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

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

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


Factual and Legal Background

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


  1. Joseph Schimmel says

    This is a great post. One would hope that another taxpayer will have the opportunity to see the issue through to a decision.
    If Procedurally Taxing has already addressed the IRS’s ability to assess self-employment taxes (or to treat them as self-assessed) from an amended return, without issuing a 90-day letter, under the circumstances described in this article (basically, situation#2), then a link would be great; if the issue has not been addressed, it might be worth a follow-up post.

  2. Jerry Borison says

    I think the student deserves a lot of credit for a well-researched presentation. and it appears there is a happy ending One thing I think is missing here and that is the practicality of pursuing this in the manner it was. I would have encouraged my client to pay the $70 and avoid the time and expense of fighting this issue. I know that clinics are different than private practice (as I have done both for all too many years) but part of the teaching should be to be practical. Now, had the refund claim been for $100,000 and the assessment for $80,000, that might pose a different situation. But for $70, it seems crazy to me to not pay first and possibly lose in district court.

    • Patrick Thomas Patrick Thomas says

      As the person who made this decision, I’ll address this. You raise a fair question, though it’s an easier critique in hindsight than it was at the time. This issue was certainly considered when the complaint was filed, though ultimately we were unsure whether the government would file a motion to dismiss for lack of jurisdiction based on Flora. As the post notes, there were essentially no cases on point; I don’t think we found the Moe case until we responded to the motion to dismiss.

      There were a number of reasons that led us to file a complaint without paying the $70. First, as a low income taxpayer that our LITC was authorized to represent, any additional payment to the IRS represented a financial hardship for our clients–even $70. Second, while we were unsure whether the government would file the motion to dismiss, I felt that doing so would be fairly outrageous given the facts outlined in the post, and ought to be challenged if it occurred. This issue is also fairly unlikely to arise in the factual scenario you identify ($100,000 credit vs. $80,000 additional assessment); rather, it’s low-income taxpayers that can more likely foresee this situation, given that their refundable credits quite often exceed self-employment or income tax assessments. It’s also low-income taxpayers who are less likely to be able to challenge the denial of a claimed refund without a clear explanation of that denial. From a systemic perspective, the IRS and DOJ shouldn’t be able to slam the courthouse door in this situation. Of course, once the DOJ presented a reasonable settlement opportunity, we discussed the issue with our clients and took it rather than pressing this legal issue.

      To answer Bob Kamman’s question below, we did not involve TAS, which resulted from a worry about the two year suit filing deadline under IRC 6532. A note on the taxpayers’ transcripts stated that the refund claim was “resolved” on a certain date; however, when we asked for a Notice of Disallowance in a FOIA request, Disclosure stated that they had no documents responsive to that request. Ultimately, Disclosure turned out to be correct (and thus, the two year deadline had never started), but we were concerned given the transcript notation that if we took more time to file suit, the Notice of Disallowance might turn up after all.

  3. Before making this a federal case, was the local or national Taxpayer Advocate asked for help? Was there a response?

    I found it interesting that the Justice Department attorney is also a Notre Dame law school graduate (2013).

    • I find the DOJ’s position as to no jurisdiction for a refund suit for an EITC credit both novel and astounding. Such refund suits are not new.

      When she ran the U. Conn. clinic, now-STJ Leyden brought a refund suit in the D. Conn. for multiple refunds attributable to the EITC for years where a return was filed more than three years after the due date of the return. The issue in the case was how the section 6511(b) amount limits apply, since they refer to tax paid in the lookback period. Prof. Leyden argued that EITCs had never been paid, so there was no limit. The DOJ never argued that 1346(a)(1) did not authorize the suit. Rather, it argued that EITCs are deemed paid on the due date of the return — a position that the Second Circuit adopted. Israel v. United States, 356 F.3d 221, 223 (2d Cir. 2004) (“[I]f [the EITC] were not an overpayment, it would not be refundable.”). See also Sorenson v. Sec’y of Treasury, 475 U.S. 851 (1986) (holding that EITC payments may be intercepted by the Secretary of Treasury under § 6402(c), which authorizes the Secretary to intercept “overpayments” of taxes from taxpayers who fail to meet their child support obligations). The Code states that if a taxpayer is owed more in refundable credits than her tax liability (after first reducing that liability by other credits), the amount in excess “shall be considered an overpayment” and the taxpayer is eligible for a “refund” in an amount corresponding to that constructive overpayment. I.R.C. § 6401(b)(1). Is the DOJ content to argue that what Congress said in section 6401(b)(1) only applies in the IRC, not to 28 U.S.C., where section 1346(a)(1) is located? That would be an odd argument, since the language of 1346(a)(1) (originally adopted in 1921) was taken from the predecessor of IRC sec. 7422(a), which has roots in the Civil War income tax. In Pfizer, the DOJ argued that the two statues (1346(a)(1) and 7422(a)) should thus be read in pari materia, as most courts have done.

      I also lost a case before the Second Circuit some years ago in which I argued for a refund of amounts of EITC and ACTC taken by the IRS under an OIC as “additional consideration” because they related to a tax year in which the OIC was accepted. The phrasing of the OIC was that: “As additional consideration beyond the amount of my/our offer, the IRS will keep any refund, including interest, due to me/us because of overpayment of any tax or other liability, for tax periods extending through the calendar year in which the IRS accepts the offer.” I argued that the OIC should be interpreted in plain English, not Code-speak, and in plain English there was no “overpaymentof any tax or other liability” when a refundable credit generated the overpayment. The Second Circuit disagreed, citing section 6401(b)(1) and holding that “overpayment” as used in the OIC must be read in Code-speak. Sarmiento v. United States, 678 F.3d 147 (2d Cir. 2012). (Note that the OIC language was later changed to remove the problematic language that caused the Sarmiento litigation; now additional consideration in OICs is “refunds”, without mention of those refunds being limited to those attributable to an overpayment.)

      Thus, it sounds to me like the DOJ is arguing out of both sides of its mouth — any argument that will win the case, even if the argument is inconsistent with the DOJ’s position in previous cases.

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