IRC 7459(d) and the Impact of Dismissal

0 Flares 0 Flares ×

On May 20, 2021, the Court of Federal Claims decided the case of Jolly v. United States, Dk. No. 20-412.  Ms. Jolly pursued the case pro se.  The court lists the opinion as not for publication. The case involves a refund suit covering four tax years.  The court decided not to dismiss her complaint rejecting the government’s motion.  Carl Smith noticed this decision and in his email forwarding the opinion he provided much of the substance of this post. 

In amicus briefs filed by the tax clinic at Harvard in the cases of Organic Cannabis and Northern California, the clinic argued that the court should not be concerned about turning late filing of a deficiency petition into a merits issue, rather than a jurisdictional one.  The counter-argument (which the 9th Cir. accepted in Organic Cannabis) was that, if a deficiency petition is dismissed for late filing and that is a merits dismissal, then it upholds the deficiency under 7459(d), and so the Tax Court decision could present a res judicata bar to a person seeking to litigate the deficiency later by paying and suing for a refund.  In our cert. amicus brief in Northern California, we acknowledged that that was a theoretical possibility.  We noted in our brief that neither Carl Smith nor I could recall any case where a person who was dismissed from the Tax Court for late filing later full-paid the deficiency and sued for refund.  We acknowledged that it is possible such rare cases existed, but said they must be a very few since it could arise in the traditional refund context or when there is no balance due but a disallowed refundable credit and a late filed petition. 

Because of the possibility, Nina Olson, when she was the National Taxpayer Advocate made a legislative proposal to fix the jurisdiction issue, and it contains a modification to 7459(d) that would except untimely filed petition dismissals from the rule upholding the deficiency. 

The Jolly case presents the fact pattern we said we did not recall ever seeing. 


In Jolly, for the 2016 year, the IRS issued a notice of deficiency.  Jolly, pro se, late-filed a Tax Court petition, which was dismissed for lack of jurisdiction.  The IRS applied overpayments from 2018 and 2019 that were shown on the returns to the 2017 deficiency, still leaving a partial balance due for 2017.  The IRS did not apply any of the overpayments to 2016.  This is unusual because normal procedure at the IRS applies payments to the earliest period to tax, then penalty and then interest.  It is unclear why the payments were posted in this manner in the Jolly case. 

Jolly, again pro se, then filed suit in the Court of Federal Claims seeking a refund for each of the years 2016 through 2019.  The DOJ moved to dismiss all four years, though on different grounds.  It wanted the court to dismiss 2016 and 2017 for failure to full pay and wait 6 months after a refund claim to bring suit – i.e., lack of jurisdiction.  It wanted the court to dismiss 2018 and 2019 because the overpayments from those years had been applied to 2017 – i.e., failure to state a claim since she received the refund she requested on her returns for those years.  Pro se taxpayers commonly misunderstand what it means when the IRS offsets a liability.  Clinic clients regular arrive at the door complaining of one year when the IRS has granted the requested refund for the year identified by the taxpayer but taken the refund to an earlier year where the problem exists.  In somewhat confusing rulings, the court denied  the government’s motions for all years.

For 2016 and 2017, the court thinks it is important to decide whether notices of deficiency were issued for each year.  It’s not clear why it feels this way.  The court finds that a notice of deficiency was issued for 2016, but not 2017.  The court notes the IRS has lost the 2017 administrative file, and the court won’t accept at this time only circumstantial evidence of mailing.  The court says that the credits from 2018 and 2019 might have full-paid the 2016 liability and part-paid the 2017 alleged liability based on the evidence in the record at this time.  This approach seems confused.  It is implicit in the court’s ruling that if a notice of deficiency was not sent for 2017, the Flora rule doesn’t apply to the erroneous assessment of the deficiency and the credits from 2018 and 2019 can be moved from the 2017 year to the 2016 year to meet Flora.  I would have thought Flora requires full payment of an assessment, even if the assessment was not made correctly procedurally, though I have never researched case law on that issue, if any. 

In addition to this argument, what about the government argument that the taxpayer had to file a refund claim and wait six months?  Clearly, a 2019 overpayment used to finish paying the 2016 year could only have been applied as a credit in 2020, and suit here was brought in 2020.  It is very unlikely that the taxpayer filed a refund claim for 2017 between the time that the 2019 credit was posted to 2017 and then waited six months to bring suit.  In denying the motion, the court doesn’t discuss this issue.  Here’s the last paragraph of the opinion as relates to the motion for 2016 and 2017:

If Ms. Jolly’s 2017 deficiency of $6,371.76 does not exist, the math follows: applying Ms. Jolly’s 2018 and 2019 tax refund ($1,947.00 and $1,255.00, respectively) to only her 2016 assessment of $2184.81 results in a residual amount of around $1017.19.2 As there is a factual dispute underlying the jurisdictional allegation in the government’s Rule 12(b)(1) motion, the Court “weigh[s] evidence” and “find[s] facts” while “constru[ing] all factual disputes in favor of [Ms. Jolly].” Knight, 65 Fed. Appx. at 289; see also Cedars-Sinai Medical Center, 11 F.3d at 1583–84, James, 887 F.3d at 1373. Accordingly, based on the record before the Court, specifically the government’s failure to locate Ms. Jolly’s 2017 IRS administrative file, the Court finds Ms. Jolly may have paid her full tax liability before filing this lawsuit, and thus the Court has subject matter jurisdiction over her 2016 and 2017 tax refund claims. See Flora, 362 U.S. at 150.

It is also unclear why the court did not dismiss the 2018 and 2019 years for failure to state a claim.  The government argued that the claims (shown on original returns) had been paid by application of the overpayments to 2017.  A taxpayer should not be able to bring a refund suit for the year in which overpayments occurred that were used as credits against earlier-year balances due.  Such a suit could only be brought for the earlier years to which the credits had been applied.  The court seems to think that because it determines that the 2017 assessment was improper, the IRS must be deemed not to have made the credits of the refund claims shown on the 2018 and 2019 returns.  But, even if so, why didn’t the court say that the 2018 overpayment should be deemed to partly pay the 2016 deficiency, so at least there can be no overpayment suit relating to 2018?  Here’s the entire discussion of why the court denies the DOJ 21(b)(6) motion for 2018 and 2019:

The government further contends Ms. Jolly is not entitled to any recovery for 2018 and 2019 since Ms. Jolly received her 2018 and 2019 refunds as payments towards her 2017 balance. Gov’t MTD at 9–10. As discussed supra, the absence of a notice of deficiency bars the IRS from assessing a tax deficiency against Ms. Jolly in 2017, thus, the record before the Court compels a finding that the IRS possibly owes Ms. Jolly a residual amount after applying her 2018 and 2019 tax credit towards her 2016 balance. Accordingly, “accept[ing] well-pleaded factual allegations as true and . . . draw[ing] all reasonable inferences in favor of [Ms. Jolly],” the Court finds Ms. Jolly alleges “enough facts to state a claim to relief [regarding her tax refund of 2018 and 2019] that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Athey v. U.S., 908 F.3d 696, 705 (Fed. Cir. 2018) (quoting Call Henry, Inc. v. U.S., 855 F.3d 1348, 1354 (Fed. Cir. 2017)) (When deciding a Rule 12(b)(6) motion to dismiss, the Court “must accept well-pleaded factual allegations as true and must draw all reasonable inferences in favor of the claimant.”).

Jolly will struggle to win this case, but perhaps the court’s ruling will allow her to prove to the Tax Division attorney handling the case that she should not have been assessed in 2016 and that she is entitled to a refund, even if she is not entitled to bring a refund suit for four years.  Since much confusion seems to surround the 2017 year and how the assessment came to exist for that year and why the IRS offset the later refunds to 2017 instead of 2016 perhaps this pause will allow time for clearing up that issue as well. The judge seems to misunderstand the basis for refund litigation but that will no doubt be worked out over time.  The case is most notable because it represents an example of someone who missed their chance to go to Tax Court but followed through in seeking a return of the tax through the filing of a refund suit.  Although Carl and I said we did not know of a case with those facts, perhaps we should have remembered the case of Flora which had those very facts and raised the question of what happens when you miss your chance to go to Tax Court.  In the Flora case we know that the Supreme Court held, in the fact of an unclear statute and contradictory prior case law, that the taxpayer can only bring the refund suit by first fully paying the tax, making a timely refund claim, waiting for the claim disallowance letter (or the passage of six months) and then coming to court.  If you want to read more about Flora and the parallels with the Jolly case, here is an article I wrote about Flora.


  1. Carl Smith says


    I don’t think we made a mistake about not citing Flora in our Northern California amicus cert. brief. In that brief, we wrote:

    [E]ven though the Ninth Circuit identified a potential problem [in how sec. 7459(d) might apply where a petition is dismissed for late filing and late filing is considered a merits issue], that problem is, realistically, not a significant problem because taxpayers filed only 219 refund suits in the fiscal year ended September 30, 2019 in all courts. IRS Data Book, 2019 at 68 (Table 29), available at It is unclear that any taxpayer filed a refund suit after the taxpayer first filed a late Tax Court petition, had her suit dismissed, and then paid the deficiency in order to bring the refund suit. Neither professor ever recalls seeing an opinion describing such a fact pattern (though they concede that it might be possible that it has happened on very rare occasion).

    I have gone back to the facts of Flora, reading all the opinions of the courts in the case (district court, appellate court, Supreme Court opinions (2), with concurrences and dissents). Although all opinions state that the amount contested in Flora was a deficiency assessment, none of the opinions says the taxpayer initially tried to contest the notice of deficiency by filing a Tax Court petition, let alone one that was dismissed for late filing. Indeed, Justice Whitaker’s dissent in the second Flora opinion states: “Petitioner did not petition the Tax Court for a redetermination of the proposed deficiency and the Commissioner assessed it on March 27, 1953.”

    So, Flora is not an example of a case where a taxpayer filed a late Tax Court petition and, after the case was dismissed, then brought suit for a refund in another court.

    I would have expected a few refund suits to be brought each year after the IRS applied an overpayment from a later year to partly pay an assessment made after a late-filed Tax Court petition. But, those suits would be dismissed for failure to full pay. What I could not recall was a case where the Tax Court petition for that year was late-filed and then payments or credits against the assessment later full-paid the assessment. People who go to the Tax Court usually do so because they do not want to or cannot full pay the deficiency (and because the IRS tells them in the notice of deficiency that this is a way to get judicial review without full payment).

    Jolly is still not exactly the fact pattern we discussed in our Norther California amicus cert. brief, but it is very close. If, as the Jolly court seems to think, the overpayments from 2018 and 2019 can be deemed to have been applied to 2016 to create full payment, then Jolly would match the facts of the kind of case we could not remember having seen. But, I am not sure we should be talking about deemed payment cases.

  2. Bob Probasco says

    I agree that the court’s analysis may be a bit muddled. It seems clear to me there is no claim for 2018 and 2019 once those overpayments have been transferred, under authority of 6402(a), to earlier years. Perhaps the judge was just conflating: (a) where the “refunds” arose with (b) where the money currently sits; jurisdiction over recovery of “the 2018 and 2019 refunds” versus jurisdiction over current alleged overpayment balances in 2016 and 2017. Or, more likely, the judge thought there would be a deemed movement of those funds to 2016 and leave a balance that stays in 2018 and/or 2019. But I don’t recall any precedent for *negating* or *reversing* a 6402(a) transfer just because it later turns out there was no liability in the year to which the overpayment was applied.

    It would be interesting to read the briefs and have been present for any oral arguments. Not just for the above issue but also something else I found curious in the decision.

    The judge seems to assume that a notice of deficiency is required for 2017. He cites an exception to the notice of deficiency requirement only for computational adjustments, but of course there are others. And something he says in the facts section sounds a bit peculiar:

    “Ms. Jolly timely filed her tax rturn for 2017 and received the requested refund of $6,863.00 on 14 March 2018. In 2018, Ms. Jolly filed an amended tax return for 2017. According to the government, on 9 July 2018, the IRS assessed a total of $6,371.16 in Ms. Jolly’s tax liability.” Per footnote 1, that’s a tax assessment of $6,298.00 plus interest of $73.76.

    Taxpayer also filed an amended tax return for 2016 in 2018 and the opinion mentions an audit and issuance of a notice of deficiency on 8 April 2019 for that year. But the paragraph about 2017 does not mention an audit.

    So – return for 2017 filed on 14 March 2018 and assessment on 9 July 2018. Is that even time enough for an audit, notice of deficiency, waiting 90+ days for taxpayer to file a Tax Court petition, and then assess??? In less than 4 months??? Seems extremely unlikely. I suspect that the assessment in question may have been simply a response to the amended return. And the IRS can assess any additional tax liability from *that* summarily, *without* a notice of deficiency.

    I would normally think that unlikely too, since surely someone on the government side would have realized that and pointed it out to the judge. But, still, an audit and assessment less than 4 months after the return was timely filed??? So, maybe nobody in DOJ Tax, Federal Claims Section noticed it.

    If a notice of deficiency were not required for 2017, the whole analysis by the court falls apart. In which case, it seems that the case should have been dismissed for all four years, although without prejudice for 2016 and 2017.

    What am I missing?

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind