CFC Holds that Math Error Notices Reducing Refund Claims Are Not Notices of Claim Disallowance for Purposes of SOL to Bring Suit

In a case brought by a pro se taxpayer in the Court of Federal Claims (CFC), Hale v. United States, 2019 U.S. Claims LEXIS 502 (May 14, 2019), the CFC held, among other interesting things, that math error notices that reduced refunds sought on original tax returns were not formal notices of claim disallowance as to the reductions for purposes of the 2-year statute of limitations for bringing refund suits at section 6532(a). The suit was thus timely for years for which such math error notices were sent, though was dismissed for failure to state a claim under CFC Rule 12(b)(6) because the taxpayer didn’t articulate a reason for why the math error notices were wrong.

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In a nutshell, the court describes the case as follows:

In this tax refund case, pro se Plaintiff Annice Hale claims that she is entitled to a refund of taxes for the tax years 2012 through 2017 because the government improperly adjusted downward the refunds claimed in her returns for each of those tax years. Ms. Hale’s complaint, liberally construed, also alleges civil rights and tort claims against the government in connection with these tax-related government actions. The government has moved to dismiss Ms. Hale’s complaint under Rules 12(b)(1) and 12(b)(6) of the Rules of the Court of Federal Claims (“RCFC”).

As discussed below, the Court lacks subject-matter jurisdiction over Ms. Hale’s civil rights and tort claims, part of her 2012 tax refund claim, and her 2014 refund claim. Moreover, Ms. Hale has failed to state a claim with respect to tax years 2013, 2015, 2016, and 2017, as well as the portion of her claim for tax year 2012 over which the Court has jurisdiction. As to these remaining claims Ms. Hale’s allegations, taken as true, do not establish any claim upon which relief can be granted.

I will discuss the years separately, for the most part. It appears that all of the claims were made on original tax returns that were timely filed.

2014

The 2014 year was perhaps the easiest year for the court. In that year, the IRS sent a notification of claim disallowance as to part of the claim on September, 9, 2015. Under section 6532(a), a notification of claim disallowance triggers a 2-year period in which a taxpayer must bring suit on the refund claim. Ms. Hale, however, waited over 3 years to bring suit. Thus her case was untimely. Following other CFC case law, which relies on Federal Circuit precedent, the court held that it lacked jurisdiction under CFC Rule 12(b)(1) because the deadline in section 6532(a) is jurisdictional.

I agree with the court that the case as regards 2014 should be dismissed for untimely filing, but under CFC Rule 12(b)(6) (failure to state a claim on which relief could be granted), not 12(b)(1) (lack of jurisdiction). In a comment to a Bob Probasco post on the refund case of Pfizer v. United States, 2d Cir. Docket No. 17-2307 (which has still not yet been decided by the Second Circuit, despite oral argument having happened on February 13, 2018), I pointed out that Keith and I have filed an amicus brief on behalf of the Harvard clinic arguing that the section 6532(a) deadline is not jurisdictional and is subject to estoppel under recent Supreme Court case law making most filing deadlines now nonjurisdictional. Our amicus brief criticizes the Federal Circuit authority, which was decided before the recent Supreme Court case law making filing deadlines only rarely now jurisdictional.

2012

Ms. Hale was a low-income taxpayer who had no income tax liability in 2012, but who reported self-employment tax of $1,192. On her original 2012 return, she sought a refund of $2,977 based on subtracting that tax liability from an earned income tax credit (EITC) of $3,169 and an American Opportunity Credit of $1,000. The IRS, apparently, did not send her a math error notice, but in processing the return, it reduced the EITC by $100 because, presumably, Ms. Hale simply misread the EITC table. That left a potential refund of $2,877, but the IRS had been informed by FEMA that the taxpayer owed FEMA $2,119. The IRS sent that amount to FEMA and issued a refund check for the balance, $758. The court does not explain it, but apparently, Ms. Hale also sent several more amended returns seeking from the IRS the balance of the original refund amount that had not previously been paid to her. The last of those amended returns was filed on June 15, 2015, and the court mysteriously treats it as the refund claim underlying the suit for purposes of timely bringing suit.

The CFC first noted that section 6402(d)(1)(A) authorizes offsets to other government agencies like FEMA, and section 6402(g) also provides that “[n]o court of the United States shall have jurisdiction to hear any action, whether legal or equitable, brought to restrain or review a reduction authorized by subsection (c), (d), (e), or (f).” Thus, it lacked jurisdiction to consider the reduction. However, the CFC also noted that it has broad jurisdiction under the Tucker Act, 28 U.S.C. section 1491(a)(1), which permits the CFC to hear “any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.” While a claim against FEMA might be heard by the CFC as an illegal exaction case, the CFC held that, since Ms. Hale’s pleadings did not even mention FEMA, the CFC had no jurisdiction to consider a suit against FEMA. Besides, documents in the record of the refund suit indicated that Ms. Hale later got the funds back from FEMA through a separate, internal FEMA proceeding.

The court then entered into a controversial discussion that it need not have done, since it is clear that, as to the 2012 claim (and all other claims), suit was brought within 6 years and 6 months after the claim was filed.

Some district courts have held that, in addition to the statute of limitation of section 6532(a), suits for refund must also satisfy the statute of limitation set out as a catchall at 28 U.S.C. section 2401(a). Section 2401(a) requires suits to be brought within 6 years of the time that they first could have been brought. Since a refund suit can be brought as soon as 6 months after the claim is filed if there has not earlier been a notification of claim disallowance, those courts held that a taxpayer has only 6 years and 6 months from the date of the refund claim to bring a refund suit where the IRS has never sent out a notification of claim disallowance. There is a parallel 6-year catchall statute of limitations under 28 U.S.C. section 2501 that applies to the CFC. In footnote 5 of its opinion in Hale, the CFC wrote:

The Court observes that in United States v. Clintwood Elkhorn Min. Co., 553 U.S. 1 (2008), the Supreme Court suggested—but did not hold—that in the absence of another, more specific limitations period, tax refund cases are subject to the federal “outside limit” six-year statute of limitations provided in 28 U.S.C. §2401(a). Id. at 8. (quoting United States v. A.S. Kreider Co., 313 U.S. 443, 447 (1941). The Supreme Court thus implied that the Court of Claims was incorrect in its 1955 holding that the six-year general statute of limitations never applies in tax refund cases. See Detroit Trust Co. v. United States, 130 F. Supp. 815, 131Ct. Cl. 223, 226-28 (1955) (finding that six-year statute of limitations did not bar action based in part on refund claim filed in 1917 and disallowed in 1951, where suit was filed within two years of 1951 disallowance); Wagenet v. United States, No. 08-142, 2009 U.S. Dist. LEXIS 115547, 2009 WL 4895363, at *2 (C.D. Cal. Sept. 14, 2009) (applying the six-year statute of limitations set forth in 28 U.S.C. §2401(a) because where “no notice of disallowance was mailed . . . Section 6532(a)(1) does not apply”). Ms. Hale filed suit within six years of her claims for refund. With respect to her $100 EIC claim for tax year 2012, Ms. Hale’s complaint is timely because her last amended return (in other words, her claim for refund) for 2012 was filed on June 15, 2015 and her complaint was filed on October 11, 2018.

However, as Bob Probasco has noted in another prior post, the IRS takes the position that Detroit Trust was correctly decided. Chief Counsel Notice 2012-012. I am surprised to see the CFC needlessly disregarding precedent of the Court of Claims (the forerunner to the Federal Circuit, which would have to follow Detroit Trust or formally overrule it). For an excellent law review article that has convinced me that Detroit Trust is wrong, see Adam R.F. Gustafson (the son of Tax Court Judge Gustafson), “An ‘Outside Limit’ for Refund Suits: The Case Against the Tax Exception to the Six-Year Bar on Claims Against the Government”, 90 Or. L. Rev. 191 (2011).

As to the extra $100 of the refund sought that had not been sent to FEMA, the CFC in Hale ruled that Ms. Hale’s pleadings made no mention of why the IRS was wrong on the EITC adjustment, so she had failed to state a claim on which relief could be granted.

2013, 2015, 2016, and 2017

The court next inquired whether the refund claims and refund suit were timely as to the claims for the years 2013, 2015, 2016, and 2017. It noted that the refund claims were timely made, since they appeared on the original returns – i.e., within 3 years after the returns were filed under section 6511(a). Under section 6532(a), Ms. Hale was thus entitled to bring suit on the reduced claims any time after 6 months, unless the IRS sent her a notification of claim disallowance. In the latter case, the Ms. Hale would have had to bring suit within 2 years thereafter. The court found that the IRS had “sent Ms. Hale ‘math error notices’ using form letter 474C for tax years 2013 and 2017, a 288C letter requesting more information for tax year 2015, and a 12C letter requesting more information for tax year 2016.” Citing no case law as authority, the CFC held that none of these notices or letters constituted a notification of claim disallowance for purposes of section 6532(a), writing:

Internal guidance from the IRS suggests that—among other criteria—a notice of disallowance must inform the taxpayer of her “right to file suit” and of the “period in which suit may be filed.” Chief Counsel Advisory, IRS CCA 200203002 (Jan. 18, 2002). Notices informing taxpayers that the IRS needs more information to process a claim, along with math error notices or similar correspondence, typically fail to adequately notify taxpayers of a final adverse action or of their right to file suit within two years. Id.Form of Notice of Disallowance of a Refund Claim—Refund Suits, Fed. Tax Coordinator ¶ T-9022 (2d ed. 2019) (discussing “dual purposes” of informing taxpayer of final disallowance and of the right to sue along with applicable statute of limitations).

Here, none of the correspondence in the record pertaining to tax years 2013, 2015, 2016, and 2017 meets these criteria for effective notices of disallowance. They do not inform Ms. Hale of her right to sue or of the applicable two-year limitations period.

After concluding that it had jurisdiction, the CFC then dismissed the suit for each of these years for failure to state a claim: For 2013, Ms. Hale had apparently already been sent two refund checks exceeding her original claim. For the other years, the IRS had either reduced credits that she claimed or subtracted from her claimed refunds the self-employment tax that would apply based on the Schedules C or C-EZ that she filed with the returns. She made no allegations showing the IRS was wrong to make these adjustments.

Civil Rights and Tort Claims

Finally, the CFC also discussed certain civil rights and tort claims contained in Ms. Hale’s complaint, finding that the Tucker Act did not authorize it to consider such claims. Interestingly, although the CFC (on PACER.gov) will not allow me to see her complaint or response to the DOJ motion, it appears Ms. Hale’s claims, in part, relied on the Taxpayer Bill of Rights (not sure if the IRS version or the statutory version). I am not sure that the CFC was aware of this, since it made no mention of the Taxpayer Bill of Rights in its opinion – an opportunity wasted, but perhaps better, since I would think that a pro se person could not make a serious argument for the application of the Taxpayer Bill of Rights in court. The CFC wrote:

As noted, the government has construed Ms. Hale’s assertions concerning violations of certain alleged rights as civil rights and tortious damages claims. The Court concurs with this interpretation of Ms. Hale’s references to alleged violations of her “Right to a Fair and Just Tax System,” “Right to Quality Tax Service,” “Right to Pay no more than the Correct Amount of Tax,” “Right to be Informed,” and “Right to Finality,” as well as her allegations that the government’s actions have damaged her credit history and caused her “financial disparity.” Compl. at 4; see also Pl. Resp. Mem. (“Pl.’s Resp.”) at 99, Docket No. 13.

The Court finds that it lacks subject-matter jurisdiction over these claims. The Tucker Act serves as a waiver of sovereign immunity and a jurisdictional grant, but it does not create a substantive cause of action.

(citations omitted).

Here’s a link to Keith’s recent PT post on the Tax Court’s opinion in Moya v. Commissioner, 152 T.C. No. 11 (Apr. 17, 2019), in which it held that the IRS version of the Taxpayer Bill of Rights does not give a taxpayer any additional procedural rights in the Tax Court.

Ninth Circuit Holds Reg. Validly Overrules Case Law; Disallows Parol Evidence of Timely Mailing

In Baldwin v. United States, 2019 U.S. App. LEXIS 11036 (9th Cir. April 16, 2019), in a case of first impression in the appellate courts, the Ninth Circuit has held that a 2011 regulation under section 7502 is valid under the deference rules of Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), and Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967 (2005), and therefore it invalidates all prior case law in some Circuits (including the Ninth) holding that the common law mailbox rule can be used to prove the IRS’ timely receipt of a document by parol evidence. The Circuit reversed the district court and directed it to dismiss the case because the only evidence offered of timely mailing of a Form 1040X refund claim was the testimony of the Baldwins’ employees that they remember timely posting the envelope containing the claim by regular mail months before the claim was due – evidence that is only relevant if the common law mailbox rule still exists in the tax law. I blogged on Baldwin before the oral argument here.

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Facts

Baldwin is a tax refund suit. There, the taxpayers reported a loss on their 2007 income tax return, filed on or before the extended due date of October 15, 2008. They wished to file an amended return for 2005, carrying back the 2007 loss to generate a refund in 2005. Under section 6511(d), this had to be done by filing the amended return within three years of the due date of the return generating the loss – i.e., by October 15, 2011. The taxpayers introduced testimony of their employees that the employees mailed the 2005 amended return by regular mail on June 21, 2011 from a Hartford Post Office to the Andover Service Center. But, the IRS claimed it never received the Form 1040X.

The California district court followed Anderson v. United States, 966 F.2d 487 (9th Cir. 1992), in which the Ninth Circuit had held that the enactment of section 7502 in 1954 did not eliminate the common law mailbox rule and still allowed taxpayers to prove by parol evidence that a document not sent by registered or certified mail or a designated private delivery service was actually mailed and so was presumed to have been received by the IRS prior to the due date. The district court credited the testimony of the employees and held that the refund claim was timely filed. The court later awarded the taxpayers a refund of roughly $167,000 and litigation costs of roughly $25,000.

The DOJ appealed the loss to the Ninth Circuit, where it argued that the suit should have been dismissed because the refund claim was not timely filed. The DOJ argued that in August 2011, the IRS adopted a regulation intended to overrule some Circuit court opinions (including Anderson) that had held that the common law mailbox rule still survived the enactment of section 7502. At least one other Circuit had agreed with Anderson; Estate of Wood v. Commissioner, 909 F.2d 1155 (8th Cir. 1990); but several other Circuits had disagreed and held that the common law mailbox rule did not survive the enactment of section 7502. See Miller v. United States, 784 F.2d 728 (6th Cir. 1986)Deutsch v. Commissioner, 599 F.2d 44 (2d Cir. 1979)See also Sorrentino v. Internal Revenue Service, 383 F.3d 1187 (10th Cir. 2004) (carving out a middle position).

As amended by T.D. 9543 at 76 Fed. Reg. 52,561-52,563 (Aug. 23, 2011), Reg. § 301.7502-1(e)(2)(i) provides, in relevant part:

Other than direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a duly designated [private delivery service] . . . are the exclusive means to establish prima facie evidence of delivery of a document to the agency, officer, or office with which the document is required to be filed. No other evidence of a postmark or of mailing will be prima facie evidence of delivery or raise a presumption that the document was delivered.

Ninth Circuit Opinion

The Ninth Circuit began its analysis with a little history: Prior to 1954, there was no timely-mailing-is-timely-filing provision in the Internal Revenue Code. That meant that the only way to timely file a document was for it to arrive at the IRS on or before the due date. At common law, there is a presumption that a properly-mailed envelope will arrive in the ordinary time for mail to go between its origin and destination. At common law, a party could bring in any evidence (including testimony) to show that the envelope likely arrived at the IRS on or before the due date.

In 1954, Congress added section 7502 to the Code. We all think of it as a provision that allows a mailing made on or before the due date to be treated as timely filed, whether or not the IRS receives the document on, before, or after the due date. But, that is not an accurate summary of the provision. In fact, subsection (a) provides, in general, that if a document is delivered to the IRS by the United States mail after the due date, then the date of the United States postmark on the envelope is deemed to be the date of delivery (i.e., filing). Other rules extend the benefits of subsection (a) to designated private delivery services and electronic filing, but only pursuant to regulations. However, subsection (c) also includes a presumption of delivery that applies in the case of use of certified or registered mail: If an envelope is sent certified or registered mail, then (1) the certification or registration is prima facie evidence that the envelope was delivered to the place to which it was addressed and (2) the date of registration or certification is deemed the date of the postmark for purposes of subsection (a).

In Anderson, the Ninth Circuit had held that subsection (c)’s presumption of delivery language (and the regulations thereunder) did not supplant the common law way to prove delivery on or before the due date. Rather, subsection (c) provided only a safe harbor for proof of delivery if certified or registered mail was used. Where ordinary mail was used, there was no statutory provision presuming or denying proof of delivery, so the common law mailbox rule could still operate to allow proof of timely mailing by any evidence.

In Baldwin, the Ninth Circuit noted that under Chevron Step 2, a court must defer to an agency’s interpretation in a regulation if that interpretation is one of the reasonable ways an ambiguous statute could be interpreted. And in Brand X, the Supreme Court held that, unless an appellate court opinion had said that the statute was unambiguous (and therefore Chevron Step 1 would deny any regulatory input), an agency could issue valid regulations overruling that appellate precedent.

In the case of the 2011 regulation under section 7502, the Ninth Circuit in Baldwin held that an interpretation that section 7502 completely supplanted the common law mailbox rule was one of the reasonable interpretations of that statute and that the Ninth Circuit had not, in its Anderson opinion, rested its holding on the unambiguous nature of section 7502’s language. Therefore, under Chevron and Brand X, the regulation barring the use of the common law mailbox rule was valid.

The taxpayers had two arguments that the Ninth Circuit quickly dismissed:

First, the taxpayers argued that there is a rule of construction that makes repeal of common law rules by statute not to be easily implied. With respect to this argument, the Ninth Circuit noted a contrary rule of construction (one that other Circuits had relied on) that when a statute speaks on an issue and makes an exception, that statutory exception eliminates all nonstatutory exceptions. The Ninth Circuit held that the subsection (c) rules presuming delivery in the case of certified or registered mail could benefit by the latter interpretive rule. Thus, these countervailing statutory rules of construction could lead to two different reasonable interpretations of the statute.

Second, the taxpayers argued that the regulation was improperly being applied retroactively, since they had claimed that they mailed the envelope in June 2011, but the regulation was only adopted in August 2011. But, the Ninth Circuit pointed out that the regulation was effective for all documents mailed after September 21, 2004 (the date the regulation was first proposed), and the court did not find that such retroactive effective date violated section 7805(b)(1)(B), which allows the IRS to make its regulations retroactive to the date they are first proposed.

Observations

Several Supreme Court Justices have recently criticized Chevron and Brand X. It is interesting that Judge Watford, who wrote the Baldwin opinion, only predicated the panel’s ruling for the IRS on the basis of reliance on those two opinions. What, then, happens if Chevron and Brand X are overruled? Will the Ninth Circuit’s precedent then revert to Anderson, which allows use of the common law mailbox rule?

Judge Watford also seems to be deliberately vague in his opinion as to the ground on which the district court should dismiss the case on remand. He does not say the dismissal should be for lack of jurisdiction (FRCP 12(b)(1)) or for failure to state a claim (FRCP 12(b)(6)). It would not much matter in this case whether the section 6511 filing deadline were jurisdictional or not, but it might matter in a future case (e.g., one where there was an argument for waiver, forfeiture, or estoppel, but not equitable tolling (see United States v. Brockamp, 519 U.S. 347 (1997) (holding the deadline not subject to equitable tolling, but not discussing whether the deadline is jurisdictional)). Indeed, Judge Watford’s Baldwin opinion really relies on section 7422(a), which requires the filing of a refund claim before a refund suit may be maintained. The opinion states that section 7422(a) also requires a timely claim. In fact, Judge Watford only writes:

The Baldwins then brought this action against the United States in the district court. Although the doctrine of sovereign immunity would ordinarily bar such a suit, the United States has waived its immunity from suit by allowing a taxpayer to file a civil action to recover “any internal-revenue tax alleged to have been erroneously or illegally assessed or collected.” 28 U.S.C. § 1346(a)(1). Under the Internal Revenue Code (IRC), though, no such action may be maintained in any court “until a claim for refund or credit has been duly filed” with the IRS, in accordance with IRS regulations. 26 U.S.C. § 7422(a); see United States v. Dalm, 494 U.S. 596, 609 (1990). To be “duly filed,” a claim for refund must be filed within the time limit set by law. Yuen v. United States, 825 F.2d 244, 245 (9th Cir. 1987) (per curiam).

Judge Watford is the author of the opinion in Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015), which we blogged on here and where I was amicus. In that opinion, he held that the then-9-month filing deadline to bring a wrongful levy suit in district court is not jurisdictional and is subject to equitable tolling under recent Supreme Court case law making filing deadlines now only rarely jurisdictional. Note that his language above from Baldwin does not mention the word “jurisdictional” with regard to section 7422(a)’s requirement. Judge Watford may not be wanting to say that section 7422(a)’s administrative exhaustion requirement is jurisdictional, rather than a nonjurisdictional mandatory claims processing rule possibly subject to waiver, forfeiture, or estoppel. It is true that in Dalm (which he cites only with a “see”), the Supreme Court called the requirements of sections 7422(a) and 6511 jurisdictional with respect to a refund suit, but the reasoning of Dalm does not accord with current Supreme Court case law. In 2016, the Seventh Circuit questioned whether Dalm is still good law, though it did not reach the question, writing:

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 Unites 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 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).

Gillespie v. United States, 670 Fed. Appx. 393, 394-395 (7th Cir. 2016) (some citations omitted). It was this passage from Gillespie that the DOJ cited as grounds for its need to file a post-oral argument memorandum of law in Tilden v. Commissioner, 846 F.3d 882 (7th Cir. 2017), arguing that the section 6213(a) Tax Court deficiency petition filing deadline is jurisdictional and not subject to waiver. The DOJ won that argument in that case, but it is currently before the Ninth Circuit on the issues of jurisdictional and equitable tolling in companion cases on which we previously blogged here.

Another Return Preparer Fails to Take Advantage of Special Time for Filing Refund Suit under 6694

Carl wrote last summer about a 9th Circuit case in which a return preparer failed to take advantage of the special rule for filing a refund suit under IRC 6694.  Les wrote about the same issue last winter.  As a result of failing to take advantage of the special path to contesting a refund claim under IRC 6694, the return preparers in the cases described by Carl and Les fell back into the full payment rule of Flora which we have discussed at some length in earlier posts such as the ones here and here

Now another 6694 case has come to the same sad ending where the return preparer paid the 15% which would have triggered the exception to the Flora rule, but did not file the complaint timely, resulting in a dismissal with a remonstration to fully pay the tax before coming back to have the court take a look at the merits.  The return preparer in Riter v. United States, No. 2:17-cv-01265 (D. Utah March 15, 2019) did not give up easily.  He made arguments challenging the Flora rule and requesting equitable tolling, but he lost all of his arguments.  The case points out once again the somewhat tricky exception to Flora created by IRC 6694 (also created in IRC 6703) and the carefully prescribed steps a penalized return preparer must take to comply.  The existence of three cases with the same problem in one year points out that the perceived benefit of the Flora exception in IRC 6694 can be somewhat illusory unless you follow the precise steps Congress set out for this section alone.  While it’s worth asking why Congress created a unique path to refund litigation for one section, these cases show why it’s not worth litigating the issue to ask the court to answer that question.

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Mr. Riter may be a subscriber to this blog because he makes an equitable tolling argument not made in the prior two cases mentioned above.  Before getting to his argument and the court’s response, here is the succinct statement of the facts set out in the magistrate judge’s report:

In this case, on June 27, 2016, the United States assessed Mr. Riter penalties under 26 U.S.C. § 6694(b) for tax years 2010 through 2014 in the amount of $5,000 for each year, or a combined total of $25,000. (Compl., ¶ 13, ECF No. 2.) In compliance with § 6694(c)(1), Mr. Riter, on July 22, 2016, filed a claim for refund and paid $750, or 15% of the total penalty, for each tax year, totaling $3,750 for the five tax years. (Id., ¶ 15.) However, Mr. Riter did not satisfy the prerequisites of § 6694(c)(2). That provision required Mr. Riter to file his lawsuit by the earlier of either (1) thirty days after the United Sates denied his refund claim, or (2) thirty days after six months from the date he filed his refund claim. The United States denied Mr. Riter’s refund claim on November 16, 2017. (Id., ¶ 26.) Thirty days after this date is December 16, 2017. Mr. Riter filed his refund claim on July 22, 2016. Thirty days after six months from July 22, 2016 is February 27, 2017. February 27, 2017 is clearly the earlier of the two dates. However, Mr. Riter did not file this lawsuit seeking a refund of the penalties until December 8, 2017, (see id.), well beyond the February 27, 2017 deadline to do so. After February 27, 2017, the 15% limited exception to the full payment rule “cease[d] to apply with respect to such penalty,” meaning that the full payment rule applied after that time. 26 U.S.C. § 6694(c)(2). However, Mr. Riter admits he paid only 15% of the penalties, (see Compl., ¶ 15, ECF No. 2), thereby conceding he did not comply § 1346(a)(1) and Flora’s full payment requirement.

If not before then certainly by the time the IRS filed its motion to dismiss for lack of jurisdiction, Mr. Riter knew that he had not followed the very precise rules required to satisfy the exception to the Flora rule available in IRC 6694.  In order to move his case forward, he did not argue that he complied with the IRC 6694 provisions, but instead argued that they were claims processing rules rather than a jurisdictional requirement.  He cited to United States v. Wong, 575 U.S. __, 135 S. Ct. 1625, 1632 (2015), arguing that because IRC 6694 does not use the word jurisdictional, the court has the ability to determine that his late performance of the requirements of IRC 6694 could be excused under the principle of equitable tolling.

Responding to this argument, the magistrate judge stated:

…as the United States points out, Wong involved a failure to comply with the Federal Tort Claims Act statute of limitations, and § 6694(c) is not a statute of limitations similar to the one at issue in Wong. (Reply in Supp. of Pl.’s Mem. in Opp’n to United States’ Mot. to Dismiss for Lack of Subject Matter Jurisdiction 4, ECF No. 12.) Significantly, Mr. Riter does not cite to any case law finding that § 6694(c) or the nearly identical § 6703(c) constitute merely claims processing rules.

The fact that 6694 is in the Internal Revenue Code and not the Federal Tort Claims Act should not control the outcome, nor should the fact that no one had previously successfully argued the claims processing issue.  The specificity of the statute and the fact that Congress knew it was creating an exception to a jurisdictional rule support the court’s conclusion.  I am troubled by the court’s view of the statement that Congress must make about jurisdiction.  It stated “If the Supreme Court considers § 6694(c) a claims processing rule and not jurisdictional, it will need to state as much explicitly before a lower court can make such a finding.”  This reverses the normal rule which requires Congress to make it clear a provision is jurisdictional and not make it clear that one is not.  The court gets to this twist because it views the law as well established that Flora is a jurisdictional requirement and sees 6694 as an exception to that requirement.

Going beyond the claim processing issue, Mr. Riter does not appear to have offered the court much, if any, reason that he missed the statutory time periods.  For his argument to succeed, assuming he were to get past the jurisdictional issue, he still must show the court why it should give him relief.  Just saying a statute is a claims processing rule does not win the day.  Someone who misses the deadline for a claims processing rule must still demonstrate a reason why they deserve relief.  He does not seem to have done this.

In losing, Mr. Riter shows that he learned from the earlier cases and made arguments attacking the standard interpretation of the statute.  Unfortunately, his argument was unsuccessful, perhaps because he did not have the facts to support the equitable tolling.  The case reminds us again of the care required from individuals assessed a penalty under IRC 6694 or 6703 if they wish to contest the penalty without fully paying it.

Financial Disability Argument Loses Because Taxpayer Husband Did not even Allege Disability

We have written several posts about the financial disability provision set forth in IRC 6511(h) which allows a taxpayer to file a refund claim after the normal statute of limitations has expired if the taxpayer missed the deadline because of a disabling condition. Some of the prior posts are here, here and here. Taxpayers have a long string of losses in the decided cases and the case of Rhandall Thorpe et ux. v. Dept. of Treasury et al.; No. 2:18-cv-04956 (D. N.J. 2019) adds to the list of taxpayer losses. As with the majority of reported cases, these taxpayers proceeded pro se. Based on the facts set out by the court, they would have benefited from the advice of counsel but the benefit may have been conceding their case earlier in the process.

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The Thorpes filed returns for several years in which they self-reported the penalty for an early withdrawal from an IRA. At some point long after the expiration of the period for timely filing a refund claim, the Thorpes discovered that they need not have paid the penalty for making an early withdrawal from their retirement account and they sought to recover the payments that they made. The IRS denied their claims as untimely and they brought a suit for refund in district court.

As we have mentioned before in discussing these cases the IRS has not written any regulations in the two plus decades since IRC 6511(h) was enacted but it issued Rev. Proc. 99-21 setting out what it thought taxpayer should show in order to meet the requirements of IRC 6511(h). The Rev. Proc. requires that the taxpayer provide:

(1) a written statement by a physician (as defined in § 1861(r)(1) of the Social Security Act, 42 U.S.C. § 1395x(r)), qualified to make the determination, that sets forth:

(a) the name and a description of the taxpayer’s physical or mental impairment;

(b) the physician’s medical opinion that the physical or mental impairment prevented the taxpayer from managing the taxpayer’s financial affairs;

(c) the physician’s medical opinion that the physical or mental impairment was or can be expected to result in death, or that it has lasted (or can be expected to last) for a continuous period of not less than 12 months;

(d) to the best of the physician’s knowledge, the specific time period during which the taxpayer was prevented by such physical or mental impairment from managing the taxpayer’s financial affairs; and

(e) the following certification, signed by the physician:

I hereby certify that, to the best of my knowledge and belief, the above representations are true, correct, and complete.

(2) A written statement by the person signing the claim for credit or refund that no person, including the taxpayer’s spouse, was authorized to act on behalf of the taxpayer in financial matters during the period described in paragraph (1)(d) of this section. Alternatively, if a person was authorized to act on behalf of the taxpayer in financial matters during any part of the period described in paragraph (1)(d), the beginning and ending dates of the period of time the person was so authorized.

The Thorpes basically complied with none of the requirements set out by the IRS in the Rev. Proc. They also did not attack the Rev. Proc. and argue that the requirements in the Rev. Proc. were not entitled to deference since the IRS did not go through notice and comment in adopting the requirements listed there. Based on their facts such an argument would have been unavailing since they only argued that Mrs. Thorpe had a medical condition and made no effort to show why Mr. Thorpe could not have addressed the claim for refund sooner. In the paragraph setting out its conclusions the court summed up the weak facts in the case very nicely:

The plaintiffs have never complied with these requirements. First, they claim disability only as to Ms. Thorpe; for all that appears here, there is no impairment that prevented Mr. Thorpe from managing the couple’s affairs, and no showing was made to the IRS that he could not. See 26 U.S.C. § 6511(h)(2)(B) (no tolling where “individual’s spouse or any other person is authorized to act” for the person in financial matters).7 Second, they supply three letters from a physician, Dr. Martin Mayer, regarding her condition (DE 1-2, 1-3) These relate certain ailments, but they do not state anywhere that Ms. Thorpe was or is unable to manage her financial affairs, and they do not include the certification required by Rev. Proc. 99-21. Third, there is no indication that the required showing was made in connection with the refund claims themselves, as opposed to here in court. See Chan v. Commissioner, 693 F. App’x 752, 756 (10th Cir. 2017) (“The district court cannot make a determination of financial disability if [the taxpayer] did not first provide the requisite proof to the IRS.”). Fourth, I observe that this claim of medical disability is an anomalous one. The plaintiffs do not claim they were unable to deal with their financial affairs and file their returns; indeed, they did file their returns, using a paid preparer. Their claim, then, is not one of inability to cope with the demands of financial recordkeeping or filing, but merely that their returns contained a mistake.

This was a case that should never have been filed. Although the loss adds to the tally of taxpayer losses in IRC 6511(h) cases, the DOJ attorney would have expended little effort in preparing the responsive pleadings and motion to dispose of this case.

Problems exist with the Rev. Proc. which were exposed in the Stauffer, Kurko and Milton cases discussed here. Taxpayers with legitimate reasons for failing to meet a refund filing deadline should look to those cases in crafting arguments in support of IRC 6511(h) relief and should not be cowed by failures to follow all of the rules the IRS created 20 years ago without notice and comment and which do not internally make sense. The Thorpes’ problem was a basic problem with the statute because Mr. Thorpe provided no evidence of his disability and poor evidence of his wife’s. The case stands for little more than the statute means what it says. Future litigants who fail to provide evidence of the disability of all parties who could fix the mistake should expect similar results. Parties with real disability claims should continue to pursue their claims and litigate the intent of IRC 6511(h) if the IRS denies their claim administratively based on the narrow rules set out in Rev. Proc. 99-21.

 

 

Damages for Lost Tax Documents = Refund Claim?

We welcome back guest blogger Sarah Lora, Supervising Attorney of the Statewide Tax Project of Legal Aid Services of Oregon. Today Sarah (with the help of 3L Katelynn Clements of Lewis and Clark Law School) examines a recent federal district court decision from Colorado. She argues that the court wrongly categorized a tort claim against the Transportation Security Administration as a tax refund claim, and so should not have dismissed the case for lack of jurisdiction. As we have discussed before on PT, the prerequisites to a successful tax refund suit are insurmountable for many taxpayers. Sarah points out that the taxpayer here may actually have a chance with the IRS. The record does not tell us if he’s tried that route yet. Christine

If the TSA removes from luggage and negligently misplaces tax papers that are essential to prove your claim for refund, sorry friend, you are out of luck. This, according to the federal district court in Schlieker v. Transportation Safety Administration, is the state of the law.

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On February 17, 2016, Mr. John Schlieker flew from Phoenix to Denver on Southwest Airlines. According to his complaint and documents attached to it, Mr. Schlieker checked luggage that contained “a multitude of green hanging files containing manila folders filled with documenting receipts, paperwork, check registers, charitable contribution receipts, medical and dental receipts, property interest confirmation; all the things needed to appropriately file [his 2015] tax return.” When he arrived in Denver, instead of those documents, Mr. Schlieker found a TSA notice of bag inspection stating that his bag “was among those selected for physical inspection.”

On May 19, 2016, Mr. Schlieker filed a claim for damage with the TSA for $5,000, representing the amount of refund he estimated he could have obtained had the TSA not misplaced his papers. TSA sent Mr. Schlieker a letter on December 1, 2016 denying his claim “after careful evaluation of all the evidence” and directing him to file a lawsuit in U.S. District Court if he was dissatisfied with the denial. Mr. Schlieker was dissatisfied. He then filed a lawsuit in the U.S. District Court for the District of Colorado against the TSA under the Federal Tort Claims Act for $5,000.

The court dismissed the lawsuit holding it lacked subject matter jurisdiction because Mr. Schlieker did not claim the refund with the IRS first. Assuming that the allegations in his complaint are true, as the law requires when considering a motion to dismiss, the papers that the TSA lost were necessary to file a claim for refund. Mr. Schlieker stated in his complaint that he could not “completely, honestly, and truthfully” sign a return claiming the refund without the papers the TSA took. How could he file a claim for tax refund when the TSA took the very documents he needed to assert the claim?

Mr. Shlieker’s actions are not unique. In many cases, even for sole proprietorships, a taxpayer may not keep any “books” detailing their profits, losses, or expenses. Instead, the taxpayer will save receipts and other records throughout the year which they then give to their tax preparer every April. This is not ideal, but it happens routinely.

Citing I.R.C. § 7422(a) and a long list of cases dismissing suits based on that statute, the court reasoned that Mr. Schlieker’s lawsuit was really a claim for a tax refund and should therefore be dismissed. The statute reads:

No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected . . . or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary [of the Treasury], according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.

The cases the court cites, which cite this statute as the reason for their decision to dismiss, fall into two inapposite categories. The first are cases in which a third party, either an employer or an airline, is acting as an agent of the IRS to collect and pay over taxes. In those cases, the courts have held that § 7422(a) protects those agents, who are required by statute to collect taxes for the government under threat of criminal penalty for failure to do so, from civil lawsuits relating to the collection of those taxes. Sigmon v. Southwest Airlines (dismissing class action against Southwest for improperly charging excise taxes to passengers); see also Kaucky v. Southwest Airlines (same); Chalfin v. St. Joseph’s Healthcare Sys. (dismissing case against employer who improperly withheld FICA from medical residents working at a hospital).

In Mr. Schlieker’s case, the TSA was not acting as an agent of the IRS to collect and pay over taxes. It did not confiscate Mr. Schlieker’s documents in order to perform some duty it believed it owed to the IRS. Assuming the allegations in the complaint are true, the TSA committed a tort, plain and simple, when it took Mr. Schlieker’s documents out of his luggage and did not return them. For that reason, those agency cases are not persuasive.

The second group of cases hold that plaintiff must timely exhaust administrative remedies, by filing a claim for refund, prior to filing suit for the refund of taxes. See United States v. Clintwood Elkhorn Mining Co; United States v. Dalm; Strategic Hous. Fin. Corp. v. United States. The court misses the mark with this line of cases as well. TSA, by means of tortious conduct, took the means for filing a claim for refund away from Mr. Schlieker. To require Mr. Schlieker to file a return without supporting documents violates the letter of IRC §7206(1):

any person who . . . [w]illfully makes and subscribes any return, statement or other document which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe true and correct as to every material matter . . . shall be guilty of a felony. . . .

In reality, even if Mr. Schlieker’s claim survived the initial motion to dismiss, he still might have lost or received only limited damages. In a case like this, TSA may argue that its seizure of the records was not the proximate cause of Mr. Schlieker’s loss. After all, with today’s technology, could he not have reconstructed his records well enough to file his tax return? Copies of bank records, dental and medical bills, mortgage interest paid, etc. are likely readily available online. I do not see much in the multitude of green hanging files that he could not replace with some headache and hassle. It is possible he could still get those documents and file his claim for refund before April 15, 2019. Perhaps the damages in a case like this should be measured by the cost to replace the documents, a reasonable estimate of the lost refund attributable to any irreplaceable documents, and perhaps any non-economic damages such as emotional distress.

NTA Report Seeks Legislation to Address Refund Suit Innocent Spouse Jurisdiction and Full Payment Rule Problems

The National Taxpayer Advocate’s 2018 annual report to Congress seeks legislation to address two refund suit issues that have been extensively discussed on PT: (1) legislation clarifying that a tax refund suit in district court or the Court of Federal Claims may consider innocent spouse relief under § 6015, and (2) legislation repealing or substantially modifying the refund suit full payment rule established by Flora v. United States, 362 U.S. 145 (1960).

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Section 6015 as a Defense in Collection Suits

Since 2007, the NTA has been alerting Congress to numerous district court holdings that the Tax Court has exclusive jurisdiction to make rulings concerning § 6015 relief, such that § 6015 relief may not be considered by the district courts as a defense in government-brought suits for collection under § 7402 or § 7403. NTA 2007 Annual Report to Congress, Vol. I, p. 631; NTA 2008 Annual Report to Congress, Vol. I, p. 525; NTA 2009 Annual Report to Congress, Vol. I , pp. 494-495; NTA 2010 Annual Report to Congress, Vol. I, pp. 504-505; NTA 2012 Annual Report to Congress, Vol. I., pp. 648, 652; NTA 2015 Annual Report to Congress, Vol. I, pp. 532-536. For a partial listing of many such district court rulings, see Keith’s post here, which links to a 2015 opinion in United States v. Stein. Footnote 1 in Stein cites most cases so holding decided up to 2015. Keith also did a post on this issue in 2018, when another district court held to the same effect. The 2018 post can be found here. Interestingly, no appellate court has been forced to face this issue, so the issue is still one of first impression there. Keith and I have been looking for a test case to bring, but the two district court cases that we have considered to date were not good candidates (for reasons I won’t get into here).

In her 2013 report, the NTA wrote:

As the National Taxpayer Advocate has pointed out, these district court decisions are inconsistent with the statutory language of IRC § 6015, which does not give the Tax Court exclusive jurisdiction to determine innocent spouse claims, but rather confers Tax Court jurisdiction “in addition to any other remedy provided by law.” Nothing in IRC § 6015 prevents a district court from determining, in a collection suit, whether innocent spouse relief is available. . . . Moreover, the refusal to allow a taxpayer to raise IRC § 6015 as a defense in a collection suit may create hardship because a taxpayer may be left without a forum in which to raise IRC § 6015 as a defense before losing her home to foreclosure by the IRS.

NTA 2013 Annual Report to Congress, Vol. I, pp. 416-417.

The NTA has also repeatedly asked that, if the courts do not correct their rulings, Congress adopt legislation that would make it even more clear that § 6015 relief is available as a defense in a district court collection suit. NTA 2007 Annual Report to Congress, Vol. I, pp. 549-550; NTA 2009 Annual Report to Congress, Vol. I, pp. 378-380; NTA 2010 Annual Report to Congress, Vol. I, p. 378-382; NTA 2017 Annual Report to Congress, Purple Book, p. 53.

The NTA collected her most important legislative recommendations (both those from the current year and those from prior years) into a Purple Book that accompanied her 2017 annual report to Congress. In the Purple Book accompanying her 2018 report, she repeats this legislative recommendation here as number 53 of her 58 collected legislative proposals.

Section 6015 Relief Consideration in Refund Suits

But, she also discusses, in the main body of her 2018 report, 10 new legislative proposals, one of which is to clarify that district courts and the Court of Federal Claims also have jurisdiction to consider § 6015 relief in tax refund suits. This clarification is necessary, since the DOJ has been arguing, in two recent refund suits, that the district courts lacked jurisdiction to rule on § 6015 relief because only the Tax Court has jurisdiction to rule on § 6015 relief – citing the DOJ victories in the collection suits.

Keith had blogged here when a district court last year in Chandler v. United States had held that it lacked jurisdiction to consider § 6015 relief in a refund suit. The NTA cites Chandler as the reason provoking her recommendation here.

What the NTA does not mention is that the same issue is currently presented in a district court case, Hockin v. United States, on which I recently blogged here. In my post on Hockin, I noted that the tax clinic at Harvard had submitted an amicus memorandum. My post also had links to the original DOJ motion to dismiss for lack of jurisdiction, the Harvard clinic’s amicus memorandum, and the taxpayer’s response to the motion. On February 26, the taxpayer submitted a supplementary response, which can be found here.  One of the major reasons for this supplementary response was that the taxpayer wanted to show the court that the IRS had issued a Chief Counsel Notice in 2000 in which the IRS wrote:  “The Service now agrees that the Tax Court, the United States district courts (including the bankruptcy courts) and the Court of Federal Claims have jurisdiction to consider whether the Service abused its discretion in denying equitable relief under I.R.C. § 6015(f).”  This Notice had not been mentioned in prior filings in the Hockin case.  (Of course, the DOJ Tax Division Trial Section is not bound by the IRS’ view, but this tends further to undermine the Trial Section’s argument in Hockin because the DOJ Tax Division Appellate Section has also recently agreed with the IRS.)

On March 12, the DOJ in the Hockin case will file its reply to the amicus memorandum and the taxpayer’s original and supplemental responses.  On April 25, 2019, John MacMorris-Adix, a student in the Low-Income Taxpayer Clinic at Lewis & Clark Law School in Portland, Oregon, will argue the Hockin motion on behalf of the taxpayer before a magistrate in the United States District Court for the District of Oregon..

Chandler was never appealed, but a loss on the same issue in Hockin is likely to be appealed by the taxpayer to the Ninth Circuit.

Repealing or Modifying the Flora Refund Suit Full Payment Rule

The Supreme Court in Flora held that in order for district courts and the Court of Federal Claims to have jurisdiction in a tax refund suit, the taxpayer must have paid the disputed tax in full. In Flora, the IRS had sent a notice of deficiency proposing an increase in income taxes. Rather than petitioning the Tax Court, the taxpayer paid part of the deficiency, filed a refund claim, and later brought a refund suit on that claim in the district court. Part of the rationale of the Supreme Court in so holding in Flora was that the taxpayer could have fought the deficiency, prepayment, in the Tax Court, so should not be heard to complain about the full payment rule. And, in a later Supreme Court case, the Solicitor General told the Court that the DOJ’s position was that the Flora full payment rule only applied when the taxpayer forwent filing a permissible Tax Court deficiency suit.

Les and I did a two-part post last year here and here on the Second Circuit’s Larson opinion from last April. In Larson, a tax shelter promoter had been assessed (jointly with other promoters) a penalty under § 6707 of about $160 million. The other promoters paid about $100 million of the penalty, and Larson paid $1 million and contended that he could not pay the balance. Larson brought a refund suit, and the court held that, even in the case of this assessable penalty, where no Tax Court prepayment suit was ever possible, Flora applies to require full payment before a refund suit may be maintained.

Keith is currently working on a law review article on the unfairness of the full-payment rule. The Harvard clinic had also submitted an amicus brief in Larson that argued the full payment rule should not apply to refund suits involving assessable penalties. Long ago, I had published an article, “Let the Poor Sue for Refund Without Full Payment”, 125 Tax Notes 131 (Oct. 5, 2009), in which I proposed that the full payment rule not apply where the taxpayer had already paid a part of the disputed liability and the taxpayer was current on an installment agreement to pay the rest or was in currently not collectible status. In April 2018, the Harvard clinic also submitted comments to Congress on the “Taxpayer First Act.” A link to the complete comments can be found within a blog post that Keith did on the proposed act here. One of the comments proposed that the Tax Court be given jurisdiction to review assessable penalties prepayment.

Acknowledging that her proposals were inspired, in part, by Larson and analogous to those made by Keith, the Harvard tax clinic, and me, in her 2018 report to Congress here, the NTA summarizes her legislative proposals regarding the full payment rule as follows (footnotes omitted):

A simple solution would be to repeal the full payment rule. If Congress prefers a more tailored approach to improve access to judicial review, the National Taxpayer Advocate recommends Congress:

  1. Amend 28 U.S.C. § 1346(a)(1) to clarify that full payment of a disputed amount is only a prerequisite for jurisdiction by district courts and the U.S. Court of Federal Claims if the taxpayer has received a notice of deficiency. If enacted, taxpayers who are subject to assessable penalties would not need to pay them in full before filing suit in a district court or the Court of Federal Claims.
  2. Amend 28 U.S.C. § 1346(a)(1) to clarify that a taxpayer is treated as having fully paid a disputed amount for purposes of the full payment rule at the earlier of when the taxpayer has paid some of it (including by offset) and either (a) the IRS has classified the account as currently not collectible due to economic hardship, or (b) the taxpayer has entered into an agreement to pay the liability in installments. If enacted, taxpayers who cannot afford to pay would have the same access to judicial review as those who can (e., the option to file suit in a district court or the U.S. Court of Federal Claims).
  1. Amend IRC § 6214 to authorize the U.S. Tax Court to review liabilities where the taxpayer has not received a notice of deficiency (g., assessable penalties) in a manner that parallels the deficiency process. In addition, allow the IRS to assess and collect liabilities only after any such review is complete or the period for filing a Tax Court petition has expired. Alternatively, Congress could expand the Tax Court’s jurisdiction to review liabilities in connection with CDP appeals when the taxpayer has not received a notice of deficiency. These changes would authorize review of assessable penalties by the Tax Court even if the taxpayer had an opportunity for an administrative appeal.

 

 

Claiming Refunds for Veterans Where Disability Severance Pay Was Improperly Withheld

Today we welcome guest blogger Sarah Lora. Sarah has been the Supervising Attorney of the Statewide Tax Project of Legal Aid Services of Oregon since April 2016.  Prior to that that, she worked for 13 years as an attorney in Legal Aid’s Farmworker Program where she concentrated her practice on employment litigation and tax controversy. Sarah is also a vice-chair of the pro bono and tax clinics committee of the ABA Tax Section. At the most recent Tax Section meeting she participated in a panel presenting on the issue of obtaining tax refunds for veterans. The blog has previously brought attention to the special extended time frame for filing refund claims by exonerees, here and here. In a similar fashion to exonerees, who needed to file refund claims long after the normal statute of limitations had expired, many veterans face the same issue because of a mistake by the Department of Defense that went unnoticed. Sarah explains the problem and the efforts being made to assist veterans in getting back the money they overpaid to the Treasury. With exonerees the need was for people to assist in filing the claims. For the veterans, perhaps the biggest need is identifying the individuals entitled to the refunds. While the Department of Defense is seeking to notify the veterans, it has lost contact with many of the individuals. Keith

Over 130,000 veterans have the right to a refund of over $717 million. So far only 26,000 have made claims and the time period for making claims for many of those veterans in nearly over. The NTA blogged about this issue last November here. In this post I will summarize the issues discussed by the NTA, as we seek to reach all affected taxpayers, and to provide resources for outreach efforts.

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Summary of Issue: Since 1991 the Department of Defense has been improperly withholding federal income taxes and issuing information returns for disability severance payments, also known as “DSP.” A DSP is a one-time lump sum payment made to service members separated due to medical disability. DOD’s withholding of federal income taxes from DSP was improper because the payments are excluded from income under Section 104(a)(4). See St. Clair v. United States. According to the IRS, the DOD improperly withheld approximately $717 million from over 130,000 veterans. These numbers would be higher if they included veterans who served in the military reserves.

To recoup the wrongfully withheld funds, veterans must file an amended tax return with the IRS. However, many taxpayers missed the 3-year deadline for claims for refund under Section 6511(a). To remedy this, Congress passed a law called the Combat-Injured Veterans Tax Fairness Act in 2016, which allows veterans to file an amended return within 1 year after the Department of Defense provides the taxpayer with a letter describing their right to a refund of improperly withheld amounts. As of October 2018, according to TAS, 13,000 letters have been returned as undeliverable. The IRS has advised that the 1-year time period does not begin to run on undeliverable letters. According to TAS, as of October 26, 2018, only 26,000 of the 130,000 veterans had made refund claims for the improperly withheld taxes.

What You Can Do: Reach out to your community partners, veterans groups, and other allies to make sure we help all qualified veterans get the refunds they deserve. Some ideas: post information to your facebook page, send information to your community partners, set up a table at a Stand Down event in your area, or request to give a presentation at your local Purple Heart chapter.

Resources Available: The resources below, created by TAS, are available for dissemination.

For any readers who have already engaged in an effort to obtain refunds for these veterans, we welcome your comments on how the effort is going or your advice on how to make the effort more effective.

 

Is the Requirement to File a Refund Claim Before Bringing Suit Waivable?

Contributor Carl Smith who is filling in for me at the tax clinic at Harvard while I am on sabbatical found time to write about a case headed for a decision in the Supreme Court that might have tax implications. The tax implications are complicated by prior Supreme Court case law in the tax area regarding the requirement for a refund claim. This is something to watch if you are interested in jurisdictional issues or if you have a case in which the client has failed to file a claim (or maybe faces a variance argument.) Keith

On January 11, 2019, the Supreme Court granted certiorari in a case that may indirectly impact whether the requirement to file with the IRS an administrative refund claim before bringing a tax refund suit is jurisdictional, Davis v. Fort Bend County, Texas, 893 F.3d 300 (5th Cir. 2018).

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Section 7422(a) requires that a taxpayer bringing a suit for refund first file with the IRS an administrative claim for refund. In United States v. Dalm, 494 U.S. 596, 601-602, 608 (1990), the Supreme Court stated that both the filing of an administrative claim and the timely filing of such claim were jurisdictional requirements of a refund suit. Jurisdictional requirements cannot be waived by the parties or forfeited if a party fails to timely object.

Dalm was decided before the Supreme Court changed its thinking on what conditions of suits are jurisdictional. Since 2004, the case law (which we have discussed in many previous posts) is that “claims processing rules” are generally no longer jurisdictional. There are only two exceptions to this rule. First, Congress can make a claims processing rule jurisdictional by making a clear statement in the statute to that effect. Second, if there is a long line of Supreme Court cases holding the claims processing rule jurisdictional, then the Court will stick to that interpretation under stare decisis.

Dalm was the first and only Supreme Court opinion calling the requirement to file a predicate administrative refund claim jurisdictional, so it seems unlikely that the stare decisis exception would apply. And, section 7422(a) does not contain the word “jurisdiction” or appear to speak in jurisdictional terms. Rather, the jurisdictional grant for refund suits is located elsewhere – at 28 U.S.C. sec. 1346(a)(1). The Supreme Court has held that the separation of a claims processing rule from a jurisdictional grant is evidence that Congress did not intend a claims processing rule to be jurisdictional.

In dicta a few years ago, the Seventh Circuit speculated that the requirement to file an administrative tax refund claim before bringing a tax refund suit might no longer be jurisdictional. It 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 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).

Gillespie v. United States, 670 Fed. Appx. 393, 394-395 (7th Cir. 2016).

Title VII of the Civil Rights Act provides for private causes of action arising out of employment discrimination and gives federal courts subject matter jurisdiction to resolve such disputes. See 42 U.S.C. § 2000e-5(f). Before seeking judicial relief, however, Title VII plaintiffs are required to exhaust their administrative remedies by filing a charge of discrimination with the Equal Employment Opportunity Commission within 180 days of the alleged discrimination. 42 U.S.C. § 2000e-5(e)(1).

The Circuit courts are badly split over whether the exhaustion of administrative remedies requirement in Title VII is jurisdictional or merely a nonjurisdictional claim processing rule subject to waiver, forfeiture, estoppel, and equitable tolling. By the count of the Fifth Circuit in Davis, three Circuits take the position that the administrative filing requirement is jurisdictional, while eight (including the Fifth Circuit in Davis) find it a waivable nonjurisdictional claims processing rule.

In holding that the exhaustion requirement was not jurisdictional, the Fifth Circuit in Davis relied heavily on the Arbaugh case (cited in the above quote from Gillespie). It wrote: “Title VII’s administrative exhaustion requirement is not expressed in jurisdictional terms in the statute, see 42 U.S.C. § 2000e-5, and just as in Arbaugh, there is nothing in the statute to suggest that Congress intended for this requirement to be jurisdictional.” Davis, 893 F.3d at 306.

But for the complicating existence of the Dalm opinion, it is hard to imagine that if the Supreme Court holds the Title VII administrative exhaustion requirement nonjurisdictional (as most Circuits have), that § 7422(a)’s tax refund claim filing requirement could still be held jurisdictional.