Late Filed Erroneous Refund Suit

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In United States v. Page, No. 3:20-cv-08072 (D. Ariz. April 16, 2021) the court holds that a large erroneous refund the IRS sent to the taxpayer could not be recovered because the Department of Justice filed the erroneous refund suit too late.  The issue of when the statute begins to run for the bringing of the suit was front and center in the case.  When the IRS issues an erroneous refund and realizes it has done so, it first must decide if the refund is a rebate or non-rebate erroneous refund.  A Chief Counsel service center advice memo linked here does a good job of explaining the two types of erroneous refunds.  It also discusses other ways, such as offset, the IRS could recover the funds.

The answer to the question of what type of erroneous refund occurred will drive the next move of the IRS since it can decide to collect rebate refunds administratively but must bring a suit to collect non-rebate refunds.  Assuming that the erroneous refund meets the non-rebate criteria, it must bring the suit within two years of the erroneous refund or five years after the non-rebate erroneous refund if the refund was procured by fraud.  Sean Akins wrote a guest blog a few years ago you can read here on an erroneous refund in which the IRS alleged fraud and lost which caused it to fail to recover the erroneous refund given the timing of the suit.

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In the Page case the IRS does not assert fraud.  So, the two-year rule applies but the question raised concerns the timing of the start of the two-year period.  On May 5, 2017, the IRS mailed to Page an erroneous $491,104.01 tax refund check.  Perhaps he spent most of the next year contemplating whether to cash the check and reading blogs like the ones recently written by Caleb Smith or perhaps postal delivery in his area was very slow.  For some reason he did not cash the check until April 5, 2018.  I pause to say I am mildly surprised he could cash the check that much after the date of the check.  I thought the checks had a 180-day time limit and I seem to remember something about the UCC rules regarding the timing of the presentment of checks but those issues were not present in the case.

After Page cashed the check, the IRS wrote him a polite note advising him that it sent the check in error and requesting that he return the money.  In response to the letter, Page did return $210,000 on December 19, 2019, but not the rest.  In the erroneous suit filed on March 31, 2020, to recover the remaining amount of the erroneous refund, the IRS alleged that he retained the balance of the check for his personal use and enjoyment.  Page did not respond to the complaint.  It is unclear if he was unavailable because he was in the midst of enjoying the refund, hunkered down because of the pandemic or some other reason.  The clerk entered a default; however, under Federal Rule of Civil Procedure 55 the court had to decide whether to enter a default judgment.  In making this decision the court considers the following factors:

(1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff’s substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.

The court notes that IRC 6532(b) provides that recovery of an erroneous refund “shall be allowed only if such suit is begun within 2 years after the making of such refund.”  Under Ninth Circuit precedent “the refund is considered to have been made on the date the taxpayer received the refund check.”  The court further notes that although the statute of limitations is normally an affirmative defense that must be raised by the defendant or be waived, the court can raise it sua sponte in certain circumstances where the facts are clear from the pleading filed by the plaintiff.

The complaint filed by the government alleges when it mailed the check but not when Page received it.  The court finds that it defies common sense “to belief it took 330 days for Page to receive the check in the mail.”  (The court has not read the Castillo case now pending in the Second Circuit discussed briefly here where the letter still shows up in the postal records as undelivered much more than a year later.)  

The IRS argues that the statute of limitations does not begin to run when Page received the check, whenever that was, but rather begins to run when he cashed the check on April 5, 2018 making the suit filed within the two-year period.  It acknowledges that there are cases in which courts, including the Ninth Circuit held that the time begins to run upon receipt by the recipient of the erroneous refund check but argues that these cases did not consider whether the better date would be the date of the cashing of the check.  Here, Page gets a significant benefit of shortening the window of time for the IRS to bring suit by holding the check, assuming he received it, for almost a year before cashing it.  In pushing back on the prior holding in the Ninth Circuit the government argued:

the government directs the Court to United States v. Commonwealth Energy Sys. & Subsidiary Cos., 235 F.3d 11 (1st Cir. 2000), and United States v. Greene-Thapedi, 398 F.3d 635 (7th Cir. 2005). Both cases characterized the Supreme Court’s statements on the issue in O’Gilvie as dicta and, consequently, did not consider O’Gilvie binding. In Commonwealth Energy, the First Circuit also declined to follow Carter, explaining that Carter “assumed, without elaboration, that the date a refund is ‘made’ is the date it is received, and did not address the important policies which [the First Circuit] considered in choosing between the date of receipt rule and date of clearance rule.” 235 F.3d at 14. Instead, Commonwealth Energy concluded that the statute of limitations began to run “at the time the check cleared the Federal Reserve and payment was authorized by the Treasury” and observed that “[u]sing the check-clearing date here both satisfies the rule that we construe statutes of limitations in favor of the Government and provides a certain limitations date by which the Government must abide.” Id. In Greene-Thapedi, the Seventh Circuit adopted the holding of Commonwealth Energy and dismissed Carter as “just another case in which the court was presented with a choice between the date of mailing and the date of receipt.” 398 F.3d at 639.

The district court finds that it is bound by the prior Ninth Circuit precedent.  In balancing the factors, it decides to deny the IRS motion for default judgment.

The case sets up a conflict between the circuits if the Ninth Circuit sticks to its prior holding in the face of the arguments by the IRS.  Because of the possibility that it could convince the Ninth Circuit to refine its prior opinion or the possibility of a creating a clear circuit split it could take to the Supreme Court, perhaps this case will be appealed by the IRS.  The government never knows exactly when a taxpayer receives an erroneous refund that it sends.  It does not send erroneous refunds by certified mail.  If the decision here prevails, the IRS must bring the erroneous refund suit within two years of the date it mails the check in order to be certain that it meets the deadline.  Maybe that’s enough time but I think it will want more time than that, given the time it takes to discover the mistake and take the necessary steps to initiate the suit.


Comments

  1. Norman Diamond says

    “(The court has not read the Castillo case now pending in the Second Circuit discussed briefly here where the letter still shows up in the postal records as undelivered much more than a year later.)”

    It’s not discussed here: https://procedurallytaxing.com/bankruptcy-filing-deadlines-and-jurisdiction/

    but it’s discussed here: https://procedurallytaxing.com/particularized-need-obtaining-grand-jury-information/
    (As you said in an earlier posting, disregard the title of that posting and scroll down to read the relevant paragraph.)

    Now, the posting about Castillo says this:
    “A very similar issue has now arisen again in NYC in a case, Castillo v. Commissioner, in which the Fordham Tax Clinic represents the taxpayer. In Castillo, the notice of determination following a CDP hearing was mailed to the taxpayer at her last known address, but she did not receive it. It is still, according to the USPS, in transit.”

    The words “Castillo v. Commissioner” are a link to this: https://www.ustaxcourt.gov/USTCDockInq2/DocumentViewer.aspx?IndexID=7803812

    Access is denied. Tax Court must have been embarrassed that too many PT readers learned too much, so they broke every link in this site.

  2. Jack Townsend says

    Could the Government sue a taxpayer for erroneous refund when he received the check but had not cashed it? I think the answer to that question must be no. If that is right, then it would seem to follow that the cause of action does not accrue until he cashes or negotiates the check.

    The question is whether the Ninth Circuit precedent dictates otherwise. I looked at the precedent. The statement the district court held to be binding in the case may be dicta. The Ninth Circuit held that the two-year statute of limitations was an affirmative defense that the taxpayer must prove. Under the facts, the taxpayer negotiated the check within the two-year window. The thing that was uncertain under the facts was when the taxpayer received the check. Technically, all the Ninth Circuit resolved was that the taxpayer did not properly lay the factual predicate to assert the claimed legal defense. The Court did not have to even make a statement about the timing of accrual of the erroneous refund suit.

    Thus, the Ninth Circuit could have said something like this: “The taxpayer claims that the two-year window started on the date of receipt of the erroneous refund check. The taxpayer failed to show the factual predicate for that legal claim. Hence, the taxpayer loses without this Court having to resolve that issue.” If that is right, the resolution of the legal issue was not necessary to the holding and thus dicta. For the reason noted above, nonsensical dicta at that.

    • Jack Townsend says

      To add to that, I ask a related question. Wouldn’t, prior to the actual clearing of the check, the Government in that context be limited to some other remedy such as stopping payment on the check or replevy action for the physical check? I would think that a court would be at least irritated if the Government hauled off to sue for erroneous refund when it had simpler remedies available, particularly stopping payment.

  3. Kenneth H. Ryesky says

    Did the IRS issue Page a Form 1099 for the erroneous refund? If so, did they issue it timely?

    Just wondering.

    • Bob Kamman says

      Is it just coincidence that Judge Teilborg waited to issue his opinion until the day after the three-year statute of limitations expired for 2017 returns? Of course, there is that six-year rule in Section 6501 for omissions of more than 25% of gross income.

      (Senior Judge Teilborg, 78, a Clinton appointee and retired colonel in the Air Force Reserves, now hears cases like this one in the Prescott, Arizona, courthouse a couple blocks down the street from my father’s home his last 20 years. Teilborg graduated from the University of Arizona Law School the same year I graduated from Tucson High School, a mile away.)

      Are whipsaw arguments allowed when IRS wants to assess tax while arguing that the income doesn’t exist?

      Meanwhile, about those Treasury checks:

      31 U.S. Code § 3328 – Paying checks and drafts

      (a)Time Limit on Treasury Checks.—
      (1)In general.—Except as provided in sections 3329 and 3330 of this title—
      (A)the Secretary shall not be required to pay a Treasury check issued on or after the effective date of this section unless it is negotiated to a financial institution within 12 months after the date on which the check was issued; and
      (B)the Secretary shall not be required to pay a Treasury check issued before the effective date of this section unless it is negotiated to a financial institution within 12 months after such effective date.
      (2)Deferral pending settlement.—
      Notwithstanding the time limitations imposed by paragraph (1), if the Secretary is on notice of a question of law or fact about whether a Treasury check is properly payable when the check is presented for payment, the Secretary may defer payment on such check until the question is settled.

      Electronic Code of Federal Regulations
      Title 31: Money and Finance: Treasury

      PART 240—INDORSEMENT AND PAYMENT OF CHECKS DRAWN ON THE UNITED STATES TREASURY

      240.5 Limitations on payment; cancellation and distribution of proceeds of checks.
      (a) Limitations on payment. (1) Treasury shall not be required to pay any check that is not negotiated to a financial institution within 12 months after the date on which the check was issued.

      (2) All checks shall bear a legend, stating “Void After One Year.” The legend is notice to payees and indorsers of a general limitation on the payment of checks. The legend, or the inadvertent lack thereof, does not limit, or otherwise affect, the rights of Treasury under the law.

      (b) Cancellation and distribution of proceeds of checks. (1) Any check that has not been paid and remains outstanding for more than 12 months after the issue date will be canceled by Treasury.

  4. Lavar Taylor says

    First I’d like to address an aspect of the case not emphasized in the post, namely, that the DOJ attorney handling the case filed an unopposed motion and lost the motion. Don’t you just HATE losing an unopposed motion? Years ago, we had a local bankruptcy judge who developed a reputation for ruling against the movant on unopposed motions. I heard some attorneys jokingly asking for someone to file an opposition to their motion in front of that judge so they wouldn’t lose! And, yes, I lost an unopposed motion in bankruptcy court. But at least in my case it was the judge who directed me to file the motion and who, upon reading the motion, realized that he was mistaken in directing me to file the motion. I took it in stride, but the poor young associate who appeared at the hearing and “lost” the unopposed motion thought they were going to get fired when they returned to the office. C’est la vie.

    Some of my wackiest war stories involve erroneous refunds. When I worked in the IRS National Office in the early 1980’s, I was asked to write an opinion on whether the IRS was required to accept a truck load of pennies in payment of an amount that the taxpayer owed the IRS. The taxpayer had received a small erroneous refund and had paid it back. But the IRS, ever vigilant in its enforcement of the law, sent a bill for a few hundred dollars of interest. This incensed (incentsed?) the taxpayer, who showed up at the local IRS office with a truck load of pennies to pay the interest. The local IRS office refused to accept the pennies, and the taxpayer then went to the press. Spurred on by the adverse press, the local IRS office sent a request to the National Office requesting legal advice on whether they were required to accept the pennies in payment of the interest. I was assigned the task of responding to the local office.

    After parsing the provisions of Title 31, we concluded that the IRS is required to accept the pennies, but that the IRS, as a condition of accepting the pennies, could require the taxpayer to be present while an IRS employee counted the pennies, to avoid any accusation that the taxpayer was being “short changed.” I suppose you could say that the answer was based on “common cents.”

  5. Carl Smith says

    Section 6532 contains three statutes of limitations: (a) is for taxpayer refund suits, (b) is for government suits to recover erroneous refunds, and (c) is for third parties to bring wrongful levy suits. Page treats the issue of the DOJ’s failure to timely file as a failure to state a claim, not as a jurisdictional defect of the government’s suit. By contrast, most Circuits to have ruled treat the 6532(a) SOL as jurisdictional. See, e.g, RHI Holdings, Inc. v. U.S., 142 F.3d 1459 (Fed. Cir. 1998). But see Miller v. U.S., 500 F.2d 1007 (2d Cir. 1974) (the SOL is subject to estoppel). Most Circuits to have ruled have also treated the 6532(c) SOL as jurisdictional. See, e.g., Becton Dickinson & Co. v. Wolckenhauer, 215 F.3d 340, 351-352 (3d Cir. 2000). But see Volpicelli v. U.S., 777 F.3d 1042 (9th Cir. 2015) (the SOL is not jurisdictional and is subject to equitable tolling).

    To me, it is pretty obvious that under recent Supreme Court case law, all three SOLs are not jurisdictional and should be subject to equitable tolling. After all, none of the SOLs addresses the court’s jurisdiction or uses the word “jurisdiction”. And the Supreme Court has said that strong evidence that Congress did not consider a deadline jurisdictional is when the deadline is not in the same section as the jurisdictional grant. The jurisdictional grants for the three 6532 SOLs are, respectively, 28 USC 1346(a)(1), IRC 7405, and 28 USC 1346(e). Note that the Volpicelli case is the only one of the above cited that made its decision under current Supreme Court case law. I think Volpicelli is the wave of the future for 6532 deadlines.

    Of course, since the DOJ is the plaintiff for a suit under 6532(b), it has no interest in arguing that the filing deadline is jurisdictional, which would only preclude the government ever being able to argue for waiver, forfeiture, estoppel, or equitable tolling in a suit to recover an erroneous refund.

    • Robert Kantowitz says

      Even if the date were subject to equitable tolling, why would there be a reason to toll the date between when the check is sent and when it is cashed? I see no argument that the IRS could make that would justify tolling unless ay mistake by the government in a taxpayer’s favor, at any time, for any reason, is ipso facto sufficient reason to allow the government to recoup the money however far into the future as the government happens to discover the error.

  6. Robert Kantowitz says

    There is absolutely no reason for the IRS not to have to start this clock on the day it mails the check, or, if they decide to mail it certified, on the day on which the taxpayer receives it. Whatever information the IRS has or needs, whether, now and when the government will discover its error does not depend in any way on when the taxpayer actually cashes the check.

  7. Bob Kamman says

    The complaint in this case adds some details about, “How could that happen?”

    “On or about June 10, 2016, the IRS received a tax payment of $543,000 from a party unrelated to the defendant. Due to a clerical error on June 16, 2016, the IRS misapplied this $543,000 to defendant’s federal income tax (Form 1040) account for the taxable year 2016.

    “On May 5, 2017, the IRS sent to defendant a refund check for $491,104.01 for the taxable year 2016.

    “On May 8, 2017, defendant filed a federal income tax return (Form 1040) for the taxable year 2016. The IRS processed the return, and determined that defendant was entitled to a refund of $3,463 for the taxable year 2016.

    “Because the IRS mailed a check for $494,104.01 to defendant, but he was only entitled to a refund of $3,463 for the taxable year 2016, $487,641.01 of that amount was an erroneous refund that was sent to defendant as a result of a clerical error. (Footnote adds: At the time the defendant filed the Form 1040 for the taxable year 2016, he had outstanding income tax liabilities for other taxable periods. . . .Therefore, even if defendant had not received the erroneous refund, he would not be entitled to collect the refund of $3,463.)”

    Does this make any sense? The payment applied to his account appears to be a quarterly payment for 2016. The refund check was sent on May 5, 2017, but he didn’t file his 2016 return until three days later. How did $543K get reduced to $491K? Did he owe $52K?

    The taxpayer owns a 2,300-square-foot house on a quarter-acre lot in the cool pines of Flagstaff, Arizona. He and his partner (it’s unclear whether they are married) bought it in 2014 for $260,000 and refinanced it in January 2017 for $308,000. Today it’s worth more than $500,000.

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