Remember to File a Refund Suit under the Shorter SOL when Congress Lets You Sue after Paying Only 15%

In Flora v. Unites States, 362 U.S. 145 (1960), the Supreme Court held that a suit for refund under 28 U.S.C. § 1346(a)(1) involving an income tax deficiency could only be brought if the taxpayer first paid 100% of the deficiency. Treating full payment as a jurisdictional prerequisite, said the Court, was not clearly required by the words of the statute or its 1921 legislative history. However, subsequent developments – including the 1924 creation of the Board of Tax Appeals to allow prepayment review of deficiencies – influenced the Supreme Court’s thinking.

It was not clear after Flora whether that full payment requirement would apply to assessable penalties, such as the section 6672 responsible person penalty, since there was no possibility of Tax Court prepayment review of the few assessable penalties then in existence. However, a footnote in Flora indicated that, in the case of divisible taxes, payment of one of one divisible portion would be enough jurisdictionally to found a refund suit. Relying on that footnote in Flora, less than three months after Flora, in Steele v. United States, 280 F.2d 89 (8^th Cir. 1960), the Eighth Circuit held that the full payment rule of Flora applied to the divisible penalties under section 6672 such that suit was jurisdictionally proper if the taxpayer had fully paid only one penalty for one employee for each quarter involved in the suit.

Section 6672(c)(1) currently provides that if a taxpayer, within 30 days of notice and demand, makes such a divisible payment, files a refund claim, and puts up a bond for the rest of the assessment, then the IRS is barred from collecting by levy or bringing a suit for payment of the balance assessed so long as a taxpayer’s refund suit under (c)(2) is pending. (The IRS may, however, counterclaim for the balance in the suit brought under (c)(2).) Under (c)(2), a taxpayer who has done what is required under (c)(1) may bring a refund suit, but only within an abbreviated period – i.e., up to 30 days after the refund claim is denied.

There are a few other assessable penalties that have special jurisdictional payment and filing features similar to that of section 6672(c). Those penalties are under section 6694 (return preparer penalty), 6700 (penalty for promoting abusive tax shelters), and 6701 (penalty for aiding and abetting understatements of tax). The assessable section 6702 frivolous submission penalty once had similar features for a part-payment refund suit, but those were removed. In each of the three cases, section 6694(c)(1) or 6703(c)(1) (applicable to the section 6700 and 6701 penalties) provides that paying 15% and filing a refund claim within 30 days of notice and demand can be enough to bar the IRS from collecting by levy or bringing a suit for payment of the balance assessed so long as a refund suit under (c)(2) is pending. (Note the lack of a bond requirement for the balance, unlike under section 6672(c).) Under (c)(2), a litigant who has done what is required under (c)(1) may bring a refund suit, but only within an abbreviated period that is potentially shorter than the period for section 6672 penalties – i.e., under sections 6694(c)(2) and 6703(c)(2), within the earlier of (1) 30 days after the refund claim is denied or (2) six months and 30 days after the refund claim is filed. Note that the six months and 30 day alternative period is a much more limited period than the indefinite period to bring suit in section 6532(a) in the absence of a claim disallowance.

I speculate that what happened in the Taylor case is that, since he was familiar with the rule of section 6532(a) that effectively allows an indefinite period to bring suit in the absence of a notification of claim disallowance, he did not realize that, under section 6694(c)(2), he could not wait beyond six months and 30 days to bring suit after he filed his refund claim – even though his claim had not yet been disallowed. My speculation is because he actually did bring suit within 30 days after the claim was disallowed. But, that was too late. And nothing in either the district court or appellate court opinion gives a reason for his late filing that might suggest an equitable reason for late filing.

So, what did Taylor argue to get out of the box he put himself into?

First, in his district court written response to the DOJ’s motion to dismiss for lack of jurisdiction he argued that the filing deadline in section 6694(c)(2) is not jurisdictional, but is simply a statute of limitations that does not go to the power of the court. I am not sure why he made this argument, since he did not show facts for equitable tolling of a nonjurisdictional statute of limitations. Even if the filing deadline is not jurisdictional, it is still a mandatory claims processing rule with which he did not comply. He argued that (c)(2) is not jurisdictional, but only “sets limits on the time frame in which the IRS is prohibited from pursuing collection action of the penalties at issue.” The Ninth Circuit disagreed.

Here is the full text of section 6694(c)(1) and (2):

(c)  Extension of period of collection where preparer pays 15 percent of penalty.

(1) In general. If, within 30 days after the day on which notice and demand of any penalty under subsection (a) or (b) is made against any person who is a tax return preparer, such person pays an amount which is not less than 15 percent of the amount of such penalty and files a claim for refund of the amount so paid, no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until the final resolution of a proceeding begun as provided in paragraph (2). Notwithstanding the provisions of section 7421(a), the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court. Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2).

(2)  Preparer must bring suit in district court to determine his liability for penalty. If, within 30 days after the day on which his claim for refund of any partial payment of any penalty under subsection (a) or (b) is denied (or, if earlier, within 30 days after the expiration of 6 months after the day on which he filed the claim for refund), the tax return preparer fails to begin a proceeding in the appropriate United States district court for the determination of his liability for such penalty, paragraph (1) shall cease to apply with respect to such penalty, effective on the day following the close of the applicable 30-day period referred to in this paragraph.

Apparently, the question whether the filing deadline under section 6694(c)(2) is jurisdictional has not been previously addressed in the Ninth Circuit. However, the Ninth Circuit in Taylor noted the virtually verbatim similarity of the language of section 6694(c) and that of section 6703(c). In Thomas v. United States, 755 F.2d 728 (9^th Cir. 1985), the Ninth Circuit had held that the 30-day deadline in section 6703(c)(1) after a notice and demand to pay the 15% is a jurisdictional requirement of a refund suit in a case involving a section 6702 penalty that was at the time (but is no longer) subject to section 6703(c). In Korobkin v. United States, 988 F.2d 975 (9^th Cir. 1993), the Ninth Circuit had held that the six months plus 30-day deadline in section 6703(c)(2) to file suit is a jurisdictional requirement of a refund suit involving a section 6700 penalty. Taylor followed these cases by analogy in holding that compliance with the filing deadline under section 6694(c)(2) is jurisdictional. So, the district court properly dismissed this untimely suit for lack of jurisdiction.

The second thing Taylor argued was that instead of having paid 15% of each penalty (as he originally directed the IRS to apply the payments) he should be deemed to have paid 100% of 15% of the penalties, so the district court had jurisdiction under section 1346(a)(1), and suit was timely under section 6532(a) with respect to the penalties that he had fully paid. This was an interesting argument, but it was first raised at oral argument on the DOJ’s motion to dismiss before the district court. The district court held that this argument was raised too late to be considered. The Ninth Circuit agreed that this argument was not timely raised.

Observations

Les and I recently blogged on Larson v. United States, 888 F.3d 578 (2d Cir. 2018), here and here. Larson involved a section 6707 penalty for failing to file a form with the IRS providing information concerning listed transactions as to which the rules of section 6703(c) do not apply. In Larson, the Second Circuit held that Flora requires full payment of such an assessable penalty as a jurisdictional prerequisite of a refund suit, even though there is no alternative Tax Court prepayment contest permitted for such penalty. Part of why Larson ruled the way it did was because the Second Circuit there noted that Congress, in sections 6694(c) and 6703(c), had created 15% exceptions to the full payment rule of Flora, but had not done so for other assessable penalties. Taylor also holds the 15% payment requirement to be jurisdictional, citing Flora.

The Ninth Circuit in Taylor failed to acknowledge that its ruling that the filing deadline in section 6703(c)(2) is jurisdictional is in conflict with that of at least one other Circuit court: In Dalton v. United States, 800 F.2d 1316 (4^th Cir. 1986), the Fourth Circuit had held that the 30-day-after-claim-disallowance deadline in section 6703(c)(2) to file suit is a not a jurisdictional requirement of a refund suit involving a section 6702 penalty. Indeed, in Dalton, the court equitably tolled the filing deadline (tolling only being possible if the filing deadline is not jurisdictional). Taylor’s attorney cited Dalton in his opening Ninth Circuit brief.

I have repeatedly noted in PT that, under recent Supreme Court case law since Kontrick v. Ryan, 540 U.S. 443 (2004), filing deadlines are no longer considered jurisdictional, unless Congress has made a rare “clear statement” in the statute that it wants what is usually a nonjurisdictional claim processing rule (a filing deadline) to be treated as jurisdictional. Of course, the Circuit court opinions in Thomas, Korobkin, and Dalton were decided before Kontrick and its progeny, so do not analyze section 6703(c) under the proper current case law. I am disappointed, however, that the Ninth Circuit in Taylor (here in 2018) did not think to reconsider its holdings in Thomas and Korobkin in light of the more recent Supreme Court authority. Appellate judges know that authority quite well and should employ it, even where (as in Taylor’s case) both parties failed to cite it in their briefs. See Volpicelli v. United States, 777 F.3d 1042 (9^th Cir. 2015) (not merely relying on prior precedent, but analyzing the wrongful levy suit filing deadline at section 6532(c) under recent Supreme Court case law and holding the deadline not jurisdictional and subject to equitable tolling).

As PT readers know, Keith and I have recently argued (with little success so far) that Tax Court filing deadlines for stand-alone innocent spouse actions (at section 6015(e)(1)(A)) and Collection Due Process actions (at section 6330(d)(1)) should no longer be considered jurisdictional under recent Supreme Court case law. We have lost those cases mostly because those provisions use the words “the Tax Court shall have jurisdiction” in the same sentences that provide the filing deadlines. It appears that one could make a stronger case that the filing deadlines in sections 6694(c)(2) and 6703(c)(2) are not jurisdictional: First, the sentences in those provisions do not contain the word “jurisdiction”. Indeed, they do not speak at all to the district court’s jurisdiction or powers. Taylor is right that these provisions really only give deadlines to file and “set[] limits on the time frame in which the IRS is prohibited from pursuing collection action of the penalties.” That does not comport with the Supreme Court’s current view that “Congress must do something special, beyond setting an exception-free deadline, to tag a statute of limitations as jurisdictional . . . .” United States v. Wong, 135 S. Ct. 1625, 1632 (2015). Second, the Supreme Court “has often explained that Congress’s separation of a filing deadline from a jurisdictional grant indicates that the time bar is not jurisdictional.” Id. at 1633 (citations omitted). Here, the real jurisdictional basis for a 15% payment refund suit is still located at 28 U.S.C. § 1346(a)(1), far away from these Internal Revenue Code sections. So, I respectfully disagree with the Ninth Circuit’s holding in Taylor that these filing deadlines are jurisdictional. [Sigh]