We welcome back guest blogger Marilyn Ames who writes today about a case in which a third party pays the tax – perhaps under duress – and seeks to recover the payment. As he finds out the path to recovery is not simple. Keith
One of my professors in law school was fond of explaining unusual results in court opinions with the statement that bad facts make bad law. The Court of Appeals for the Federal Circuit illustrated this principle in the recent case of Roman v. United States, which if not totally bad law is possibly unnecessary and at the least is undeveloped in terms of its application within the structure of the tax system.
When Mr. Roman and his wife, Iris Espinosa, divorced in 2009, the property settlement they entered resulted in Mr. Roman receiving the family home in exchange for a payment of $150,000 to his former spouse. The agreement was later amended to provide that Mr. Roman would pay any taxes Ms. Espinosa would owe for the sale of her share of the residence to him. Ms. Espinosa filed her return for 2010, reporting the $150,000 as income but apparently not claiming it as being excluded under the provisions of IRC Section 121. An assessment was made in the amount of $50,002.04 in taxes and penalties, and according to the Court of Appeals, Ms. Espinosa received a “notice of intent to take possession of her property, including the previously shared home.” Presumably this was the usual notice and demand issued after an assessment, but the opinion does not make that clear.
Mr. Roman and Ms. Espinosa then met with an IRS employee, who indicated that that the IRS had not “placed a lien” on his home but Mr. Roman would have to pay the outstanding tax liability to avoid his residence being levied. Mr. Roman claims he believed he had no realistic alternative but to pay a tax he felt he did not owe, but claimed he was also told he could appeal the assessment once the tax was fully paid. Mr. Roman made a large initial payment and then paid the remainder of the tax over a period of time, beginning at some unspecified date and completing the payments on March 8, 2017.
Almost three years later, on January 13, 2020, Mr. Roman filed a refund suit in the Court of Federal Claims, asserting that the income tax was not owed as the amount should have been excluded from Ms. Espinosa’s gross income pursuant to Section 121(a), asserting he had standing to contest Ms. Espinosa’s tax liability in a refund suit under 28 USC § 1346(a)(1), and to claim monetary damages under the implied contract clause of 28 USC §1491(a)(1), also known as the Tucker Act. The Court of Federal Claims held it had jurisdiction as to Mr. Roman’s third-party tax refund claim, finding that Mr. Roman was a taxpayer for purposes of a refund suit. (There is no discussion in the opinion as to whether a refund claim was actually filed, whether the suit in the Court of Federal Claims was timely, or how much of the amount paid could be recovered under the look back rules of IRC Section 6511(b)). The government appealed.
The Court of Appeals reversed on the question of refund suit jurisdiction, holding that the Supreme Court decision in United States v. Williams was inapplicable to make Mr. Roman a taxpayer for purposes of 28 USC § 1346(a)(1), as the holding that a third party could be a taxpayer when the third party had no other remedy had been limited when Congress added a remedy to the Internal Revenue Code to address the situation in Williams. But apparently then feeling some sympathy for Mr. Roman’s situation, the Court of Appeals held that the Court of Federal Claims had jurisdiction to address Mr. Roman’s complaint under the provisions of 28 USC § 1491(a), the Tucker Act.
The Tucker Act gives the Court of Federal Claims jurisdiction to hear a suit and to enter a judgment for damages against the United States or one of its agencies for an action based on the Constitution, any statute, any regulation of an agency, or on an express or implied contract with the United States. Citing prior authority, the Court of Appeals held that the Tucker Act gives the Court of Federal Claims jurisdiction to hear a suit brought by a party to recover a tax for which he is not liable if the tax was paid under duress, as the duress creates an “implied in fact” contract. The Court of Appeals then held that duress requires: (1) involuntary acceptance with (2) no alternative and (3) coercive acts by the government, and the question of duress is fact-specific to the case. Because Mr. Roman alleged that he was told by the IRS employee that he had to pay, the employee suggested no alternative, and the IRS had threatened to levy his home, the Court of Appeals held that the allegations were sufficient to support the claim of an implied contract, giving the Court of Federal Claims jurisdiction to hear the suit.
Much is left unanswered by the Court of Appeals’ opinion. Because the Court of Federal Claims decided based on Mr. Roman’s claim that he was a taxpayer and could bring a refund suit, we don’t know if the Court of Federal Claims or the Court of Appeals was briefed on whether Mr. Roman actually had no other alternative. Section 7426(a)(1) permits a third party to bring a wrongful levy action if a levy has been made on the third party’s property. A simple search on Westlaw finds numerous cases with holdings that Mr. Roman could have brought such an action, although a suit filed in 2020 would have been untimely. Does the Court of Appeals’ holding imply that an employee in the Internal Revenue Service must suggest every possible way in which the third party can avoid payment to avoid a claim of duress? Did the Court of Appeals reach the conclusion that Mr. Roman had an implied contract claim because the time for bringing suit under Section 7426(a) had expired? And when did the statute of limitations for the implied contract claim begin to run – was it when Mr. Roman made the first payment, or when he made the last, or on some other date?
Granted, Mr. Roman deserves sympathy for having paid tax that was probably not owed, but the solution reached by the Court of Appeals for the Federal Circuit is not one that can be applied by the United States or by taxpayers, and seems destined to create further rounds of litigation.