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

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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!

About Carlton Smith

Carlton M. Smith worked (as an associate and partner) at Roberts & Holland LLP in Manhattan from 1983-1999. From 2003 to 2013, he was the Director of the Cardozo School of Law tax clinic. In his retirement, he volunteers with the tax clinic at Harvard, where he was Acting Director from January to June 2019.

Comments

  1. Carl Smith says

    Dixon was appealed today (March 17, 2022) to the Fed. Cir.

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