What to Do After Receiving a Notice of Claim Disallowance

The National Taxpayer Advocate wrote a blog post last month highlighting a potential trap for the unwary who receive a notice of claim disallowance and think that they have worked out or are working out a resolution.  In oversized bolded letters, she stated:

If you are working with the IRS or the IRS Independent Office of Appeals (“Appeals”), do not make the mistake and assume that working toward a resolution equates to the IRS’s ability to pay a refund or allow a credit once the IRC § 6532 statute has expired.

The NTA made this statement because IRC 6214(a)(2) “prohibits the IRS from paying the refund or allowing the credit” if more than two years has passed from the notice of claim disallowance.  In order to preserve the right to obtain payment beyond the two-year period, the taxpayer must either file suit or ensure that they and an authorized IRS employee sign a Form 907, Agreement to Extend the Time to Bring Suit.

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The NTA felt it necessary to write the post highlighting this issue because of the significant and unusual delays the pandemic has caused.  Taxpayers might think they have worked something out with the IRS to resolve an issue after the notice of claim disallowance, but unless the IRS actually takes action within the two years to pay the refund or allow the credit, the taxpayer can lose out.  In the current climate, matters can take more than two years to resolve.

The advocate lays out the problem in stark terms as she describes the administrative process of contesting a claims disallowance letter:

Once the notice of claim disallowance is received, a taxpayer needs to send a protest to the issuing office contesting the disallowance. This assumes the taxpayer understands the notice and the requirements, as these notices are not always clear. (See the National Taxpayer Advocate 2014 Annual Report to Congress, Refund Disallowance Notices Do Not Provide Adequate Explanations.) With the delays in processing correspondence, these protests may sit for many, many months before being addressed. Once assigned, the IRS employee assigned to the case needs to obtain the administrative file, bundle it with the taxpayer’s protest, and send it to Appeals for consideration. Unfortunately, the backlog adds more delays to this process. Once a protest is assigned to Appeals, it still needs to be assigned to an Appeals Officer and worked, which could be an additional six to 12 months. If the issue involves whether the claim was timely, and the Appeals Officer concludes that it was, the case may be transferred back to Exam for a determination on the merits of the refund claim. If the IRS and the taxpayer do not agree on the merits, the taxpayer can file another protest with Appeals to contest the merits of the underlying claim and the process starts all over. It is not surprising that this process may take over two years to be resolved, exceeding the two-year period in which a refund could have been issued (or a credit allowed).

While the Form 907 extension exists to remove the pressure of the two-year time period in this circumstance, executing that form may not always solve the problem.  The blog also points out that representatives must ensure that their power of attorney designates the Form 907 as an act within their scope of representation.  Of course, the IRS must agree to the Form 907.  A taxpayer cannot unilaterally execute a binding extension agreement.  Look to IRM 8.7.7.3.3(1) to find the reasons that will cause the IRS to agree to extend the time.

The NTA also points out that sometimes no one at the IRS has the case under assignment.  In that situation the taxpayer will struggle to find someone at the IRS willing and authorized to sign Form 907.  For this reason, the NTA suggests starting the process of getting the Form 907 filed 4-6 months before the running of the two-year period. 

If a taxpayer cannot obtain the necessary signature as the two-year period approaches, filing a refund suit may provide the taxpayer’s only option.  The NTA states the IRS could extend the time period by exercising its authority under IRC 7508 as it has done for several pandemic-related matters; however, it has not done so for the two-year period for refund.

Be aware that filing a refund suit has slightly different timing rules than the filing of a petition in Tax Court.  The timely mailing is timely filing rule of IRC 7502 does not apply.  Carl discussed this in a post a few years ago.  A recent unpublished opinion of the Federal Circuit also addresses this issue.  In Weston v. United States, No. 22-1179 (Fed Cir. 2022), an unpublished opinion [appearing in Tax Notes Federal on April 14, 2022], the Fed. Circuit affirmed the dismissal of a pro se complaint for Lack of Jurisdiction for late filing under the 2-year rule of 6532(a).  No new law was made, and there was no way the taxpayer could have won her case under 6511, anyway.  The taxpayer filed joint 2012 and 2013 returns with her deceased husband in mid-2017 – more than 3 years late.  The returns showed overpayments.  The claims were timely under 6511(a) (filed on the same day as the returns), but would be limited to zero under 6511(b)(2)(A).  The IRS sent her notifications of claim disallowance on April 4, 2018 (for 2013) and April 11, 2018 (for 2012).  She mailed a complaint to the Court of Federal Claims on April 11, 2020, which arrived at the CFC and was filed on April 20, 2020.  Of course, the 2013 disallowance 2-year period ran before she mailed.  But, she argued for timely filing for the 2012 year because of timely mailing of the complaint.  She lost because 7502 applies to filings with the IRS and the Tax Court, but not with any other court. 

The NTA’s post provides a good reminder of yet another hurdle created by the pandemic.  Don’t let this hurdle prevent your client from obtaining a refund.

What Happens After Boechler – Part 3:  The IRS Argues that IRC 7459 Requires that IRC 6213(a) Treat the Time for Filing a Tax Court Petition as Jurisdictional

After Congress created the predecessor statute to IRC 6213 in 1924 (and created the Board of Tax Appeals – the predecessor to the Tax Court) it came back in 1926 and 1928 to create a separate statute which is now IRC 7459.  Section 7459 provides that a dismissal from a Tax Court case on jurisdictional grounds does not prevent the taxpayer from paying the tax and suing for refund.

When Carl Smith and I began making the argument that time periods for filing a Tax Court petition are not jurisdictional time periods, we initially confined our arguments to Collection Due Process (CDP) and innocent spouse cases out of concern that succeeding in deficiency cases might harm taxpayers because of 7459.  As we thought about this further over time, we could not remember a single incidence of a taxpayer being dismissed from the Tax Court on jurisdictional grounds and subsequently full paying the tax and suing for refund.  Of course, this does not mean it has never happened, but it does suggest it happens rarely.

This post will explain why IRC 7459 should not factor into the decision of whether IRC 6213 is a jurisdictional provision or a claims processing rule.  That conclusion results from both the language of the two statutes as well as the goal to protect taxpayers.

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In the prior two posts we have explained why the Supreme Court’s decision in Boechler knocks out all of the arguments that IRC 6213 is a jurisdictional provision previously made by the IRS, the Tax Court, and other courts, including the 9th Circuit in Organic Cannabis.  This post looks at the arguments regarding IRC 7459 and the cases the Tax Court dismisses in order to provide an explanation for removing the last argument from consideration.

In Organic Cannabis the 9th Circuit explained the various types of suits a taxpayer could bring to contest a tax liability and pointed out that:

if the taxpayer does file a petition in the Tax Court, then a decision “dismissing the proceeding shall be considered as its decision that the deficiency is the amount determined by the [IRS],” id. § 7459(d), and such decision as to “amount” is entitled to preclusive effect in subsequent proceedings between the taxpayer and the IRS, see Malat v. Commissioner, 302 F.2d 700, 706 (9th Cir. 1962). [emphasis added]

We have written before about the effect of a Tax Court dismissal, and we have explained that petitioners to the Tax Court cannot voluntarily dismiss a Tax Court case once jurisdiction has attached.  After setting up the general rule, the 9th Circuit went on to explain the exception in IRC 7459(d) when the Tax Court dismisses a case because it lacks jurisdiction:

there is no such “decision” as to “amount,” and no preclusive effect, if the Tax Court’s “dismissal is for lack of jurisdiction.” 26 U.S.C. § 7459(d) (emphasis added)

Then the 9th Circuit used as one of its bases for finding IRC 6213 to be a jurisdictional provision with regard to the time of filing the problem that would attach if it were not jurisdictional:

Under Appellants’ non-jurisdictional reading of § 6213(a), the Tax Court’s dismissal of a petition as untimely could potentially have the perverse effect of barring the taxpayer from later challenging the amount in a refund suit—ironically yielding precisely the sort of “harsh consequence[]” that the Supreme Court’s recent “jurisdictional” jurisprudence has sought to avoid.  Kwai Fun Wong, 575 U.S. at 409.  That peculiar outcome is avoided if § 6213(a) is read as being jurisdictional, because then dismissals for failure to meet its timing requirement would fall within § 7459(d)’s safe-harbor denying preclusive effect to Tax Court dismissals “for lack of jurisdiction.” 

So, the 9th Circuit used what it thought would be a negative effect of finding IRC 6213 to be a claims processing rule as a basis for justifying its decision.  This is wrong both as statutory interpretation and wrong in thinking that keeping IRC 6213 as a jurisdictional provision would not harm taxpayers, while making that deadline non-jurisdictional would harm taxpayers.

With respect to statutory interpretation, IRC 7459 simply has no role to play.  The argument for the role of IRC 7459(d), at least based on the IRS argument, is that interpreting the jurisdictional dismissal exception of that subsection to exclude dismissals for late filing would render the exception superfluous.  The IRS has argued that the only dismissals that are currently jurisdictional (other than those when no notice of deficiency was issued and so the amount of a deficiency cannot be set out in the dismissal order) are from late filing. This argument fails because many reasons exist why a petition may be dismissed for lack of jurisdiction other than merely late filing or the lack of a notice of deficiency.  The most obvious situation occurs when the Tax Court dismisses a petition for lack of jurisdiction due to an invalid notice of deficiency because the IRS did not send the notice to the taxpayer’s last known address.  See, e.g., Crum v. Commissioner, 635 F.2d 895 (D.C. Cir. 1980).  Another example occurs when the automatic stay in bankruptcy bars the filing of a Tax Court petition, see, e.g., Halpern v. Commissioner, 96 T.C. 895 (1991).  Another example occurs when a corporation lacks capacity to file the petition, see, e.g., Vahlco Corp. v. Commissioner, 97 T.C. 428 (1991) (Texas law).  The biggest reason for dismissal from Tax Court for lack of jurisdiction occurs for failure to pay the filing fee – almost 2/3rds of the dismissals occur for this reason.  So, the IRS is wrong when it argues that determining IRC 6213 is a claims processing rule renders IRC 7459(d) superfluous.

The legislative history of IRC 7459(d) also does not support the conclusion that Congress enacted the statute to preserve the rights of taxpayers who file late in the Tax Court to avoid res judicata in a subsequent refund suit involving the same deficiency.  There is no such legislative history.  There is also nothing in the language of IRC 7459 that speaks to the time frame for filing a Tax Court petition as a jurisdictional time frame.  There is simply no language to parse.

After you leave the legal arguments that have no merit, you move to the apparent presumption by the 9th Circuit that somehow IRC 7459 helped taxpayers.  First, there’s the problem that Congress gave no indication it sought that result, either in the language of the statute or its legislative history. Second, the actual effect of the 9th Circuit’s take on the statute hurts far more taxpayers than it helps.

Carl Smith looked at the dismissals for lack of jurisdiction due to late filing in February and March of 2022 searching DAWSON using the search words “lack of jurisdiction and timely.”  He found 103 cases which suggests 618 dismissals over the entire year or some similar number.  Each of those individuals could theoretically be adversely impacted if section 7459(d)’s exception for jurisdictional dismissal could not apply, so that res judicata would prohibit their filing later refund suits.

To know how the loss of 7459(d) protection could adversely impact this group, it’s necessary to know how many taxpayers in this group paid the tax and filed a suit for refund.  For this fiscal year ending September 30, 2020, 188 refund suits in total were brought in the Court of Federal Claims and the district courts.  Not all of the 188 complainants filed after a prior Tax Court dismissal for late filing and perhaps none of them did.  Indeed, Carl looked at all district court and CFC opinions issued in 2021 using the search terms “refund and (Tax Court) and dismiss!” and could not find a single refund suit in which it was clear that the IRS had issued a notice of deficiency, the taxpayer had then late-filed a Tax Court suit, and, after the suit’s dismissal, the taxpayer sued for a refund. 

Carl did come across one 2021 opinion where a taxpayer’s Tax Court deficiency suit had been dismissed for lack of jurisdiction, purportedly for late filing, and a CFC refund suit ensued — see my post of June 4, 2021 on the case, Jolly.  However, in that case, it was unclear whether the IRS had ever issued a notice of deficiency, with the IRS arguing in the Tax Court that a notice of deficiency had been issued, but arguing in the CFC that the IRS had never issued one and that the Tax Court dismissal was wrong for saying there had been a late-filed petition rather than a petition lacking an underlying notice of deficiency.  And, in Jolly, the taxpayer did not fully pay the tax before bringing the CFC suit.    Reading the 2021 opinions, Carl also found a citation to a pre-2021 opinion in a refund suit where a taxpayer brought a CFC suit after his Tax Court deficiency suit was dismissed for lack of jurisdiction for late filing and where there was no dispute that a notice of deficiency had been issued, Wall v. United States, 141 Fed. Cl. 585 (2019), but the taxpayer in the suit was only seeking relief from liens, not a refund, and, in any event, had not fully paid the deficiency before bringing the suit.

It’s probable that no refund suits resulted from the Tax Court dismissals for failure to timely file the petition because a very high percentage of the petitioners dismissed were pro se taxpayers who lack knowledge of tax procedure and funds to full pay.  Only in a rare cases does the taxpayer benefit from IRC 7459(d), and not one that we know of.  Yet, we know there are cases in which taxpayers could benefit from the interpretation of IRC 6213 as a claims processing rule.

Petitioners who would especially benefit from the interpretation of IRC 6213 as a claims processing rule are petitioners with a good basis for equitable tolling.  While this is not a large number, the individuals with a good reason for filing late present very sympathetic cases in which the petitioners deserve the chance to have the merits of their case heard.  The next post will talk about the equitable tolling rules and who these petitioners might be. 

In addition, petitioners who would benefit are the petitioners dismissed because the Tax Court spent the time and effort to carefully review each case to determine if it had jurisdiction and issued an order to show cause when it had concerns about its jurisdiction even though Chief Counsel did not raise an issue.  In February and March of 2022, Carl searched for this type of order to show cause and found 34 cases.  This means that about 204 petitioners a year might benefit if the Tax Court did not need to spend time carefully scouring each case to check on its jurisdiction.  This would not only give these taxpayers a chance to have the merits of their argument heard but would save the Tax Court all of the time it currently spends looking at each case to determine if it has jurisdiction. 

To determine how many of the cases in which the Tax Court show cause orders resulted in a dismissal, Carl went back to April and May of 2021 expecting that most of those cases would have cleared through the system by now, offering a percentage of cases dismissed after a show cause order.  His research suggests that about 75% of the cases identified were dismissed as untimely.  The 9th Circuit’s effort to “help” taxpayers by citing to IRC 7459(d) instead created a misguided view of the system.  The actual cases show that few, if any, taxpayers receive a benefit from IRC 7459(d) but quite a few taxpayers might benefit from a claims processing rule, either because they have a basis for equitable tolling or, more likely assuming the Chief Counsel attorneys continue to fail to identify issues of timely filing, because taxpayers will no longer face orders to show cause for dismissal for lack of jurisdiction on account of late filing.

District Court in Rewwer Holds Improperly-Signed Timely Forms 843 Can be Informal Refund Claims

The recent decision in Rewwer v. United States, 1:20cv495 (S.D. Ohio 2022) regarding a misfiled refund claim later corrected reaches the opposite conclusion from the Court of Federal Claims’ recent decision in Dixon v. United States, (Ct. Fed. Cl. 2022) (Dixon 2) (blogged here) and contradicts the decision in Fulham v. United States, 1:20-cv-05871 (N.D. Ill. 2021), that I blogged about on December 17, 2021, which took a very narrow view of what could pass muster as an informal claim.  In each case the taxpayer did not properly file the original claim.  Rewwer more or less combines the mistakes made in Fulham and the Dixon cases, yet the taxpayer in Rewwer moves on to the merits while the taxpayers in Fulham and Dixon can’t get out of the starting gate. Another recent case, Deeb v. United States, 1:20-cv-01456 (N.D. Ga. 2022), doesn’t concern itself with whether the form is correct but dismisses on variance. Credit to Carl Smith for staying on top of these issues and providing much of the language for this post.

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Fulham

In Fulham, the taxpayer filed a Form 843, seeking a refund of income taxes.  After not getting a response, he filed a refund suit.  While in court, he learned that he should have used a Form 1040X, so he filed a Form 1040X with the court using PACER, not with the IRS.  The court dismissed the case for lack of jurisdiction (LOJ) because the Form 843 was the wrong form, and the right form was not filed with the IRS before suit began.

Dixon 1

In Dixon 1 (at 147 Fed. Cl. 469 (2020)), the taxpayer filed Forms 1040X with the IRS, but those forms were signed for the taxpayer by his attorney, John Castro, who held a POA, but not one entitling him to sign tax returns for the taxpayer.  The signature on the taxpayer signature line was hard to read, and the IRS did not realize until the first Dixon case was in court that Castro had signed the Forms 1040X.  Prior to the suit being brought, the IRS had reviewed the claims and denied them on the merits. The Court of Federal Claims (CFC) held that the lack of signatures from the taxpayer on the Forms 1040X was fatal to jurisdiction because the requirements to sign and to verify under penalties of perjury were statutory and not waivable.  The court distinguished the Supreme Court’s opinion in Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945), which held that the IRS could waive the non-statutory claim specificity requirement by rejecting a claim on the merits.  The Dixon court said that the signature and verification requirements are statutory and not waivable.

Dixon 2

The Dixon 2 case arose after Mr. Dixon went back and properly signed identical Forms 1040X to the ones originally signed by Mr. Castro and filed them with the IRS.  They were filed, however, after the statute of limitations for refund claims expired.  When the IRS did not allow the corrected refund claims, Mr. Dixon then brought a new CFC refund suit on the new Forms 1040X, where he argued that the original Forms 1040X were informal claims that were perfected by the corrected Forms 1040X, so the corrected Forms 1040X were deemed to relate back to the originals for purposes of the timely filing requirement.  In the Dixon 2 opinion, the CFC again dismisses for LOJ, holding that the improperly-signed Forms 1040X cannot constitute informal claims because of the lack of the taxpayer’s signature and compliance with the verification requirement.

Rewwer

Rewwer presents a combination of facts from both the Fulham and Dixon cases.  In Rewwer, the taxpayers timely filed Forms 843 with the IRS for a few years, which the IRS considered on the merits, granting one and denying two.  The Forms 843 were signed on the taxpayer signature lines by a holder of a POA, as “[taxpayer] POA”.  During consideration of the claims, the IRS told the taxpayers that Forms 843 were not the right forms, so the taxpayers then submitted Forms 1040X in replacement.  The Forms 1040X were not properly signed and verified by the taxpayers, either.  The Forms 1040X were filed after the 3-year SOL under 6511 had expired.  After two Form 1040X claims were disallowed, the taxpayers brought suit in district court.  Only then did the taxpayers learn that the Forms 1040X were not properly signed, so the taxpayers prepared new, identical Forms 1040X and filed them with the IRS during the refund suit.  The court rejected an IRS motion to dismiss, finding the Forms 843 to be informal claims for refund that had been timely filed, even though on the wrong form and with the wrong person signing and verifying.  Here’s a quote from the Rewwer opinion:

An informal claim must have ‘a written component . . . and should adequately apprise the Internal Revenue Service that a refund is sought and for certain years.’” Estate of Hale v. United States, 876 F.2d 1258, 1262 (6th Cir. 1989) (quoting American Radiator & Standard Sanitary Corp. v. United States, 318 F.2d 915, 920 (Ct. Cl. 1963)). “[T]he writing should not be given a crabbed or literal reading, ignoring all the surrounding circumstances which give it body and content. The focus is on the claim as a whole, not merely the written component.” Id. Accord Wilshire v. United States, No. 1:07-CV-00377, 2008 WL 4858256, at *1 (S.D. Ohio Nov. 10, 2008) (two years of oral and written communications from the executor of the taxpayer’s estate, along with a copy of the will and original tax return were sufficient to constitute a valid informal claim for a refund).

The Rewwer court also discussed a Sixth Circuit decision, Thomas v. United States, 166 F.3d 825, 831 (6th Cir. 1999), in which that court addressed the specific issue of Form 843 as an informal claim, holding:

the “Forms 843” dated November 1, 1995 are sufficient administrative claims. Although filed on the wrong form, the “Forms 843” dated November 1, 1995 put the IRS on notice. This fact is evidenced by the corresponding IRS rejection letters dated June 27, 1996, which refer Thomas to the IRS’ initial examination of his tax returns. Therefore, the IRS was aware of the nature of Thomas’ claims.

In Rewwer, the court based its decision on the totality of the facts.  It found that:

the IRS understood that Plaintiffs were seeking a refund, even though the proper form was not used. The Form 843s which were submitted made it clear which years were being claimed

The court described the information in the Form 843 and explained that in the correspondence back and forth between the IRS and the taxpayer that followed the filing of the Form 843,

there is no indication that the IRS did not understand Plaintiffs’ request. Rather, the IRS asked for more time to conduct research, sent the claims to the Cincinnati Service Center for processing, and at one point, actually appeared to allow the requested adjustment for tax year 2007. Moreover, the IRS allowed the full amount of Plaintiffs’ claim for tax year 2008, which was also filed on Form 843.

The Rewwer court then quoted from Angelus Milling, where the Supreme Court stated:

If the Commissioner chooses not to stand on his own formal or detailed requirements, it would be making an empty abstraction, and not a practical safeguard, of a regulation to allow the Commissioner to invoke technical objections after he has investigated the merits of a claim and taken action upon it.

The Rewwer court also found that any deficiencies in the informal claim were cured by the filing of the formal claims. The Court concludes that the IRS should be estopped from asserting this formal requirement since it waived strict compliance until Plaintiffs filed their claim here. 

Note the use of estoppel.  Only non-jurisdictional claim processing rules are subject to waiver, forfeiture, and, in some cases, estoppel and equitable tolling.  Implicit in the court’s holding is that the signature and verification requirements are not jurisdictional and are subject to waiver, forfeiture, and estoppel.

Deeb

One more case presenting this issue has recently come out, Deeb v. United States, 1:20-cv-01456 (N.D. Ga. 2022).  He sought refunds of income tax deficiencies and accuracy-related penalties which he had paid for 2010 and 2011.  For the 2010 year, the court cites Dalm for the proposition that a late-filed refund claim is a jurisdictional defect to a refund suit, but then inconsistently grants an IRS merits motion for summary judgment for 2010 because the refund claim was filed late.  Of course, if Dalm is the law, the 2010 year should have been dismissed for LOJ. For the 2011 year, the court finds a variance between the refund claim and the refund suit and so doesn’t allow the taxpayer to contest certain non-travel disallowed business expenses.  The court (citing precedent) calls the variance doctrine jurisdictional, though this is not necessarily the case.  No court I know of has discussed whether variance is still jurisdictional.

The court then goes on to rule on the deductibility of certain travel expenses and finds them not deductible for reasons of the taxpayers not being away from home (a tax home issue) and substantiation.  The court grants summary judgment to the IRS on these travel expenses.  The court finds the accuracy-related penalties to apply because the taxpayers made no separate contest of the penalties beyond arguing that the travel expenses were deductible.

The claim was filed on a single Form 843 covering both years and covering both penalties and income taxes.  There is no discussion in the opinion that the Form 843 would not be the right form (other than possibly for the accuracy-related penalties).  Deeb shows that, at least for some courts, Form 843 can at least constitute an informal claim that can be perfected prior to suit when a Form 1040X is filed after the SOL has passed.  In Deeb, the Form 843 was never perfected by the filing of Forms 1040X.  The IRS did not argue that he had filed the wrong claim form and did not move for dismissal based on lack of jurisdiction.  What seem like odd rulings from the court based on the other cases litigated probably flowed from the arguments the court received (and did not receive).

Two Circuits Sustain Tax Court’s Inability to Grant Requested Relief

Within the span of a few days the 2nd Circuit and the 4th Circuit each sustained a decision of the Tax Court that it lacked jurisdiction to grant the taxpayer the requested relief.  The cases arise out of different sources of the Court’s jurisdiction and deal with different requests yet provide a common theme regarding the limits of the Tax Court’s authority.  In McLane v. Commissioner, No. 20-1074 (4th Cir. 2022) the 4th Circuit sustains the Tax Court’s decision that it lacks the ability to order an overpayment refund in a Collection Due Process (CDP) case in which the IRS withdrew its notice of federal tax lien.  We blogged the McLane case here following the Tax Court memorandum opinion.  In Ruesch v. Commissioner, Dk. No. 20-3493 (2nd Cir. 2022), the 2nd Circuit sustains the Tax Court’s decision that it lacks the ability to determine the underlying tax liability in a passport revocation case.  We blogged the Ruesch case here following the Tax Court precedential decision.

Neither opinion provides a lot of reasoning and both opinions appear to leave open the question of whether the Tax Court could still decide the issues if the IRS had not withdrawn the lien or reversed the certification.  To the extent the decisions left the door open a crack, that’s the silver lining in cases otherwise disappointing to the taxpayers.

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In McLane, the petitioner proceeded pro se in the Tax Court and into the Circuit Court before Daniel Lader of Diruzzo & Company signed on for pro bono representation.  Amicus briefs were filed in support of the petitioner by the American College of Tax Counsel and the Tax Freedoms Institute, signaling an issue of some importance to the practitioner community.  The issue here was first decided by the Tax Court in Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), a case in which the taxpayer also proceeded pro se.  The 4th Circuit said the case presented a single issue:

whether, after the Commissioner of Internal Revenue conceded that a taxpayer owed $0 and was entitled to the removal of any lien or levy, the United States Tax Court had jurisdiction to determine that the taxpayer overpaid and order a refund.

Although the IRS sent Mr. McLane a notice of deficiency to his last known address, all parties agreed that he never received it.  This fact allows him to contest the liability in a CDP hearing, which he did.  He presented enough information to support the losses claimed on his return and the IRS conceded that he owed no taxes for the year at issue.  He claimed that he had overpaid, and the IRS argued the Tax Court lacked jurisdiction to hear whether he had overpaid.  The Tax Court agreed with the IRS.  The 4th Circuit said it would review this decision de novo.  After reciting the facts, it states:

When as here, the Commissioner has already conceded that a taxpayer has no tax liability and the lien should be removed, any appeal to the Tax Court of the Appeals Office’s determination as to the collection action is moot.

The Court stated that it could not interpret the phrase “underlying tax liability’ in isolation but must read it in “the specific context in which that language is used.”  It then concluded the phrase “does not provide the Tax Court jurisdiction over independent overpayment claims when the collection action no longer exists.”

The glimmer of hope on the issue for future taxpayers seeking a refund in a CDP case is found in a footnote designated with a *.  The court says:

Here, we believe it is unnecessary to decide the “[m]ore fundamental[]” question of whether § 6330 ever grants the Tax Court jurisdiction to determine an overpayment or to order a refund given that § 6330 so clearly cannot confer such jurisdiction when no active collection action persists. 

Not a lot of reasoning in this opinion with which to work.

In Ruesch, the 2nd Circuit issues a per curiam opinion.  Frank Agostino argues the case for the petitioner/appellant.  The taxpayer’s underling problems stem from penalties under IRC 6038 for failure to file information returns concerning controlling interests in foreign businesses.  She received a CDP notice and timely requested a hearing, but the IRS misplaced her request.  Because it thought it had not heard from her, it certified her debt as seriously delinquent tax debt.  She filed a Tax Court petition in response to this determination.  While her Tax Court case was pending, the IRS discovered her CDP request and reversed her certification to the State Department since its policy was not to certify debt while a CDP matter was pending.

Having reversed the certification, the IRS moved to dismiss her Tax Court petition for lack of jurisdiction and for mootness.  The Tax Court granted the IRS motions, determining that IRC 7435 did not authorize it to rule on the merits of the underlying liability and that the case was moot since the IRS had withdrawn certification.  She appealed, arguing that the Tax Court should make a determination on the merits of her liability.  She argued that the voluntary cessation doctrine should apply to keep her passport claim alive.

The voluntary cessation doctrine provides an exception to mootness if a party can prove that the defendant voluntarily ceases the offending conduct in order to evade judicial review “by temporarily altering questionable behavior.” Connecticut Citizens Def. League, Inc. v. Lamont, 6 F.4th 439, 446 (2d Cir. 2021).  The court explains that the doctrine is not absolute.  It’s still possible for a case to be moot even if the defendant concedes if the defendant can demonstrate (1) “interim relief or events have completely and irrevocably eradicated the effects of the alleged violation” and (2) “there is no reasonable expectation that the alleged violation will recur.”  Here, the Second Circuit agrees with the Tax Court that both conditions are satisfied and affirms the dismissal of the challenge to the certification to revoke the passport as moot.  The court indicates that if the IRS, after the conclusion of the CDP hearing, again tries to certify the debt to the State Department for passport revocation, the taxpayer at that time can bring a new Tax Court suit under IRC 7435.

Then, the Second Circuit takes up the issue of the challenge to the underlying liability.  It finds that at the time of dismissal she had already received the only relief available, making her claims on this point moot, but in footnote 3 notes that she

may yet have the chance to challenge her underlying liability in court. That liability is currently the subject of an IRS appeals process that has still to run its course. See 26 U.S.C. § 6320. After receiving a final determination through that process, Ruesch will be able, if necessary, to “petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter).” Id. § 6330(d)(1); see id. § 6320(c). If Ruesch continues to object to the IRS’s position regarding her underlying liability, she will eventually have her day in court. For now, however, there is nothing further for our Court or the Tax Court to do.

I am not convinced she will have the opportunity to litigate the merits of her liability in a CDP case.  That’s for another day, however.  The lesson from this case is that the Tax Court is not the place to go to litigate the merits of the underlying liability if you get into Tax Court because your passport was certified to the State Department.

I don’t expect either of these cases to go beyond the circuit stage at this point.  No conflict exists.  The cases do not have high administrative importance, which is not to say they are unimportant.  However, the issue decided in McLane is headed to the Third and Ninth Circuits, which have never ruled on the issue, in Ahmed, T.C. Memo 2021-142, appeal pending (3rd Cir.) and Brown, T.C. Memo 2021-112, appeal pending (9th Cir.).  It will not surprise me to see a few more tries at the appellate level on that issue.

The Train Tracks

My three-year old grandson Sam is enamored with trains and train tracks.  He loves to lay out the tracks and run Thomas and Thomas’ friends along the tracks.  Unfortunately for Sam, his 14-month old sister has now learned to walk.  She wants to do whatever Sam is doing, which includes playing with the train tracks.  One day recently Sam threw his body across a stack of train tracks in order to protect them from the clutches of his sister.  His tactic might work if his only goal is to keep her from the tracks; however, if he also has a goal of playing with the train tracks, this tactic will not work.  As I read the case of Chow v. Lee, Adv. Proc. No. 20-4036 (Bankr. E.D. Tex. 2021), I was reminded of Sam and the train tracks.  Let me explain why.

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The Impasse

Mr. Lee had a profitable business fixing the LCD monitor (front cover) of iPhones when Apple, without notice to Mr. Lee, according to his testimony, changed the landscape and caused repairs of its phones to move to China, essentially throwing him into bankruptcy because of his business losses.  Mr. Lee’s wife had a good job as director of financial analysis as an employee.  Mr. Lee decided to file a chapter 7 bankruptcy petition to deal with his financial problems; however, his wife did not join him.  Somewhat like the decision to file a joint tax return, married couples have the choice to file an individual or joint bankruptcy. 

Mr. Lee brought into the bankruptcy a pile of business losses.  He and his wife filed a post-petition tax return on which they claimed the losses.  In doing so, they reduced the taxable income on the return to zero, resulting in a refund of about $26,000.  The bankruptcy trustee sought the refund for the estate, arguing that the refund was the result of the business losses which were an asset of the estate.  Mr. Lee agreed that the losses did belong to the estate but pointed out that the refund resulted entirely from his wife’s withholding because following the loss of the business he decided to go to divinity school and during the year at issue he had no income.

The bankruptcy court analyzed the varying interest in the refund and determined that:

the Debtor and his spouse did not have authority to use the net operating losses, which are the Debtor’s pre-bankruptcy tax attributes, in their 2018 Tax Return.  Those attributes belonged to the Debtor’s bankruptcy estate. Although it is not clear how the trustee can use the Debtor’s pre-bankruptcy tax attributes, the Court will require the Debtor and his non-filing spouse to take whatever steps are necessary, if requested by the Chapter 7 trustee in writing with 14 days of entry of this Memorandum Opinion and Order, to return the net operating losses to the estate by amending their 2018 Tax Return.

So now, the trustee, like Sam, has smothered the loss carryforward and can prevent the Lees from obtaining the benefit of this tax attribute, but what will she receive for taking this position?  Mr. Lee has no income in the year at issue and based on my reading of the case is unlikely to have much income in the near future.  Will the trustee assert her right to prevent the use of the loss to shelter a non-debtor’s income from tax or can the parties negotiate an agreement mutually beneficial to each?  Somewhat similar to the position of the trustee, the Lees also have an interest in reaching an agreement since they cannot enjoy the benefit of the loss to reduce their overall taxes without such an agreement.  A good case for a negotiation exercise in law school.  Maybe someday I will talk to Sam about the case, but I don’t think it will do much good yet.

The Family

The tax refund issue was only one part of Mr. Lee’s bankruptcy case.  The other part also reminded me of my family and of many families.  Mr. Lee and his wife have small children.  As his business grew and his wife’s job responsibilities took her away from the home, they looked for a way to take care of their children and other responsibilities around the house.  They convinced Mr. Lee’s parents to sell their business and move to Texas to provide child care.  My daughter has not yet convinced me to do this, but my wife provides significant childcare for our grandchildren as do many grandparents, bringing Mr. Lee’s bankruptcy case closer to home than just the example with Sam.

Initially, the parents lived in Mr. Lee’s house, but as his family grew, space became a premium.  Mr. Lee and his wife assisted his parents, who no longer had outside income, in buying a house nearby and in buying a car to transport them back and forth to the Lees’ house and elsewhere.  The trustee sought to bring the value of the house and the car into the estate as transfers from Mr. Lee that defeated creditors.  The court works through the necessary analysis regarding each of the transfers before determining that these two assets should not be brought back into the estate.  I was a little surprised that in the analysis the court did not explicitly talk about the value of the services provided by Mr. Lee’s parents who not only provided childcare, but seemed like they also provided meal preparation and lawn maintenance, etc.  I suspect this value was in the judge’s mind as she thought about this family situation but she did not need to use it in reaching her conclusion.

The case provides lessons not only about negotiation but also blended families.  I think the judge got it right, but the opinion, like any opinion, tells the story as written by the deciding judge who wants you conclude they got it right.  When you have informal assistance going from one generation to another, with reciprocal services coming back, the formalities of property law, fraudulent transfer and other concepts designed to sort out assets in a bankruptcy case sometimes meet up with real life situations in which a family seeks not to defraud its creditors but to make life work.  I don’t fault the trustee for raising questions about the transfer of property from someone who ends up owing creditors.  Here, it forced the judge to look at the goal of the transfers and the timing of the transfers in deciding they were not done to defeat creditors but to preserve the best interest of the family.  Here, and in other cases, this can be a close question as the court and the trustee try to determine the motive and timing behind transfers of wealth from one family unit to another.

CFC in Dixon Holds Improperly-Signed Timely Forms 1040-X Cannot Be Informal Refund Claims

We have reported before on a series of refund suits pending in cases brought by accountant John Castro on behalf of his clients.  The most recent post is on the recent Fed. Cir. opinion in Brown (on which Keith blogged here).  The Brown opinion actually came down before the opinion discussed in this post but is erroneously not acknowledged or followed in the CFC holding on the jurisdictional issue.  Mr. Castro’s latest opinion out of the Court of Federal Claims (CFC), issued on January 18, is in the case of Dixon v. United States, No. 20-1258T (Ct. Cl. 2022).  This is another taxpayer for whom Mr. Castro (as he did for many other taxpayers), without proper POA authorization, initially signed and filed amended returns claiming refunds, instead of properly having the clients sign.  In an earlier Dixon case, the CFC (as in all Castro cases) held that the signature requirement mandating that the taxpayer sign is statutory and not subject to waiver, so dismissed the case for Lack of Jurisdiction (LOJ). 

Once it became clear from the first Dixon case’s opinion that the client and not the representative must sign the amended return, Mr. Castro had Dixon sign copies of the amended returns and refiled them.  Since this was after the refund statute of limitations (SOL) had expired, he had to argue in this latest Dixon case that the earlier, improperly-signed claims were informal claims under the doctrine set out in United States v. Kales, 314 U.S. 186, 194 (1941) to which the properly-signed claims related back.  The latest Dixon opinion appears to be the first in which the informal claim doctrine has been litigated in one of Castro’s cases.  So, it is important that he win this because he has had other taxpayers go back and sign and file amended returns after the SOL expired.

Another recent loss in this group of cases occurred in Mills v. United States, No. 1:20-cv-00417 (Fed. Cl. 2021), blogged here. After realizing that the initial claims were not properly signed, Castro submitted a second set of amended returns electronically, but unfortunately at a time when the IRS was not accepting amended returns that way.  But Dixon’s properly-signed second set of refund claims apparently were filed by mail, not electronically, so Mills has no relevance, and the Dixon court must decide for the first time whether unsigned refund claims can constitute informal claims.

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The new Dixon case involves Department of Justice (DOJ) motions to dismiss under Rules of the Court of Federal Claims (RCFC) 12(b)(1) (lack of subject matter jurisdiction) and 6 (failure to state a claim on which relief can be granted), which are identical to the Federal Rules of Civil Procedure 12(b)(1) and (6).  

In the first issue (involving a refund sought of tax assessed by the IRS on certain additional income reported in the amended returns), the court finds a variance problem in that Dixon is trying to litigate an issue not mentioned in the initial amended returns.  Indeed, the court says Dixon seeks a refund of taxes paid after filing the first refund claims, so those taxes could not be the subject of that claim.  The court dismisses this first issue for lack of jurisdiction. 

That jurisdictional dismissal has to be wrong in light of Brown (decided on January 5, 2022), where the Federal Circuit held that the requirement to file an administrative claim is not jurisdictional.  How can there be a variance problem that is jurisdictional, when the court’s jurisdiction doesn’t even depend on a taxpayer having duly filed an administrative claim?  It is true that in the past, courts have treated variance as a jurisdictional defect, but that can no longer be true in light of Brown in the Federal Circuit. Curiously, Brown is nowhere mentioned in the opinion, though it was decided only days before Dixon.  The Dixon court issued its opinion likely in ignorance of the Brown opinion.

In the second issue (the net investment income tax), the issue was mentioned in both amended returns, so there is no variance problem.  This second issue is the most important in the case because it is the first time a CFC judge has written on whether improperly-signed amended returns can be considered informal claims under Kales to which the untimely perfecting claims relate back.  The court holds that improperly-signed returns are not informal claims — citing no other case for such holding.  Here’s language from the opinion:

Mr. Dixon’s unsigned returns cannot form the foundation of an informal claim before the IRS. The Internal Revenue Code bars a taxpayer from filing a suit for tax refund until a claim for refund has been “duly filed” with the IRS according to the regulations set out by the Secretary of Treasury. 26 U.S.C § 7422. These regulations expand on what it means for an administrative tax refund claim to be “duly filed.” Treasury Regulations require that tax refund claims before the IRS “must be verified by a written declaration that is made under the penalty of perjury.” 26 C.F.R. § 301.6402-2(b)(1). The regulation further mandates that a tax refund claim that does not comply with this requirement will not be considered “for any purpose as a claim for refund or credit.” Id. (emphasis added). The United States argues that, by incorporating the phrase “for any purpose,” the plain text of the regulation bars any unsigned tax refund claims from being considered for the purposes of the informal claim doctrine. The Court agrees.

After knocking out the claim signed by the representative as an informal claim based on the language of the regulation, the court then takes on the Supreme Court opinion in Kales:

Mr. Dixon relies on the Supreme Court’s decision in Kales in arguing that the unsigned amended tax returns qualify as valid informal claims.  Kales involved a taxpayer who submitted a timely informal letter, rather than the correct IRS form, to request a tax refund.  The taxpayer later filed an untimely amendment that complied with the regulation and remedied that error. Id. In describing the tenets of the informal claim doctrine, the Supreme Court stated that “a [timely] notice fairly advising the Commissioner of the nature of the taxpayer’s claim, which . . . does not comply with formal requirements of the statute and regulations, will nevertheless be treated as a claim,” if the “formal defects” are later remedied by another filing. Id. at 194. Mr. Dixon claims that because his unsigned amended tax returns provided the IRS with notice that he sought a tax refund, and because the amended tax returns laid out the legal and factual basis for that refund, his returns qualify as informal claims under Kales, though unsigned. (Pl.’s Resp. at 13–16). That particular deficiency, Mr. Dixon claims, was later remedied by submitting the signed amended tax returns in 2020. (Id.).

A more careful reading of the Supreme Court’s guidance in Kales undermines Mr. Dixon’s reliance on that case. Most importantly, the Court elaborated on the scope of the informal claim doctrine by emphasizing that valid informal claims are only those that “[have] not misled the [IRS] and [have been] accepted and treated” by the IRS as valid claims. Kales, 314 U.S. at 194 (emphasis added). Tax returns that are unsigned, and therefore not made under the penalty of perjury, can never be accepted and treated as valid claims by the IRS and, as such, they cannot constitute informal claims under Kales. To be legally valid, a claim must be “duly filed” with the IRS, “according to the regulations” established by the Secretary of Treasury. 26 U.S.C. § 7422(a)see also Clintwood Elkhorn Min. Co., 553 U.S. at 4 (2008) (to seek a tax refund “the taxpayer must comply with the tax refund scheme established in the [Internal Revenue] Code”). Those regulations state that any declaration that is not “verified” and is not “made under the penalties of perjury,” is not “duly filed.” Hall v. United States, 148 Fed. Cl. 371, 379 (2020) (addressing the requirements of Treas. Reg. § 301.6402-2(b)(1)). Because unsigned claims can never be deemed “duly filed” under Section 7422(a), the IRS would be prohibited from “accepting and treating as valid claims,” requests not made under the penalty of perjury. Sicanoff Vegetable Oil Corp. v. United States, 149 Ct. Cl. 278, 285 (1960) (when the IRS is “not permitted by law” to pay a claim, it cannot “enlarge [its] legal authority” by considering that claim.); see also Mobil Corp. v. United States, 52 Fed. Cl. 327, 337 (2002) (citing Finn v. United States, 123 U.S. 227 (1887)) (finding that the IRS cannot waive the requirements of § 7422 or its regulations because it cannot “require the Government to make a payment that legally it was not obligated to pay”).

Because the taxpayer signature requirement derives from statute, the IRS cannot waive those requirements. See Angelus Milling Co., 325 U.S. at 296 (1945) (finding that although IRS could waive regulatory requirements in reviewing informal claims, it cannot waive “statutory requirements”). In other words, unsigned tax returns present a more serious deficiency than garden-variety technical deficiencies that are normally protected under the informal claim doctrine. Barenfeld v. United States, 194 Ct. Cl. at 908–9 (1971); Wilson v. United States, No. 18-408, 2019 WL 988600, at *4 (Fed. Cl. Feb. 27, 2019).

Having gone back to look at both the Supreme Court and appellate court opinions in Kales, it is clear to me from the quote from the letter in the appellate opinion that a lawyer drafted the text of the letter that was held to be an informal claim.  The letter was termed a protest.  It is not clear from Kales whether the letter was signed by the taxpayer with a paragraph verifying the facts in the letter under penalties of perjury or whether it was instead signed by the taxpayer’s lawyer who at that time had held a POA authorizing him or her to sign refund claims on behalf of the taxpayer.  I can’t recall other informal refund claim cases I have read, but I am sure I have read many where a letter was considered an informal claim, and I somehow doubt that, even if those letters were signed by the taxpayers (as opposed to a POA who probably did not have authority to sign a refund claim), the letters all contained a jurat paragraph.  Somehow, I doubt that the letters held to constitute informal claims did contain jurats, which makes the Dixon court’s distinguishing of Kales surprising.

If followed in other CFC cases of Castro, this holding will kill all the other cases where he went back, after the SOL had expired, and had his clients properly sign new refund claims.

Dixon then argued that the claim filing requirement is not jurisdictional and is subject to waiver.  The court (not yet knowing about Brown), disagreed.  In Brown, the Fed. Cir. held that the signature and verification requirements relate to the requirement in IRC 7422(a) that a claim be “duly filed” and that these are not jurisdictional requirements to a refund suit.  I won’t quote all the Dixon court’s opinion holding the claim-filing requirement jurisdictional, since that jurisdictional holding is not consistent with the recent Federal Circuit precedent (Brown), nor does the holding contain a persuasive discussion of current Supreme Court case law.  I will quote the part in which, like the Tax Court in Guralnik v. Commissioner, 146 T.C. 230, 235-238 (2016) (en banc), the CFC distinguishes all the recent Supreme Court case law as not in the tax area, so ignorable. 

In discussing jurisdiction, the Dixon court wrote:

There is reason to believe that Section 7422(a) should be deemed jurisdictional. The cases cited by Mr. Dixon involve the Supreme Court’s review of administrative exhaustion requirements in modern administrative schemes, outside of the context of tax and revenue collection. To this end, so far, none of the statutes held to be non-jurisdictional under the Supreme Court’s administrative exhaustion jurisprudence implicate an administrative program with such a lengthy lineage in administrative claim requirements as tax and revenue collection. The Supreme Court’s treatment of administrative tax claims as jurisdictional far pre-dates the current codification of that rule at 26 U.S.C. § 7422(a)See Nichols v. United States, 74 U.S. 122, 129–30 (1869) (finding that public interest behind “prompt collection of the revenue” bars the Court of Claims from ruling on tax refund claims when the “alleged errors and mistakes” were not communicated to the tax collector). For over 100 years, the Court in addressing the predecessor to Section 7422(a) has held that “[n]o suit can be maintained for taxes illegally collected unless a claim therefor has been made” with the tax collector “within the time and in the manner pointed out by law [ ].” Kings County Savings Institution v. Blair, 116 U.S. 200, 205 (1886) (citing Cheatham v. United States, 92 U.S. 85 (1875)) (emphasis added).

The CFC in Dixon overstates the consistency of the Supreme Court’s opinions terming (often in dicta) the refund claim filing requirement of IRC 7422(a) or its predecessors jurisdictional.  In recent non-tax opinions, the Supreme Court has created a stare decisis exception to its current rule that claim-processing rules (including administrative exhaustion requirements) are generally no longer jurisdictional.  The stare decisis exception applies where, if writing on a clean slate, the Court would not currently hold the requirement jurisdictional, but a consistent line of Supreme Court opinion (generally over 100 years) has held the rule jurisdictional.

The Dixon court relies on a couple of 19th Century opinions for stare decisis.  (The opinion notes that the DOJ also cited a statement in United States v. Dalm, 494 U.S. 596 (1990) calling the filing requirement jurisdictional.) But, in Flora v. United States, 362 U.S. 145 (1960) (which the Dixon court does not mention), the Court stated:

The ancestry of the language of § 1346(a)(1) [(i.e., “any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws”)] is no more enlightening than is the legislative history of the 1921 provision. This language, which, as we have stated, appeared in substantially its present form in the 1921 amendment, was apparently taken from R.S. § 3226 (1878).  But § 3226 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 to the Commissioner. 362 U.S. at p. 152 (emphasis added).  (At the end of this quoted material the Court added footnote 11 which stated: “The successor of R. S. § 3226 is I. R. C. (1954), § 7422 (a), 68A Stat. 876.”)

In the end, the Dixon court hedges its bets and holds that the dismissal with respect to the net investment income tax issue is either under RCFC 12(b)(1) or (6).  The court says the same thing as Brown, though, that, even if not jurisdictional, based on the Supreme Court’s 1945 dicta in Angelus Milling Co. v. Commissioner, 325 U.S. 293, 296 (1945), the signing requirement is statutory and can’t be waived.  The court writes:

Regardless, the Court need not determine this issue, given that Mr. Dixon’s claims fail even if, as he urges, the signature requirement was merely a claims-processing rule. If Section 7422(a) is viewed as a claims-processing rule, that only means that its requirements are subject to equitable exceptions. Bowles v. Russell, 551 U.S. 205, 213 (2007) (claims-processing rules are subject to equitable exceptions and jurisdictional limits are not). Importantly, Mr. Dixon has not established that equitable exceptions apply in this case. The only equitable exception indirectly relied upon by Mr. Dixon is the waiver exception. As the Court has already addressed, because the signature requirement is a statutory requirement, the IRS could not have waived this requirement. Therefore, even if the Court were to find the requirements of Section 7422(a) to be a claims-processing rule, because the waiver exception cannot apply, Mr. Dixon’s claim still should be dismissed for failure to state a claim upon which relief can be granted. RCFC 12(b)(6).

As in Brown, the Dixon court makes the error of holding that statutory claim-processing rules cannot be waived because dicta in the Angelus Milling case said so.  But that dicta was based on the general thinking in 1945 that any procedural requirement that Congress wrote into a statute in connection with a court case is jurisdictional.  That Angelus Milling dicta is no longer good law.  More recent Supreme Court cases make clear that anytime even a statutory rule is held to be a non-jurisdictional claim-processing rule, it is subject to waiver and forfeiture (though not necessarily estoppel or equitable tolling). Fort Bend Cnty. v. Davis, 139 S. Ct. 1843, 1849 (2019) (statutory requirement to file a predicate claim with the EEOC before district court suit was forfeited because noncompliance was raised too late in the case; “A claim-processing rule may be “mandatory” in the sense that a court must enforce the rule if a party “properly raise[s]” it. Eberhart v. United States, 546 U.S. 12, 19 (2005) (per curiam). But an objection based on a mandatory claim-processing rule may be forfeited “if the party asserting the rule waits too long to raise the point.” Id., at 15 (quoting Kontrick, 540 U.S., at 456).

The third issue in the case involves foreign tax credits with respect to the additional income reported that would only be due to Dixon if a certain entity was a partnership.  The IRS accepted the additional income (the first issue in the case) but rejected the foreign tax credits relating thereto.  The court holds against Dixon on this foreign tax credit issue on the merits (RCFC 12(b)(6)), though the court finds a variance issue with regard to some arguments made by Dixon in the CFC that were not made in the claims.  I am not sure how the court can get to this issue on the merits, since Castro signed the only timely claim, which the court held in the second issue, could not be considered an informal claim.

What a mess!

Two Recent Circuit Level Decisions Appear to Dispute View That the Refund Claim Filing Requirement is Jurisdictional (Part 2)

This is part two of a two-part post on jurisdiction issues arising from the filing of a claim for refund and the subsequent litigation.  The prior post focused on the case of Morton v. United States and this post will focus on Brown v. United States.  Carl Smith contributed to the commentary in this post.

The Brown case is part of a group of refund suits brought in the Court of Federal Claims involving US citizens living abroad seeking a refund based on the foreign earned income exclusion.  Their refund claims were prepared and signed by John Castro who held a power of attorney but not one that authorized the signing of a return.  The IRS disallowed the refund claims citing to a closing agreement that foreclosed their right to claim the credit but not to any procedural defect.  The Federal Circuit notes that “neither party seems to dispute that the Browns claim was properly before the Claims Court if it was ‘duly filed.’”

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The IRS moved to dismiss the suit for lack of jurisdiction because the Browns did not sign the claim which prevented it from meeting the duly filed test.  The Browns responded that even if they did not properly sign the claims the IRS waived that requirement by processing the claims.  Additionally, they argued:

signature and verification requirements are regulatory conditions, which the Supreme Court has deemed waivable, instead of unwaivable statutory conditions.

The Claims Court dismissed the case for lack of jurisdiction pursuant to Rules of Court of Federal Claims (RCFC) 12(b)(1).  The Federal Circuit reversed this holding, finding that the procedural defect in the claim did not create a jurisdictional barrier to the suit; however, it determined that the defect caused the claim to fail the duly filed requirement, making the Claims Court’s decision harmless error since the case could be dismissed under RCFC 12(b)(6) for failure to state a claim.  The Tax Clinic at the Legal Services Center of Harvard filed an amicus brief in this case arguing that the court had jurisdiction based on relevant Supreme Court precedent.

The Federal Circuit distinguished the facts here from those in United States v. Dalm, 494 U.S. 596 (1990), and distinguished its own prior precedent.  It concluded that the duly filed requirement in IRC 7422(a) serves as a claims processing rule rather than a jurisdictional requirement.  This is an important concession by the Federal Circuit which could assist claim filers across the country because anyone filing a refund suit can choose Claims Court.

The Federal Circuit still upholds the dismissal of the Browns’ case because of the lack of their signature.  The court spends the remainder of the opinion explaining why and addressing the Browns’ argument that the IRS waived the duly filed argument by processing the claim.  The court finds:

Because the taxpayer signature and verification requirements derive from statute, the IRS cannot waive those requirements. See Angelus Milling, 325 U.S. at 296. Therefore, the IRS had no authority to accept the Browns’ improperly executed refund claims.

Whatever other requirements may exist to render a return “duly filed” we cannot say. We deal here only with the facts presented to us, relating to a return that is both unsigned by the taxpayers and not accompanied by a power of attorney.

The court finds in the alternative that even if the signature requirement is only a regulatory provision that the IRS could waive, under the applicable Supreme Court case, Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945) (the seminal case for informal claims), the Browns cannot show that the IRS knew that the claim forms did not bear their signature at the time it processed the claim.

What Next

The Federal Circuit’s attempt to distinguish Dalm and its own case law on 7422(a), but then citing Gillespie v. United States, 670 Fed. Appx. 393, 394-395 (7th Cir. 2016), blogged here, arguably doesn’t work.  In Gillespie, the taxpayer filed a timely refund claim, but the claim was a tax protestor one which reported all zeros.  The district court held that this form was not a valid claim because it was frivolous, but the requirement to file a predicate claim was not jurisdictional to a refund suit.  The 7th Cir. in affirming the district court – but, without deciding the jurisdictional issue (because the court said it was unnecessary) – suggested that Dalm and 7th Cir. precedent holding the filing requirement jurisdictional are no longer good law.  In Gillespie, the 7th Cir. wrote:

The Gillespies do not respond to the government’s renewed argument that § 7422(a) is jurisdictional, though we note that the Supreme Court’s most recent discussion of § 7422(a) does not describe it in this manner, see United States v. Clintwood Elkhorn Mining Co., 553 U.S. 1, 4-5, 11-12 (2008). And other recent decisions by the Court construe similar prerequisites as claims-processing rules rather than jurisdictional requirements, see, e.g., United States v. Kwai Fun Wong, 135 S. Ct. 1625, 1632-33 (2015) (concluding that administrative exhaustion requirement of Federal Tort Claims Act is not jurisdictional); Reed Elsevier, Inc. v. Muchnick, 559 U.S. 154, 157 (2010) (concluding that Copyright Act’s registration requirement is not jurisdictional); Arbaugh v. Y & H Corp., 546 U.S. 500, 504 (2006) (concluding that statutory minimum of 50 workers for employer to be subject to Title VII of the Civil Rights Act of 1964 is not jurisdictional). These developments may cast doubt on the line of cases suggesting that § 7422(a) is jurisdictional. See, e.g., United States v. Dalm, 494 U.S. 596, 601-02 (1990); Greene-Thapedi v. United States, 549 F.3d 530, 532-33 (7th Cir. 2008); Nick’s Cigarette City, Inc. v. United States, 531 F.3d 516, 520-21 (7th Cir. 2008).

Although the amicus brief prominently featured the Federal Circuit’s opinion in Walby v. United States, 957 F.3d 1295 (2020), the Brown opinion makes no mention of Walby, which was blogged here.  In Walby, the taxpayer filed a proper refund claim, but it was late. The Court of Federal Claims dismissed the case for lack of jurisdiction.  In dicta, the Fed. Cir. panel made no distinction between its prior precedent holding the requirements to timely file predicate refund claims as jurisdictional to a refund suit, but head on called for the reconsideration of that precedent in light of the Supreme Court opinion in Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014).  Note that, in holding the duly filed requirement of IRC 7422(a) non-jurisdictional, the Brown panel only cited Lexmark (a case involving statutory standing defects), without citing Supreme Court opinions like the 2019 opinion in Fort Bend County v. Davis, 139 S. Ct. 1843 (2019) (blogged here).  Fort Bend held that the failure to comply with the statutory requirement to file a predicate claim with the EEOC before bringing a district court discrimination suit was not jurisdictional and was subject to forfeiture when the failure was not raised by the defendant in the district court case soon enough. The Walby panel wrote, in part:

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, 134 S. Ct. 1377, 188 L. Ed. 2d 392 (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 Walby court went on to discuss recent Supreme Court case law on jurisdiction and cited Gillespie, as well.  So, it’s hard to understand why the Brown panel decided not to simply overrule the Federal Circuit’s prior precedent and instead attempted to just distinguish that precedent and Dalm. 

Conclusion

Since the decision in Brown, additional decisions have come down regarding the issue of refund jurisdiction.  We will be posting on these decisions in the coming days.  The cases signal a shift as recent Supreme Court precedent comes into play but do not suggest a consensus which may lead ultimately to another Supreme Court decision addressing the issue of jurisdiction in tax cases.

Two Recent Circuit Level Decisions Appear to Dispute View That the Refund Claim Filing Requirement is Jurisdictional (Part 1)

At the end of 2021 and beginning of 2022, a pair of cases came out which may create a turning point in the view of courts regarding a court’s jurisdiction in refund suits where a possible defect in or the absence of an administrative claim exists.  In the Third Circuit the case of Morton v. United States Virgin Islands, No. 21-1292 (3rd Cir. 2021) held that the district court erred in applying a failure-to-state-a-claim analysis to the issue of Mr. Morton’s Article III standing to bring the claim.  In Brown v. United States, No. 2021-1721 (Fed. Cir. 2022), the court held that the dismissal of the Browns’ refund suit for lack of jurisdiction was incorrect but sustained the decision below because the Browns failed to prove that their claim for refund was duly filed.

The Morton opinion is not precedential but the Brown opinion is.  This post will focus on Morton and is the shorter of the two posts.  The Brown case sets the scene for an even more recent Court of Federal Claims case which will be discussed in a forthcoming post.

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The Morton case is a class action prisoner case in which Joe DiRuzzo and Daniel Lader, representing the prisoners pro se, sought to bring to prisoners in the Virgin Islands the same relief that prisoners in the United States received as a result of Scholl v. Mnuchin, Dk. No. 20-cv-05309-PJH (N.D. Cal. 2020) blogged here, here, here, and here.  The final link discusses both the Scholl case which was coming to an end and the Morton case which was beginning at the time of that post.  It contains links to the pleadings in Morton.  The Scholl and Morton cases seek to set aside the administrative denial of the stimulus payments to prisoners.  Even though at the time of deciding the case the district court had the benefit of the Scholl decision, the district court in Morton dismissed the claim for lack of jurisdiction because Mr. Morton had not filed a return which it read as a prerequisite to relief.

The Third Circuit disagreed, stating that standing requires that he establish three things:

Morton must have “(1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.” Thorne v. Pep Boys Manny Moe & Jack Inc., 980 F.3d 879, 885 (3d Cir. 2020) (quoting Spokeo v. Robins, 578 U.S. 330, 338 (2016)). Morton has met all three elements for each of his three claims.

He could show that the Virgin Islands would have denied his claim for the stimulus payment had he filed a return.  He could show that his injury is directly traceable to the refusal to issue stimulus payments to incarcerated individuals, and he could show that the harm could be remedied by the equitable and monetary relief he proposed.  Based on these conclusions which directly tied to the requirement for standing, the Third Circuit determined that the district court erred in dismissing the case on this ground. 

After holding that Morton had Article III standing to bring the suit, the court indicated that the IRC 7422(a) requirement to file a predicate administrative refund claim is not jurisdictional, writing:

The Virgin Islands’ arguments to the contrary — that Morton did not file a tax return before suing and does not belong to a protected class — bear on the merits of Morton’s claims rather than whether he had standing to bring them. They are arguments for a motion to dismiss for failure to state a claim, not a motion to dismiss for lack of subject matter jurisdiction. Bell v. Hood, 327 U.S. 678, 682 (1946); Mielo, 897 F.3d at 479 (“our standing inquiry must avoid any consideration of the merits beyond a screening for mere frivolity.”). For that reason, the District Court erred by crediting these arguments in concluding that Morton lacked Article III standing.

Oddly, however, the Third Circuit did not cite the recent Supreme Court case law holding that most claim-processing rules for court suits (including administrative exhaustion requirements) are no longer jurisdictional.  The Third Circuit merely remanded the case to the district court for further proceedings on the merits.

In part two of this post, I will take up the decision in Brown.