could not be allowed because “[y]ou filed your original tax return more than 3 years after the due date. Your tax return showed an overpayment; however, we can’t allow your claim for credit or refund of this overpayment because you filed your return late.” Dkt. No. 1-1, Ex. B. The letter continued, “We can only credit or refund an overpayment on a return you file within 3 years from its due date. We consider tax you withheld and estimated tax as paid on the due date (i.e., April 15) for filing your tax return.” Id.

By letter dated August 3, 2016, plaintiffs’ counsel appealed the denial of the Libitzkys’ $692,690 claim for the 2011 tax year to the IRS. Dkt. No. 1-1, Ex. C. On November 29, 2017, the IRS again determined that there was “no basis to allow any part of your claim” for the $692,690. Dkt. No. 1-1, Ex. D. The letter advised plaintiffs that they could further pursue the matter by filing suit with the district court within two years of the April 20, 2016 claim denial letter. Id.

The 9th Circuit points out that the three year look back rule of IRC 6511(b) presents a problem here since the 2011 return was not deemed filed until January 20, 2016, but the payment giving rise to the overpayment would have been deemed paid on April 17, 2012, more than three years prior to the filing of the claim.

For that reason, the Libitzkys argue that “[w]hether through the 2012 Form 4868, or through the 2012 Form 1040, or the combination thereof, or other documents and communications, [they] made a formal or informal claim (either of which is legally sufficient), timely.” Dkt. No. 51 at 35. Ordinarily the Court would have been inclined to find that what is recoverable is a merits inquiry, while the Section 6511(a) timely claim requirement is satisfied by the 2011 tax return at a minimum, thus establishing the Court’s jurisdiction over this dispute. The circuit has stated, however, that “§ 6511(b)(2)(A) is jurisdictional.” Zeier v. United States Internal Revenue Service, 80 F.3d 1360, 1364 (9th Cir. 1996). As another court has observed, this essentially collapses the jurisdictional and merits inquiries in cases like these. See Stevens v. United States, No. 05-03967 SC, 2006 WL 1766794, at *3 n.3 (N.D. Cal. June 26, 2006) (“accepting that Section 6511(b)(2)(A) creates a jurisdictional bar to Plaintiff’s case, Plaintiff may clear that bar with proof that the estate submitted an adequate informal claim, the same thing it will need to prevail on the merits.”).

The court finds that in order to determine if the overpayment is recoverable questions of fact exist on which a jury will need to decide.  By taking the position that the timeliness of the claim creates a jurisdictional issue, the court makes the inquiry slightly more difficult and places it at odds with at least one other jurisdiction.

The court says it has recognized the informal claim doctrine and that could provide a path forward for the taxpayers.  The IRS counters that neither the 2012 extension request nor the 2012 return could meet the test for an informal claim because neither provides the IRS with the information necessary to determine if the claim is correct.  If the court finds that the subsequent year return can serve as a formal or informal claim for refund for the year in which the taxpayer seeks a credit carryforward on an unfiled return, the decision would expand the informal claim doctrine and would offer a large benefit to taxpayers who fail to timely file their returns. 

The equities are interesting here.  You could say the IRS led the taxpayers on by accepting the 2012 return with the somewhat phantom 2011 overpayment.  The IRS did not start questioning the overpayment until the taxpayers filed their 2013 return, lulling the taxpayers into a false sense of security.  On the other hand, the taxpayers not only failed to file the 2011 return for unknown reasons, but also failed to react quickly when the IRS brought them the problem.

Disallowing the credit would be a harsh result here, particularly if the taxpayers have a history of filing and apparently only missed the 2011 year filing due to inadvertence of some type. For those interested in credit carryover issues, a CDP case involving these issues just had an order entered which you can read here.

Complications from Extensions and Unprocessible Returns

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

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

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

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Interest on Refunds Claimed on the Original Return

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

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

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

Other Code provisions, however, may adjust this further.

When Is the Return Considered Filed?

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

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

And Now We Add COVID Relief

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

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

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

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

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

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

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

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

And Now, the PMTA

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

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

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

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

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

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

Two Final Thoughts

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

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

Refund Claims and the Specificity Requirement

A trio of cases have recently seen the IRS raise the specificity requirement in claiming a refund.  In opposition to the motions filed by the IRS, the taxpayers have raised waiver as a defense.  The results are interesting and instructive.  Of course, you don’t want to plan for having to defend against a failure to meet the specificity requirement but understanding how to defend against this argument can be useful.

When a taxpayer seeks a refund, the taxpayer must give the IRS a fair opportunity to administratively determine whether it should grant a refund.  If the claim filed by the taxpayer does not point the IRS in the right direction with enough information to allow to it understand the issue being raised by the taxpayer, then the taxpayer’s claim may fail the specificity test.

In Premier Tech v. United States, No. 2:20-cv-890-TS-CMR (D. Utah 2021); Intermountain Electronics v. United States, No. 2:20-cv-00501-JNP (D. Utah 2021); and Harper v. United States, 847 F. Appx. 408 (9th Cir. 2021) the courts grappled with the claims filed by the taxpayers.  The IRS objected that the claims lacked specificity and that the complaints did as well.

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In Intermountain Electronics, the court held that the IRS had waived the specificity requirement by processing Intermountain’s refund claim, so the court had jurisdiction.  Even though it ruled favorably on the claim itself, the court found that the taxpayer’s complaint was not sufficient to state a claim under Rule 12(b)(6) under the Twombly/Iqbal plausibility pleading standard.  Carl Smith has written about the pleading issues raised by Twombly/Iqbal previously here and Patrick Thomas has written about it here.  The court allows the taxpayer to amend the complaint to make it more detailed and not just spout legal requirements from the research credit statute.

The court states without discussion that the refund claim filing requirement of 7422 is jurisdictional — a point currently pending in the Brown case before the Federal Circuit and a point raised in the cases of Walby v. United States, 2020 U.S. App. LEXIS 13711 (Apr. 29, 2020), which joined a panel of the Seventh Circuit in Gillespie v. United States, 670 F. App’x 393, 394–95 (7th Cir. 2016) questioning this position.  The issue and these cases have previously been discussed here and here.  Although it fails to mention Walby and Gillespie, the court discusses the Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945) opinion of the Supreme Court from 1945, where the Supreme Court held that the specificity requirements for a refund claim are waived if the IRS reviews and denies the claim on the merits because those requirements are only regulatory and therefore subject to waiver.  The district court in Intermountain notes that the taxpayer appears to have done all that was required under IRS forms by filling out the Form 6765 required for claims of research credits and attaching that form to its amended returns.  While the court is skeptical that the taxpayer had to attach a lot more unrequested information than the Form 6765 to create a valid claim, it does not decide that issue, but holds that the IRS waived the specificity requirements, even if the claims were initially insufficient. 

The court writes, as to the facts: 

As a result of the amended returns, the IRS initiated an examination to determine Intermountain’s eligibility for the credits. Over the course of an approximately five-year examination, the IRS requested and received substantial amounts of information from Intermountain. The IRS ultimately disallowed Intermountain’s claim for credits for both years, concluding both that much of the work performed by Intermountain employees did not constitute qualified research and that Intermountain failed to adequately substantiate its claims through the evidence it provided to the IRS. See ECF Nos. 26-3, 26-4, 26-6.  

The court notes that this case is virtually on all fours with a 9th Cir. opinion from earlier this year also involving research credit claims, Harper v. U.S., where the 9th Cir. held that due to a long audit of a Form 6765 attached to a refund claim, the IRS had waived the specificity requirements.  In both cases, the IRS received tons of documents from the taxpayers while the refund claim was audited, and the formal claim disallowance did not mention a specificity requirement defect, just that the taxpayer hadn’t shown entitlement to the claimed refund (which appears to be a denial on the merits).  (A concurring opinion in Harper would have held that the suit was valid because the taxpayer had made an informal claim, not that there had been a waiver.)

In Premier Tech provides a similar opinion decided a day earlier than Intermountain by another judge in the D. Utah, where it appears the judges must have coordinated their opinions. Premier Tech also involves a section 41 research credit refund claim.  Again, the taxpayer filled out a Form 6765 and attached it to the refund claim, and the IRS argues that alone was insufficient to meet the specificity requirement.  Unlike in Intermountain, though, while the IRS also audited the refund claim, the IRS never issued a notice of disallowance to Premier Tech, so suit was brought based on the rule regarding the passage of six months without such notice.  As a result, there is no argument in Premier Tech that the IRS waived the specificity requirement (the Angelus Milling argument).  Thus, the judge in Premier Tech is forced to decide the issue that was dodged in Intermountain — whether the refund claim met the specificity requirement.  The Premier Tech court holds that the specificity requirement was met and, unlike in Intermountain, that the complaint properly states a claim on which relief could be granted.  (In Intermountain, the judge held that the complaint did not state a claim, but allowed the taxpayer to amend the complaint to provide more detail.)  The reasoning in Premier Tech for finding the claim specific enough reads very similar to the reasoning expressed in Intermountain (but which was dicta there):  

Nevertheless, the United States argues that the amended return is not sufficient because Premier did not attach additional documents addressing every single element in 26 U.S.C. § 41, such as describing the research conducted, explaining how that research worked to develop a business component, detailing on whose wages and what supplies the money was spent, and proving the amount spent on research in the prior three tax years. But the United States offers no authority for imposing such a requirement. Form 6765 does not ask taxpayers to provide any of these details. If the IRS wants more information about the research tax credits, the IRS could require that information on Form 6765. It does not, and the IRS cannot now say its own forms are not sufficient to constitute claims for refunds. That would lead to absurd and patently unfair results for taxpayers. Furthermore, under the government’s position, no tax return claiming tax credits for increasing research activities could possibly constitute a claim for a refund. This is directly contradicted by 26 C.F.R. § 301.6402-3(a)(5).

In cases in which the taxpayer provides a wealth of detailed information to the IRS as part of the claims process and in cases in which the IRS rejects the refund claim on the merits, these cases show that the Department of Justice will struggle when it seeks to stop the litigation pointing to defects in the claim itself for failure of the claim to provide the IRS with enough information to adequately consider whether to grant the refund.  Even though DOJ may have correctly identified a poor refund claim, if the IRS acted in such a way that shows it understood what the taxpayer sought in requesting the refund, then courts will struggle to turn the taxpayer away on this basis.  The best practice is to carefully state the basis for the refund claim but where the facts show that the taxpayer provided enough information for the IRS to understand what the taxpayer wanted, the case will likely survive the types of challenges DOJ makes in these cases.

The Effect of the Missing Postmark

Today’s case highlights the difference in treatment of envelopes with no postmark between the Court of Federal Claims (CFC) and the Tax Court.  It turns out that on this issue, petitioners receive better treatment at the Tax Court.  Of course, it is better not to find out what a court thinks about a missing postmark.  For those filing Tax Court petitions, the ability to electronically file offers an easy way around the postmark/private delivery service/postal delay issue.  Credit to Carl Smith for spotting this case and providing much of the text of this post. 

I have heard that only 15% of Tax Court petitioners have taken advantage of the post-DAWSON ability to electronically file petitions.  The Tax Court is no doubt disappointed at this uptake of a provision that could save it time in processing petitions and in having to decide these types of cases.  For a relatively long time, individuals have been able to file electronically in the Court of Federal Claims, district courts, bankruptcy courts and other federal courts.  Yet, service from the post office continues its siren song for many petitioners.  With the low uptake on the Tax Court’s electronic filing system for petitions, a decent number of practitioners must continue to prefer USPS or a private delivery service, but in many instances the people using the non-electronic filing options are pro se and low income.

The taxpayers in the case at issue did not have an electronic filing option because the document they were filing that causes the problem was not a petition but a refund claim.  As of yet, the IRS does not have a way to electronically file refund claims (amended returns) that go back more than two years, apart from original tax returns.  Even where you cannot electronically file documents with the IRS, faxing documents to the IRS provides a fast way to transmit them and immediately receive a receipt.  But the IRS instructs filers of Form 843 refund claims to mail in the form.  The mailing of documents continues to fill the pages of case books with situations where things do not work out.

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In an opinion issued by the CFC in a refund case, McCaffery v. United States, No. 1:19-cv-01112 (Ct. Fed. Cl. 2021), the issue was whether the taxpayer could introduce extrinsic evidence of the mailing of a refund claim where the claim arrived at the IRS just after the filing deadline, but the envelope in which the claim came had no postmark.  Under regulations, extrinsic evidence is allowed where the postmark is illegible, and the Tax Court has extended the reg.’s reasoning to situations where there is no postmark at all.  The CFC disagrees with the Tax Court’s interpretation and would not accept parol evidence in the absence of a postmark.  The CFC dismisses the case for lack of jurisdiction, without discussing whether a dismissal for failure to state a claim might be more appropriate (i.e., there is no discussion of the Walby Fed. Cir. opinion which we discuss here in a post by Carl). 

Here’s what the CFC wrote about the Tax Court’s position:

Plaintiffs argue that extrinsic evidence may be used to prove the date of mailing for purposes of the deemed delivery rule even when the postmark is absent. They cite a line of cases from the Tax Court holding that extrinsic evidence as to timely mailing must be considered when an envelope contains no postmark at all. Pls.’ Opp. at 5 (citing to Sylvan v. Comm’r, 65 T.C. 548 (1975); Seely v. Comm’r, 119 T.C.M. (CCH) 1031, 2020 WL 201751 (2020); Williams v. Comm’r, 117 T.C.M. (CCH) 1328, 2019 WL 2373552 (2019); Blake v. Comm’r, 94 T.C.M. (CCH) 51, 2007 WL 2011294 (2007); Menard, Inc. v. Comm’r, 41 T.C.M. (CCH) 1279, 1981 WL 10531 (1981); Monasmith v. Comm’r, 38 T.C.M. (CCH) 60, 1979 WL 3117 (1979); Ruegsegger v. Comm’r, 68 T.C. 463 (1977)). That line of cases, however, originates in conceptual errors by the Tax Court in Sylvan.

In that case, much like this one, the Tax Court confronted an envelope with no postmark that was delivered after a deadline. The court found a gap in the statute: “There is nothing at all in the statute or legislative history indicating what Congress intended where the postmark is illegible; where there is no postmark because the petition was inserted in a new postal cover when the original cover was damaged; or where no postmark is affixed due to oversight or malfunction of a machine.” Sylvan, 65 T.C. at 552. “[I]n these circumstances,” the court reasoned, its “task . . . is to ask what Congress would have intended on a point not presented to its mind, if the point had been present.” Id. (quotes omitted). The court concluded, over a dissent, that extrinsic evidence should be admitted to prove the date of mailing for purposes of the deemed delivery rule not only when a postmark is illegible, but where it is absent.

That was erroneous for several reasons. To begin with, the Tax Court was mistaken that the Internal Revenue Code contains “nothing at all . . . indicating what Congress intended” in cases of absent postmarks. Id. Section 6511(a) contains a deadline, and section 7502 contains a deemed-delivery exception that is textually inapplicable when a postmark is missing. There is thus no gap to be filled; a late-received envelope lacking a postmark is simply untimely, whatever the extrinsic evidence might be. When a court treats circumstances covered by a general rule as falling into a gap, the court is not really “ask[ing] what Congress would have intended,” Sylvan, 65 T.C. at 552, but presuming that the statute should say something different.8 See also Antonin Scalia & Bryan Garner, Reading Law: The Interpretation of Legal Texts 94 (2012) (“As Justice Louis Brandeis put the point: ‘A casus omissus does not justify judicial legislation.’ And Brandeis again: ‘To supply omissions transcends the judicial function.’”) (citing Ebert v. Poston, 266 U.S. 548, 554 (1925), and Iselin v. United States, 270 U.S. 245, 251 (1926)).

Besides, when Sylvan was decided, the Treasury had already promulgated the regulation providing for extrinsic evidence of the contents of illegible postmarks, but not absent ones. See Republication, 32 Fed. Reg. 15241, 15355 (Nov. 3, 1967); see also Sylvan, 65 T.C. at 560 (Drennen, J., dissenting) (noting that the regulations then in effect “provide[ ] that if the postmark on the envelope is not legible, the petitioner has the burden of proving the time when the postmark was made”). By sanctioning proof by extrinsic evidence in other circumstances, the Tax Court merely created a new exception that neither Congress nor the administering agency authorized.9 That, too, is inappropriate: A judge should not “elaborate unprovided-for exceptions to a text, as Justice Blackmun noted while a circuit judge: ‘If the Congress had intended to provide additional exceptions, it would have done so in clear language.’” Scalia & Garner, supra, at 93 (citing Petteys v. Butler, 367 F.2d 528, 538 (8th Cir. 1966) (Blackmun, J., dissenting)). Nor should a court assume that because a legislature provided relief from a general rule in one circumstance, similar relief should be applied in other circumstances. See Easterbrook, supra, at 541 (“Legislators seeking only to further the public interest may conclude that the provision of public rules should reach so far and no farther[.]”).

Limiting judicial discretion to elaborate on enacted texts is especially important when it comes to this Court’s jurisdiction. This Court’s authority to hear cases brought against the United States rests on waivers of sovereign immunity which must be interpreted strictly. See Block v. N. Dakota ex rel. Bd. of Univ. & Sch. Lands, 461 U.S. 273, 287 (1983) (“[W]hen Congress attaches conditions to legislation waiving the sovereign immunity of the United States, those conditions must be strictly observed, and exceptions thereto are not to be lightly implied.”); see also, e.g., Sumner v. United States, 71 Fed. Cl. 627, 629 (2006). That makes it inappropriate to find jurisdiction by implying additional exceptions to Plaintiffs’ deadlines, or otherwise enlarging the deemed delivery rule.

In short — contrary to Sylvan — cases like this one are controlled by the plain text of the relevant statutes and regulations. See, e.g., Myore v. Nicholson, 489 F.3d 1207, 1211 (Fed. Cir. 2007) (“If the statutory language is clear and unambiguous, the inquiry ends with the plain meaning.”) (citing Roberto v. Dep’t of the Navy, 440 F.3d 1341, 1350 (Fed. Cir. 2006)).

The result in this case is harsh. Mr. McCaffery has declared — without contradiction, and with some circumstantial corroboration — that he mailed the amended return on a day when it would have been deemed timely, if it only had been postmarked.

In Sylvan, the date of receipt left the court with “no doubt whatsoever” that the envelope was mailed on a day when a contemporaneously applied postmark would have satisfied the deemed delivery rule. 65 T.C. at 550-51. Plaintiffs cite other cases where it seems unfair not to consider evidence of mailing. E.g., Pls.’ Opp. at 8 (citing to Glenn v. Comm’r, 105 T.C.M. (CCH) 1228, 2013 WL 424879 (2013) (noting that the Postal Service’s employee made an error, and but for that error, the envelope in question would have contained a timely postmarked date)). One can even imagine two filings with the same deadline mailed on the same day, one with a missing postmark and one with an illegible postmark, where extrinsic evidence on deemed delivery can only be admitted as to the latter. Like many bright-line rules, the deemed delivery rule might be simple and predictable to administer, but its results are not always satisfying in close cases.

Yet the text controls.

Splitting the Refund When One Spouse Files Bankruptcy

Three individuals who have all provided guest blogs for PT have co-authored a new ABA Tax Section Publication that could be important for those interested in tax controversy work:  Litigating a Case in Tax Court by Sean Murphy Akins, Kandyce Lyndsey Korotky, and David M. Sams.  Designed to cover every aspect of a United States Tax Court case from start to finish, Litigating a Case in Tax Court provides detailed guidance and tips on the Tax Court process in an easy-to-read and easy-to-use paper format with an online portal for accessing many sample documents that practitioners can use.  If you are interested in the book, you can find information about ordering it here.  This is one of several books published by the ABA Tax Section on a tax procedure topic.

The case of In re Culp, No. 20-52558 (Bankr. E.D. Mich. 2021) resolves a fight between the debtor and the trustee of his chapter 7 case over who receives his 2018 refund.  The court decides that the trustee will get to keep the entire refund, applying one of the four tests that bankruptcy courts have developed for this situation.  The result follows the majority rule and follows the result that would attach outside bankruptcy in an injured spouse situation if one spouse had debts subject to offset.  I agree with the outcome but the various possibilities depending on where a bankruptcy petition is filed suggest that the issue should be resolved to reach a uniform application of the law.

I have written about bankruptcy and refunds previously here and here.  We have recently had articles about bankruptcy and offset, here and here.  In this case, the Culps were apparently up to date on the tax liabilities and offset did not become an issue.

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Mr. Culp filed bankruptcy but his wife did not.  Although they did not file a joint bankruptcy petition, an election similar to filing a joint return, they did elect to file a joint 2018 return.  The 2018 return requested a refund of $13,825 which had not been paid as of the date of the filing of Mr. Culp’s bankruptcy petition on December 23, 2020.  The court does not explain why a 2018 refund was still unpaid so long after the due date.  It does say that the IRS paid $590.00 of interest on the refund, indicating that the return was probably filed on time, and something held it up in processing.  The delay in processing the return, whatever the reason, works to the Culps’ distinct disadvantage here.

When the IRS did issue the refund check on April 15, 2021, it knew of the bankruptcy case and sent the check to the trustee who, I am sure, gratefully received it since now the trustee had an asset case and was assured of getting more money out of this case than the ordinary no asset chapter 7 case.  The trustee moved to include the entire refund check as property of the bankruptcy estate.  Mr. Culp opposed the motion, arguing that the check should be split 50-50 between him and his wife with whom he filed the joint return.

In 2018, Mr. Culp worked and earned all the income reported on the return.  He had also paid all of the withholding generating the refund.

The court notes that bankruptcy courts have split four ways in their treatment of refunds issued in situations in which only one spouse has filed a bankruptcy petition.  It cites to the case of In re McInerney, 609 B.R. 497, 503 (Bankr. N.D. Ill. 2019) as describing and discussing in detail all the approaches that bankruptcy courts have taken on this issue.  The four approaches are:

  1. The 50/50 Rule: to allocate a joint tax refund equally between the spouses, regardless of tax withheld, income produced, or credits applied. A presumption of equal contribution and thus equal ownership is applied to find that a joint tax refund, as marital property, should be equitably distributed. This follows from the imposition of joint liability for any tax deficiency resulting from the filing of a joint tax return. This approach represents the minority approach in U.S. courts.
  2. The Income Rule: to divide joint tax refunds proportionally according to the income generated by each spouse. This rule is based on the principle that income tax liability arises from the receipt of income but has little support because income does not directly correlate to amounts withheld. This rule has thus been effectively superseded by the Withholding Rule, below.
  3. The Withholding Rule: to allocate the refund between spouses in proportion to their respective tax withholdings during the relevant tax year. This rule is based on the premise that the filing of a joint tax return does not alter the property rights of the spouses, and that each spouse has a separate legal interest in any overpayment of tax made by them on their own respective income. This is the majority rule in U.S. courts.
  4. The Separate Filings Rule: to apportion the refund based on a determination of what each spouse’s contributions and tax liabilities would have been if the spouses had filed separately, and to apply that proportion to the joint tax refund resulting from filing a joint return. This method is based on Revenue Ruling 74-611, in which the IRS ruled that when a joint return is filed, each spouse has a separate interest both in the reported income and in any overpayment. This approach considers each spouse’s withholdings, estimated tax payments, income, and contributions as a whole.

As mentioned above, the debtor argued for the 50/50 split since that would preserve the largest refund from the trustee’s clutches.  The trustee chose the withholding approach since that would bring the largest amount into the estate.

Interestingly, the bankruptcy judge deciding this case had split on the issue himself in prior opinions.  He had an opinion from 2008 using the 50/50 approach and one from 2013 using the withholding approach.  He benefited from the nice discussion in McInerney.  He decides here that the withholding approach, which has become the majority approach among bankruptcy judges, applies.

Because the treatment in the withholding approach tracks tax law principles, it makes the most sense to me.  Here, it works to debtor’s disadvantage, but it could work to the debtor’s advantage or be relatively neutral in another case.  Having the bankruptcy outcome parallel the tax outcome seems the most appropriate, even though the combination of this approach and the IRS’s delayed issuance of the refund hurts the Culps here.

Because the refund was sizable, it makes you wonder if earlier receipt of the refund might have staved off the bankruptcy filing.  It’s also impossible, at least without digging into the bankruptcy case, to know which creditors are the winners and losers as a result of the late refund – assuming that the Culps would have used the refund to pay creditors.  The clear winner here is the trustee who will get to take a fee out of the refund.

IRS Whiff on Timeliness of Refund Claim Prevents Payment of Refund If Taxpayer Fails to File Suit Within Two Years

What happens if a taxpayer timely files a refund claim, IRS denies the claim because it mistakenly believes that the claim is untimely and the taxpayer fails to files a refund suit within two years? To top it off, IRS, outside the two-year window for filing suit, realizes that it made an initial mistake in rejecting the claim on SOL grounds?

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A recent email released as Chief Counsel Advice describes this scenario. As the email notes, that the IRS later acknowledges the claim as timely does not grant the IRS the power to reconsider its earlier denial if the two year period for filing suit in federal court has passed. 

A quick statutory background on refunds. As to filing a suit, Section 7422 authorizes a suit for refund for taxpayers who believe they have overpaid taxes (or are entitled to an excess of refundable credits). Section 7422 authorizes such a suit only once the taxpayer has submitted an administrative claim for refund with the Service. Section 6532 prevents suits 1) until at least six months have passed after filing the claim (unless there is an earlier denial) or 2)  “after the expiration of 2 years from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of the part of the claim to which the suit or proceeding relates.”

The email/advice does not provide the underlying facts but as many readers (and my suffering procedure students learn) is that the 6511(a) and 6511(b) SOL refund rules and limitations on amount can be tough.  The email flags that the timeliness of the claim issue in question relates to Section 7503, which provides rules for when the last day for performing an act falls on a weekend or holiday.  The advice acknowledges that the  refund claim was in fact timely when taking into account Section 7503.

As the advice notes, if a taxpayer has not in fact filed suit, under Section 6514(a)(2) a refund issued after the two-year period in 6532 is considered erroneous. As such, the taxpayer is out of luck unless there was some procedural defect with the IRS’s denial of the refund, such as a failure to be sent to the proper address or a failure to send by certified or registered email. 

What would happen if the IRS had issued the refund after the two-year period had lapsed?  Then the payment would be an erroneous refund, allowing the IRS to recover under erroneous refund procedures, leading to yet another complex set of rules that delight tax professors and annoy students and taxpayers alike.

The situation highlights the at times unfairness of the SOL rules. Whether the time period for an action is jurisdictional or generally subject to equitable exceptions is a topic we have discussed frequently. Bryan Camp has thoroughly discussed these issues in a recent Tax Lawyer article where he explores why he believes the refund suit rules in Section 7422 and Section 6532 are not jurisdictional.  To that end see also a PT post from Carl Smith discussing a district court case from the ED of Washington where the court equitably tolled the 6532(a) filing deadline, citing the Volpicelli case from the 9th Cir. holding that the 6532(c) wrongful levy suit filing deadline is not jurisdictional and is subject to equitable tolling. The brief CCA does not go down this rabbit hole, but I note that IRS does not accept Volpicelli, and this topic is one courts will continue to address.

Unsigned and Electronically Signed Refund Claims

Last year I blogged on the case of Gregory v. United States, 149 Fed. Cl. 719 (2020), in which the Court of Federal Claims denied a refund claim because the taxpayers did not sign the amended return.  It turns out the Gregory case is part of a larger group of cases involving the same or similar issues.  The tax clinic at Harvard filed an amicus brief in the Federal Circuit regarding one of the cases in the group, Brown, on behalf of the Center for Taxpayer Rights.  The Court of Federal Claims has recently addressed another case in the group and one that has a slightly different fact pattern.

In Mills v. United States, No. 1:20-cv-00417 (Fed. Cl. 2021), the CFC issued another opinion in the long line of cases caused by accountant and lawyer John Anthony Castro, who is doing contingency fee refund suits involving IRC 911 exclusions for numerous people overseas. The first case decided by the Court of Federal Claims was last year and Gregory was among the first wave.

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In the earlier cases, the problem was that the Forms 1040X were substantively reviewed by the IRS and denied on their merits.  Only when the cases got to the CFC did the DOJ object that Castro signed the Forms 1040X, though his POA did not authorize him to sign for the taxpayers.  In these earlier cases, the taxpayers, relying on a Supreme Court opinion from the 1940s, Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945), argued that the IRS waived the signature defect by disallowing the claims on the merits rather than based on the lack of signature. 

In all of the cases decided so far, the Court of Federal Claims has held that the signature requirement is jurisdictional and not subject to waiver.  The judges dismissed all such suits without deciding whether a waiver might have occurred if the requirement were not jurisdictional.  An appeal to the Fed. Cir. has been taken only in one such suit, Brown, where the Center for Taxpayer Rights, as amicus, has argued that the whole requirement to file a refund claim is no longer jurisdictional under recent Supreme Court case law, so the signature requirement is also one that can be waived or forfeited by IRS inaction.

The Center cited, among other things, an opinion of the Fed. Cir. from 2020 named Walby, a case Carl Smith blogged here.  In Walby v. United States, 957 F.3d 1295 (Fed. Cir. 2020), a pro se tax protester case, a panel of the Federal Circuit joined a panel of the Seventh Circuit in Gillepsie v. United States, 670 F. Appx. 393 (7th Cir. 2016), in questioning, in dicta, their Circuits’ precedents holding that the administrative tax refund claim filing requirement at section 7422(a) is a jurisdictional requirement to the bringing of a refund suit, as probably no longer good law under recent Supreme Court case law

Mills differs from the prior cases in that, after the first set of Forms 1040X were signed by Castro, the IRS denied them on the grounds that Castro improperly signed them — i.e., not on the merits.  So, there could be no argument in Mills (unlike in the prior cases) that the IRS waived the signature requirement.  Castro responded by getting the CFC to dismiss without prejudice a prior suit Mills had brought and tried again. 

Mills filed new Forms 1040X on which to bring suit.  Mills was in Afghanistan, however, where he could not print out the Forms 1040X and sign them.  So, he affixed his digital signature to the new Forms 1040X.  This was done before the IRS authorized using digital signatures on Forms 1040X.  Waiting more than 6 months after the second amended returns were filed, Mills brought suit for refund.  The opinion just issued (which had initially been issued 2 weeks ago as a sealed opinion, but is no longer sealed) again holds that the claim filing requirement is jurisdictional — citing prior Fed. Cir. case law, but not mentioning Walby.  The court goes on to hold that Forms 1040X at the time these were filed could not be electronically signed.  Thus, the court dismisses this second Mills suit for lack of jurisdiction. All may not be lost for Mills, however, who can now, if he so chooses, go back and perfect his Forms 1040X for the third time, this time complying with IRS procedures for electronic signatures.

It is Carl’s view that Mills would not make a good test case for asking the Fed. Cir. to overrule its prior precedent on whether claim filing is jurisdictional to a refund suit because there is no possible way for Mills to argue for waiver on these facts (and, indeed, no waiver argument was ever made by Mills in this case).  Although the Court of Federal Claims in Mills may have been wrong to call the requirement jurisdictional, in any appeal, the Fed. Cir. would likely duck the jurisdictional question as not necessary to decide the case — just as it did in Walby.  In Brown, deciding whether or not the filing requirement is jurisdictional cannot be avoided, since the taxpayer has an argument for waiver that has not yet been considered by the CFC.

Fellow blogger, Jack Townsend, wrote to Les and I with the following comment:

In the conclusion, the court says:

“This result here is admittedly harsh. Mr. Mills was working overseas under difficult circumstances and made demonstrable efforts to sign the returns as best he could. The IRS could have accepted his digital initials as an appropriate signature but chose not to do so. If it is to process millions of tax-forms each year, the IRS may insist on strict compliance with its procedural requirements. The plaintiff’s second amended returns did not comply with IRS requirements and were therefore not duly filed. Under these facts, the Court lacks jurisdiction over the plaintiff’s refund suit and must dismiss the complaint.” (emphasis added by Jack)

In the bold-face, the court says IRS had authority/discretion to accept the returns but chose not to do so.  Could that decision be reviewed under the APA arbitrary and capricious standard or some review of discretionary decisions?

Les responded “I would think that an APA claim under 706(2)(A) could have been brought as part of the refund suit. Having failed to raise it the taxpayer is out of luck as the APA would not confer independent jurisdiction.”

Unintentionally, a whole group of taxpayers has been keeping lawyers interested in procedural issues occupied.  It’s possible that the Brown case could create some new precedent in the Federal Circuit that could have an impact on other circuits.  The digital signature problem faced by Mr. Mills is in some ways similar to the mailing problem faced by Guralnik and Organic Cannabis.  In both situations, the rules changed shortly after their failure to follow the old rules.  The old rules were changed because they no longer fit the circumstances but the last taxpayers to incorrectly attempt action under the old rules are paying the price.