Complications With Rolling Credit Elect Transfers – Part 2

Bob Probasco returns with Part Two of his examination of rolling credit elect transfers and their treatment for interest purposes. Christine

In Part 1, I discussed the result in Goldring v. United States, 2020 U.S. Dist. LEXIS 177797, 2020 WL 5761119 (E.D. La. Sept. Sep. 28, 2020) and started laying the framework for a critique of the decision.  That included the treatment of credit elect transfers (CETs), which is now pretty much settled law.  Now we’ll take a look at previous cases with the specific scenario at issue in Goldring – rolling CETs – for which the results have been mixed.

Treatment of rolling CETs for interest purposes

FleetBoston Fin. Corp v. United States, 483 F.3d 1345 (Fed. Cir. 2007) is the only Circuit Court decision clearly on point, for now.  (Rolling CETs were also involved in Marsh & McLennan Cos. v. United States, 302 F.3d 1369 (Fed. Cir. 2002), but the taxpayer agreed with the government’s position later adopted in FleetBoston and the case addressed a different statutory provision, so the court did not have to decide this issue.)  It concluded that interest computation should take into account only the first CET, from the year at issue, and ignore subsequent (rolling) CETs.  Under that approach, the underpayment interest assessed against the Goldrings would be entirely valid.

In re Vendell Healthcare, 222 B.R. 564 (Bankr. M.D. Tenn. 1998), Otis Spunkmeyer, Inc. v. United States, 2004 WL 5542870 (N.D. Cal. 2004), and the dissent in FleetBoston follow the use of money principle from Avon Products and progeny.  The balance in the year at issue doesn’t become “due and unpaid” until the CET amount actually provides the taxpayer with a benefit in a subsequent year – either applied to an estimated tax installment to avoid the addition to tax or included in an overpayment that is refunded instead of transferred to the next year.  Under that approach, the Goldrings would be entitled to a full refund of the underpayment interest.

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FleetBoston disagreed with Vendell and Spunkmeyer, concluding that they

disregard both the account-specific meaning of the term “paid” in the Internal Revenue Code and the regulatory scheme under which a credit elect overpayment will be deemed to reside in the tax account for the succeeding year, even if it is not needed to pay estimated tax in that year. 

In other words, the use of money principle is a tool of statutory construction but cannot override the specific terms of the statutes enacted by Congress. 

Who’s right?

The FleetBoston interpretation may be correct, but I don’t think either the Code or the regulatory scheme are as clear as the Federal Circuit thought they are.  FleetBoston distinguished Vendell and Spunkmeyer in part because of “the account-specific meaning of the term ‘paid’ in the Internal Revenue Code.”  But the issue in these cases is when underpayment interest under section 6601(a) begins running, the “last date prescribed for payment,” not when it stops, “the date paid.”  As discussed in Part 1, Avon Products, Inc. v. United States, 588 F.2d 342 (2nd Cir. 1978) concluded that the beginning date was not clearly addressed by the statute and effectively re-wrote it; the IRS acquiesced in not only the holding but also the reasoning.  That suggests it would be feasible and permissible to re-write it again to address rolling CETs.

The relevant part of the regulatory language, which is the same in both § 301.6402-3(a)(5) and § 301.6611-1(h)(2)(vii), says only that “such amount shall be applied as a payment on account of the estimated income tax for such [succeeding] year or the installments thereof.”  The regulations were enacted back in 1957 and didn’t address when underpayment interest on a subsequently determined deficiency would run.  (I found nothing helpful in the Federal Register when the proposed and final regulations were issued; I doubt if the IRS thought about issues with subsequently determined deficiencies at that time.)  That was worked out through cases and revenue rulings, not regulations.  Even Revenue Ruling 99-40 doesn’t specifically address situations where the CET is not needed at all for estimated tax installments and is rolled to the next year rather than refunded. 

The parties in Goldring argued a lot about the interpretations of cases and rulings, and whether they should apply here.  The disagreement seems to flow from fundamentally different frameworks for thinking about CETs, both in general and with rolling CETs, in this context.

Government perspective – it’s a matter of accounting 

From the perspective of the government (and the FleetBoston court), the focus is on the fact that money has been transferred from one year to another year – the particular year to which the overpayment was first transferred.  The statute and regulations are clear.  The subsequent CETs and the other years are irrelevant.  This has intuitive appeal.  Generally, interest is computed on each tax year independently.  Independence of each tax year is a foundational principle for many purposes in our system and the language in the regulations for CETs is consistent with that perspective.  The initial CET is irrevocable and anything that happens thereafter (a subsequent CET) is not related to the original CET.  If a deficiency arises in the original year of the overpayment, you figure out the effective date of the transfer to the succeeding year, using the approach developed in the cases and summarized in Revenue Ruling 99-40.  If the election on the original year’s return is made before the due date of the return for the succeeding year, which it almost always is, the transfer (a “payment” in the succeeding year) would be effective no later than the due date of that return.

That amount of money is sitting in only one tax year at any point in time.  This is generally how the IRS would record it on account transcripts.  Under this interpretation, in the Goldring case, the amount at issue would be:

  • Included in the account for the 2010 tax year from April 15, 2011, until transferred out on April 15, 2012
  • Transferred into the account for the 2011 tax year on April 15, 2012, and remaining there until transferred out on April 15, 2013
  • Transferred into the account for the 2012 tax year on April 15, 2013, and remaining there until transferred out on April 15, 2014
  • Etc.

In other words, the Code doesn’t offset the 2010 deficiency against the overpayment in 2011 (or subsequent years) as a result of the CET.  The Avon Products decision was not a broad interest netting solution; it just addressed when the transfer between years is considered to take place.

Taxpayer’s perspective – prevent inequitable results

From the perspective of the taxpayer (as well as Vendell, Spunkmeyer, and the FleetBoston dissent), the language is ambiguous enough to allow a construction to meet the policy objectives of Congress.  Avon Products and its progeny, combined with other Code provisions such as sections 6601(f) and 6611(b)(1) and the global interest netting regime of section 6621(d), evidence a strong desire by Congress to avoid “interest arbitrage” results that might be unfair to taxpayers when there are both overpayments and underpayments outstanding.  Global interest netting protects taxpayers from paying underpayment interest at a higher rate than received for overpayment interest on equivalent balances outstanding at the same time.  The same principle should protect all taxpayers from paying underpayment interest during periods when there was an equivalent overpayment balance outstanding for which the taxpayer doesn’t receive interest at all.

Section 6621(d) only allows, by its terms, netting of overpayments on which interest is allowable and underpayments on which interest is payable.  If not for the fact that overpayments that the taxpayer elects to CET to the following year do not earn overpayment interest, that section would give the Goldrings the result they ask for.  But excluding CETs from the reach of section 6621(d) was not necessarily Congress’s intention.  I haven’t done a comprehensive review of the legislative history, but I suspect that limiting section 6621(d) to overpayments on which interest is allowable and underpayments on which interest is payable was only intended to maintain certain restricted interest provisions that give the government an incentive to act quickly. 

For that matter, was the regulation providing that an overpayment transferred by CET does not earn overpayment interest the best decision?  Section 6402(b) is a broad specific grant of authority to issue regulations.  But this was also an exception to the general rule of section 6611(a).  The provision makes some sense, given the solution in Avon Products and progeny, if the taxpayer does not continue to roll over CETs.  The IRS could have written the regulation to address rolling CETs in a way that would conform to the Congressional purpose of disallowing government interest arbitrage.

Avon Products and its progeny have an effect very similar to netting.  Prior to those decisions, the IRS treated the original overpayment in those situations (on which interest was not allowable because it was used for a CET) and the subsequently determined deficiency as separate and independent transactions.  Thus, until the CET was effective, there was – for the same year – an overpayment transaction that didn’t earn interest at all and an underpayment transaction for which the IRS charged interest.  Avon Products combined the two transactions into a single balance before computing interest, what I term “annual interest netting.” 

Notably, the final result of this line of cases and rulings did not treat the CET as effective based on an artificial date, such as the date the return was filed for the overpayment year or the unextended filing due date of the overpayment year.  Instead, the CET was effective only when the taxpayer got a benefit from having the money in the succeeding year.  The current IRS practice limits the effective date of the CET to no later than the unextended filing due date for the succeeding year.  Why should it be limited that way, if the taxpayer receives no benefit in the first succeeding year and instead rolls the amount over to the next year? 

Even if the government’s accounting perspective is respected, is the application of it necessarily immutable?  The CET from Year 1 to Year 2 creates a “negative payment” in Year 1 and a payment in Year 2.  The CET from Year 2 to Year 3 creates a “negative payment” in Year 2 and a payment in Year 3.  Can we consider the payment in Year 2 (from Year 1’s CET) and the “negative payment” in Year 2 (from Year 2’s CET) to have simply offset to eliminate both?  Perhaps.

Where do we go from here?

The government’s position prevailed in FleetBoston, the only Circuit Court decision on the issue of rolling CETs to date.  Vendell, Spunkmeyer, and the FleetBoston dissent held for taxpayers on this issue.  The Goldring decision ruled for the government in a fairly cursory manner and it has now been appealed.

I’m not sure which of the opposing position will prevail in the Fifth Circuit.  I suspect the interpretation in FleetBoston will prevail.  But there are certainly arguments for the taxpayers’ position.  We have an example, over the past couple of years, of a single Circuit Court decision on an issue that might have seemed durable – but wasn’t, once other Circuit Courts eventually considered the issue.  We’ll see whether that happens here.

Complications With Rolling Credit Elect Transfers – Part 1

We welcome back guest blogger Bob Probasco. In Part One of this two part post, Bob dives into the history of “credit elect transfers” and their treatment for interest purposes. Part Two will analyze the Goldring case in more detail and discuss the arguments that are likely to be made on both sides as the case goes before the Fifth Circuit. Christine

A brief order was issued in September, concerning an issue related to interest on federal tax overpayments and underpayments.  In Goldring v. United States, 2020 U.S. Dist. LEXIS 177797, 2020 WL 5761119 (E.D. La. Sept. Sep. 28, 2020), the court granted the government’s motion for summary judgement, concluding that the IRS properly assessed $603,335 of underpayment interest.  The court rejected the taxpayers’ arguments concerning the proper treatment of interest in situations with rolling credit elect transfers.

We’re all familiar with “credit transfers,” the terminology for IRS authority under Code section 6402(a) to apply an overpayment for one year against an outstanding tax liability for another year.  IRS records show tax balances from the government perspective, of course, under which an overpayment by the taxpayer is a liability or, in accounting terminology, a credit.  (These transfers show up on transcripts with transaction codes 826/706, labeled “credit transferred out”/“credit transferred in”.)

A “credit elect transfer” (CET) is one the taxpayer requests, on their tax return; I frequently make such an election and some of you may as well.  The election, made on line 36 of the Form 1040 for 2020, is to apply part or all of the overpayment shown on the return to your estimated tax obligations for the next year.  The overpayment that the taxpayer elects to transfer does not earn overpayment interest for the period before the transfer, even if the return is filed well after the due date of that return.  This is not a statutory restriction; section 6402(b) just authorizes Treasury to prescribe regulations governing such CETs.  It did, including § 301.6402-3(a)(5) and § 301.6611-1(h)(2)(vii).

As for “rolling credit elect transfers,” those may be most easily illustrated by the facts of this case.   

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Facts

I’m going to dispense with most of the details and just focus on the key facts regarding the specific issue at hand.

  • Mr. and Mrs. Goldring’s 2010 tax return showed an overpayment of $6,782,794, which was applied to their 2011 tax return at their request.
  • Their 2011 tax return showed an overpayment of $6,521,775, which was applied to their 2012 tax return at their request.
  • Their 2012 tax return showed an overpayment of $5,869,478, which was applied to their 2013 tax return at their request.
  • Etc., etc., etc.

Thus, “rolling” CETs – the Goldrings kept rolling over their overpayments to the next year instead of receiving refunds. 

I’ve used CETs often, occasionally even rolling CETs, although the numbers were much smaller than for the Goldrings.  I intended to use the CET against the estimated tax installment obligation due at the same time as my tax return.  It was easier to make that portion of the obligation by CET rather than making a separate payment for year 2 and getting a refund (without interest) for year 1 several weeks later.

Mr. and Mrs. Goldring had something else in mind.  They anticipated a possible audit deficiency for their 2010 tax return.  Their accountants had suggested the rolling CETs as a way to keep funds with the IRS sufficient to cover the potential deficiency, thereby avoiding underpayment interest.  Remitting a separate deposit in the nature of a cash bond would have been an option as well.  Perhaps rolling CETs were seen as a low key way to accomplish the same thing, without waving a red flag to alert the IRS of the potential deficiency?  If there had never been a deficiency for 2010, the rolling CETs wouldn’t have been an issue.  Eventually the Goldrings would have asked for a refund instead of rolling the overpayments over.  No interest would be allowed on the refund and that would have been an end of it.

But, as they feared, there was a deficiency for 2010.  The IRS began an audit on April 15, 2013 and issued a 30-day letter on August 11, 2015.  Appeals agreed with the audit determination and issued a notice of deficiency for $5,250,549 on March 30, 2017.  On June 20, 2017, rather than go to Tax Court, the taxpayers consented to immediate assessment.  The audit deficiency was eventually paid from overpayment balances for later returns, specifically, Mrs. Goldring’s 2014 separate tax return and Mr. Goldring’s 2016 separate tax return. A refund claim and this refund suit followed.

The validity of the 2010 deficiency itself had been resolved in this same case, by an order issued on April 13, 2020.  That left the question of interest that had been assessed on the deficiency.  The IRS assessed underpayment interest on the 2010 deficiency for the period from April 15, 2012, the due date for the 2011 tax return, until paid.  The Goldrings argued that, because the IRS always had money in its possession sufficient to cover the audit deficiency, no underpayment interest should be accrued.        

The District Court’s Opinion

The court decided this issue in favor of the government.  Section 6601(a) provides for underpayment interest as follows:

If any amount of tax imposed by this title . . . is not paid on or before the last date prescribed for payment, interest on such amount . . . shall be paid for the period from such last date to the date paid.

The regulations sections cited above provide that the portion of an overpayment designation as a CET “shall be applied as a payment on account of the estimated tax for [the succeeding] year or the installments thereof.”  The 2010 CET was irrevocable and resulted in transferring $6,782,794 from the account for the taxpayers’ 2010 tax year to the account for their 2011 tax year.  That transfer from 2010 to 2011 was effective as of April 15, 2012, the due date of the 2011 tax return.  The original overpayment in 2010, transferred to 2011, would not earn overpayment interest.  But it could shield the taxpayers from underpayment interest from a subsequently determined deficiency, until the funds were deemed transferred to 2011.  Underpayment interest began accruing on April 15, 2012, the last date prescribed for payment for the year to which the overpayment was transferred, and continued until April 15, 2015 and April 15, 2017, when the deficiency was paid by section 6401(a) transfers from subsequent tax returns.  The plaintiffs were not entitled to a refund of underpayment interest and the government was entitled to summary judgement.

This sounds like a very straightforward application of clear law, doesn’t it?  Particularly since the printed order was just barely over 4 pages and the “law and analysis” portion is only 2 pages, double-spaced.  But I’m not sure that answer is necessarily the best interpretation of the law.  Here’s why.

Treatment of CETs for interest purposes

Today, in most instances when you elect to apply some or all of an overpayment to estimated taxes for next year, interest issues don’t come up at all.  You’re not entitled to interest on the overpayment, by regulation.  When an interest issue does come up, it’s because the IRS audits the year with the overpayment and determines a deficiency.  With most CETs, the method of calculating underpayment interest on that subsequently determined deficiency is no longer contested. 

But there was a great deal of uncertainty before the decision in Avon Products, Inc. v. United States, 588 F.2d 342 (2nd Cir. 1978).  By the last date prescribed for payments of its 1967 taxes, the unextended filing due date, the taxpayer had paid in $44,500,086.58.  When it finally filed its tax return on September 15, 1968, it reported its tax liability as $44,384,460.26, resulting in an overpayment of $115,626.32, which it elected to apply to 1968’s tax liability.  A subsequent audit determined that its correct liability was $44,483,062.42, resulting in a deficiency of $98,602.17.

Section 6601(a), by its literal terms, only charges interest on underpayments if the correct tax liability was not paid on or before the last date prescribed for payment.  But the amount paid as of the last date prescribed for payment was $44,500,086.58, which was more than the adjusted tax liability of $44,483,062.42.  Under the literal terms of the statute, the IRS could not assess any underpayment interest at all for that deficiency.

The interpretation didn’t seem right either, but the Second Circuit found an elegant solution.  It interpreted “last date prescribed for payment” in these situations to mean the moment at which the tax first became “due but unpaid.”  It was fully paid by March 15, 1968, the last date prescribed for payment.  But a CET was effectively a “negative payment,” just as a refund would have been.  It reduced the net amount paid by Avon from $44,500,086.58 (as of the date prescribed for payment) to $44,384,460.26 (after the CET).  At that point, the tax liability became “due but unpaid” and underpayment interest would begin accruing.

When the “negative payment” is a refund, we know when that happened and therefore when underpayment interest on a subsequently determined deficiency begins.  But what is the effective date of a “negative payment” by CET?  That wasn’t clear.  The IRS argued for the due date of the return without regard to extensions, or March 15, 1968.  Avon argued for September 15, 1968, the date of both (a) filing the 1967 return and making the election to apply the CET to 1968’s tax liability and (b) the due date of an estimated tax installment for Avon’s 1968’s tax liability.  The Second Circuit agreed with Avon.

Avon Products, several subsequent cases – May Dep’t Stores Co. v. United States, 36 Fed. Cl. 680 (C.F.C. 1996); Kimberly-Clark Tissue Co. v. United States, 1997 U.S. Dist. LEXIS 3100 (E.D. Pa. 1997); Sequa Corp. v. United States, 1996 U.S. Dist. LEXIS 5288 (S.D.N.Y. Apr. 22, 1996); Sequa Corp. v. United States, 1998 U.S. Dist. LEXIS 8556 (S.D.N.Y. June 8, 1998) – and a series of revenue rulings eventually developed what is now the standard treatment for CETs.  “When a taxpayer elects to apply an overpayment to the succeeding year’s estimated taxes, the overpayment is applied to unpaid installments of estimated tax due on or after the date(s) the overpayment arose, in the order in which they are required to be paid to avoid an addition to tax for failure to pay estimated income tax under §§ 6654 or 6655 with respect to such year.”  Revenue Ruling 99-40.

The logic behind this solution was to avoid a double benefit, to either the taxpayer or the government.  The CET amount would provide a potential benefit to the taxpayer in the year of the overpayment (1967 in the Avon Products case) for periods before the effective date of the transfer.  Overpayment interest was not allowable, but the CET amount would reduce the subsequently determined deficiency that would be subject to underpayment interest.  The CET amount would benefit the taxpayer in the succeeding year (1968 in the Avon Products case) for periods after the effective date of the transfer.  It would either (a) avoid the addition to tax for failure to pay estimated taxes or (b) be refunded to the taxpayer for its use.  There would be no period during which the taxpayer received a potential benefit for neither year or received a potential benefit for both years. 

None of the cases or revenue rulings specifically dealt with situations in which the CET is not needed for an estimated tax installment.  IRS practice has been to apply any remaining portion as of the due date of payment for the succeeding year’s tax liability.  That makes perfect sense if there is no rolling CET, as the taxpayer will either need that amount to pay the liability or receive a refund.  It makes less sense in situations with rolling CETs, as in the Goldring case.  That had to wait for a new series of cases, and the results are mixed.  I’ll turn to that in Part 2.

Pfizer Again – On to the Substantive Issue

We welcome back guest blogger Bob Probasco with an update on the Pfizer case and its, seemingly, never ending quest for interest on a large refund.  Pfizer has moved past the procedural hurdles and onto the merits of its claim for interest.  As Bob describes below, we have not yet seen the end of the case and our continuing lessons on the payment of interest.  Keith

I’ve discussed a particular jurisdictional issue in the Pfizer case, and others, several times on Procedurally Taxing over the last two years.  That issue was whether taxpayers can file standalone suits for additional overpayment interest, in excess of $10,000, in the Court of Federal Claims as well as District Court.  (If you’re interested in this issue, the PT posts are here, here, here, here, here, here, here, and here.)  Over that period, Pfizer has moved from the Southern District of New York to the Second Circuit to the Court of Federal Claims.  The jurisdictional issue was resolved long ago, at least for this case, and the parties can proceed to the substantive issue. 

When we last visited the status, Pfizer had filed a motion for summary judgment; the government opposed that motion and sought additional discovery.  The CFC issued an opinion and order on September 14, 2020. 

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The substantive issue – overpayment interest when a refund check is re-issued

The case resolves around a refund of $499,528,449.05, resulting from an overpayment on Pfizer’s tax return for 2008, which was timely filed on September 11, 2009.  The government contends that it processed six separate checks – five for $99 million each and the sixth for $4,528,449.05 – and mailed them on October 20, 2009, by first-class mail.  Pfizer contends that its tax department in New York never received the checks.  The government then cancelled the checks and executed an electronic funds transfer for the entire $499,528,449.05 on March 18, 2010, which was deposited into Pfizer’s account on the following day.

The government did not pay overpayment interest on the refund; Pfizer contends it should have. During that period, the overpayment interest rate on large balances (so-called “GATT interest”) was 1.5%.  Even at that low rate, interest on half a billion dollars would have added up; Pfizer’s complaint asked for more than $8 million, “plus statutory interest” which continues to compound. 

The legal dispute comes down to two words, italicized below.  Section 6611(b), which defines the period for which overpayment interest is paid, states in relevant part:

(b) Period  Such interest shall be allowed and paid as follows: . . .

(2) Refunds

In the case of a refund, from the date of the overpayment to a date (to be determined by the Secretary) preceding the date of the refund check by not more than 30 days, whether or not such refund check is accepted by the taxpayer after tender of such check to the taxpayer. The acceptance of such check shall be without prejudice to any right of the taxpayer to claim any additional overpayment and interest thereon.

Meanwhile, Section 6611(e)(1), which is an exception under which overpayment interest will not be paid, states:

Refunds within 45 days after return is filed

If any overpayment of tax imposed by this title is refunded within 45 days after the last day prescribed for filing the return of such tax (determined without regard to any extension of time for filing the return) or, in the case of a return filed after such last date, is refunded within 45 days after the date the return is filed, no interest shall be allowed under subsection (a) on such overpayment.

The conference report for the 1993 amendment to Section 6611(e) describes the provision as:

No interest is paid by the Government on a refund arising from an original income tax return if the return is issued by the 45th day after the later of the due date of the return . . . or the date the return is filed.

The government focuses on the word “issued” in the legislative history for Section 6611(e) and concludes that mailing the refund within 45 days avoids interest, regardless of whether the refund is delivered to the taxpayer.  Pfizer focuses on the word “tender” in Section 6611(b)(2) and concludes that it requires “that a taxpayer has some knowledge of [the refund check] and an opportunity to accept, or decline to accept, the check.”  That quote is from Doolin v. United States, 918 F.2d 15, 18 (2d Cir. 1990).  The Seventh Circuit adopted that analysis in Godfrey v. United States, 997 F.2d 335, 337 (7th Cir. 1993).  The Doolin precedent is why Pfizer originally brought the case in the Southern District of New York instead of the Court of Federal Claims.

This issue appears to have been litigated infrequently, with Pfizer only the third case to address it.  Although he didn’t seem very impressed with the government’s proffered legislative history, Judge Lettow didn’t decide the legal issue.  Material disputes of fact remained.

The Fact Issues

The government offered evidence of the Treasury’s processing and mailing procedures and that Pfizer’s checks were processed accordingly.  But an email from an IRS employee stated that “the checks weren’t sent & stopped the request.”  Further, problems with the Post Office or Pfizer’s mail handling practices might have resulted in one or two missing checks, but there were six missing checks.  That raised questions about whether Treasury’s procedures were really followed.  Pfizer also argued that the usual presumption of delivery should not apply when there is evidence that the mail was not received.

On the other side, the government wanted additional discovery concerning Pfizer’s mail practices, to challenge Pfizer’s assertion that the checks were never delivered.  A third-party contractor picked up all of Pfizer’s mail from the Post Office and took it to Pfizer’s central mailroom, to be sorted and delivered to various offices and departments.  Pfizer’s Tax Department didn’t receive the refund checks but that didn’t necessarily mean Pfizer hadn’t.  During an earlier deposition, an Operations Manager for Pfizer testified that he wasn’t aware of any complaints regarding lost, non-received, or misplaced mail.  But he hadn’t inquired into incidents of lost mail in preparation for the deposition.  The government had asked to examine a Pfizer witness concerning “all incidents in which Pfizer lost or allegedly failed to receive mail addressed to Pfizer” at that address and considered the deposition testimony insufficient.

Conclusion

The judge declined to resolve the statutory interpretation issue on a motion for summary judgment because neither party would have been entitled to summary judgment at this point.  The government could not win because there were genuine disputes of act concerning whether Treasury issued and mailed the checks.  Pfizer could not win because there were genuine disputes of fact concerning whether the checks were appropriately delivered to Pfizer.

As a result, the judge denied Pfizer’s motion for summary judgment and granted the government’s motion to reopen discovery.  The judge ordered the parties to file a proposed schedule for discovery and further proceedings by the end of September.  It may be a while longer before we get a ruling on the legal issue.

Inside a Virtual Settlement Day

Today guest blogger Bob Probasco returns with a detailed account of his recent Virtual Settlement Day experiences in Texas. Bob also offers some advice for those participating in future VSD events. Christine

Virtual Settlement Days are the new craze, as IRS Counsel and the Tax Court press for making progress on cases even under our current difficult circumstances.  Several of you likely have already participated in one or more VSD; many others at least have heard about them from others who have participated.  Counsel put a team together to establish a general process and issued a “Best Practices” guide.  But the VSDs are organized by local offices, and likely there is some degree of variety from place to place.  So I thought there might be some benefit to PT readers from additional sharing of experiences by those of us who have already been through this.  I hope to hear more from others.

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The Pre-COVID History

Some of my comments may make more sense if I start out with a brief overview of what Texas was doing, for both calendar calls and settlement days, before the coronavirus.  The environment within which we operated influenced how VSDs were organized and operated and may have resulted in some differences (good and bad?) from VSDs elsewhere.

Texas has five different cities where the Tax Court holds trial sessions – Dallas, El Paso, Houston, Lubbock, and San Antonio.  The IRS Counsel office in Dallas handles Dallas and Lubbock trials; their office in Austin handles San Antonio and El Paso trials; their office in Houston handles Houston trials.  Texas has eight LITCs and our state bar Tax Section has a long-established calendar call program, created by Elizabeth Copeland back in 2008.  The state bar program has coordinators for Dallas, Houston, and San Antonio; the coordinators generally have a small group of volunteers they rely on regularly. 

Texas’s experience with in-person settlement days dates to 2014, with the first one in San Antonio.  Rachael Rubenstein, when she directed the LITC at St. Mary’s University School of Law, brought the idea back to Texas from an LITC conference and helped organize it with Counsel.  It was a successful trial, although only one IRS attorney came down from Austin.  (The need to travel is usually a complication for the IRS.)  Dallas started its settlement days in 2016, normally on a Saturday morning at one of the local clinics.  They’ve been very successful.  Houston and San Antonio started more recently.

Enter the VSDs

Texas was not the first location to have a VSD, but Counsel quickly scheduled three this summer.  The first, organized by Counsel’s Dallas office, for cases in Dallas and Lubbock, was scheduled over three days, Thursday 6/25 through Saturday 6/27.  Counsel sent out 96 invitation letters; 26 petitioners replied to make an appointment.  We were ultimately only able to hold meetings with 18 of them, as we ran low on volunteers.  More about that later.  I took four appointments, the SMU clinic took three, we had eight state bar volunteers who took nine appointments, and two petitioners had other representation and didn’t ask to meet with a pro bono volunteer.  Three petitioners cancelled or no-showed and one settled in advance of the appointment.  All told, nine cases settled and another five moved toward settlement.  This was a very successful event, with better turnout than we usually had in Dallas for in-person settlement days.

The Houston and Austin offices of Counsel scheduled their VSDs for the week of July 20th.  Houston had about twelve appointments; Austin had five.  I haven’t heard yet as much about how those events went, other than one appointment I had, but my impression was that those also were very successful.

That’s the high-level summary; what follows are my specific experiences.

Thursday, June 25:  Dallas Counsel sent out the invitation letters and scheduled appointments as petitioners contacted them.  Counsel then emailed a link to the WebEx meeting to petitioners with confirmed appointments a couple of days in advance of the meeting.  The email asked the petitioners whether they wanted to talk with the pro bono volunteer in advance.  My first appointment was an EITC substantiation case and talking in advance and sharing documents might have been very helpful.  But the petitioner didn’t ask to talk with me in advance and I met her only at the beginning of the virtual session.  My understanding of WebEx is that the host can allow any participant to share their screen.  Depending on how tech-savvy the petitioner was, she might have been able to share her documentation with us during the meeting and we might have been able to settle.

But we ran into a snag.  Two WebEx servers crashed that morning and the meeting had to be rescheduled as an IRS telephone conference call.  The petitioner had documents but couldn’t share them over the phone.  The IRS attorney had virtually nothing; the petitioner had submitted documents to Appeals last fall, but they hadn’t been uploaded and the physical administrative file was of course not available to Counsel.  In a situation like that, you can discuss generalities, but you may not be able to settle until later.  My clinic later took on the petitioner as a client and I’m hopeful we’ll settle soon.

Friday, June 26:  This petitioner, whose case was for Lubbock, did send me a lot of documents in advance.  My schedule precluded a telephone or Zoom meeting before the appointment, but I was able to evaluate his situation and we communicated by email.  The actual WebEx meeting ran into another snag.  There were still some potential problems with the WebEx servers, I think related to capacity, so Counsel came up with a workaround.  We used WebEx for video only and a telephone conference call for audio. 

I had already provided him with substantial advice by email Wednesday and Thursday nights, but we talked through the issues more.  I had concluded earlier that this CDP case would likely not settle; it seemed to be almost entirely based on strongly held but very different interpretations of tax law, rather than factual disputes.  When I’ve encountered such cases in the past, they never seem to settle.  Sure enough, on Friday there was some discussion but no settlement.  However, we did clarify some of the petitioner’s arguments and gained additional information.  I also communicated with the petitioner by email Friday night to answer some additional questions he had and clarify some aspects of court procedure.  It’s unfortunate when you’re unable to progress toward settlement in a Virtual Settlement Day, but perhaps the meeting at least contributed to resolution of the case.

I had a second appointment on Friday, but that petitioner did not show up.

Saturday, June 27:  This petitioner’s case was also for Lubbock, and he also sent me quite a few documents in advance.  And again, my schedule was busy so it wasn’t until late Friday night that I had an opportunity to review everything and email him with my preliminary evaluation.  The meeting proceeded similarly to the one the day before.  And this appeared also to be an instance of strongly held but very different interpretations of tax law. 

Although I understand that WebEx does have “breakout room” functionality, the original plan was for the IRS attorney to make the pro bono volunteer a co-host, and then leave the WebEx meeting to allow a private conversation.  But once again we were using WebEx for video only and an IRS conference call for audio.  There was no way for the IRS attorney to leave the conference call without terminating it.  So instead, the petitioner and I left the WebEx meeting and the IRS conference call; then I called the petitioner for a private conversation.  After that, we returned to WebEx and the conference call.

Although we weren’t able to reach a settlement, I was able to provide information to the petitioner about the strength of his case and answer some questions about court procedure.  Since there apparently was no dispute concerning the material facts, I suggested a submission without trial under Rule 122 would be appropriate and more convenient than appearing for trial.  I think both petitioner and the IRS attorney were satisfied with that approach and will cooperate in stipulating the facts, so this case seems headed toward resolution.

That was it for the Dallas event.  We had enough state bar volunteers, along with the clinics, for the Houston and Austin event, after some balancing between the two.  But the Austin event got a last-minute email from a petitioner on Wednesday asking for an appointment on Thursday, so I volunteered to take that one.

Thursday, July 23:  Another CDP case.  For the Dallas VSD, Counsel copied the applicable volunteer when emailing a petitioner with a link for the WebEx meeting.  I didn’t know who the petitioner was on this case until the virtual meeting began.  I’m not sure if that was a conscious decision by Austin Counsel to delay the communication of the petitioner’s name as long as possible or just a result of this being a last-minute appointment.  I don’t know if he was offered an opportunity to talk with me in advance, but if he was, he didn’t pursue it.

We were able to use WebEx for both video and audio this time, and I had an opportunity to experience sharing documents within WebEx.  The IRS Attorney showed us the Notice of Determination.  It’s a little bit awkward when someone else is at the controls (I’m gaining sympathy for what my students in a virtual class go through) and I didn’t capture in my notes all of the important information for reference later when we had a private conversation.  But the process works.

We ran into problems when transitioning to a private meeting between me and the petitioner.  The IRS attorney left the WebEx meeting, as planned, but that unexpectedly kicked all of us out the meeting and the IRS attorney had to schedule a new WebEx meeting and invite us.  None of us were absolutely sure if that would happen again, so the petitioner and I decided to have our private conversation outside of WebEx.  The IRS attorney kept the WebEx meeting going, the petitioner and I exited, and then he and I had a Zoom meeting.  (You’re probably wondering why I didn’t use Zoom for private conversations with petitioners during the Dallas VSDs.  So am I.  IRS Counsel only uses WebEx for videoconferencing but that restriction wouldn’t apply to a meeting that IRS Counsel does not attend.  It should have occurred to me earlier as it would have been easier than a cellphone call.)

After we returned to the WebEx meeting to discuss the case with the IRS attorney, there were a couple of times that the petitioner wanted to speak with me privately again.  The discussions were likely to be brief, so we came up with a workaround rather than returning to Zoom.  The IRS attorney left the WebEx meeting going but left his office so he couldn’t hear us, then came back in five minutes.  A little inconvenient for him but, unlike my other VSD cases, we were able to reach a settlement.  Hurray!

Takeaways

Compared to the in-person settlement days, there were some noticeable differences – some better, some worse.  Overall, I thought the VSDs went well.  Counsel is to be commended for their efforts in trying to make progress on the cases even under today’s difficult circumstances.  In reflecting over it, there were also some things to consider the next time around.

Choice of cases to invite.  Our Dallas in-person settlement days usually invited petitioners whose cases were scheduled for trial in the next 2-3 months, and sometimes Counsel limited the invitations to cases they considered good candidates for settlement.  For the VSDs, it seems as though the invitation list was crafted more broadly.  Of the four cases I assisted with, three were in the very early stages and had not yet been set for trial.  (The fourth had been set for trial in May, before the Tax Court cancelled those trial sessions.)  I was somewhat surprised by that, as often at that stage Appeals has jurisdiction.  But if we can settle cases earlier, bring them on.  It seemed to work well overall.

I think there’s an argument for only inviting cases for which Counsel thinks progress is likely.  I’ve heard in the past about in-person settlement days where that approach was taken but here it seems Counsel may have not focused as much on that.  Progress seemed unlikely for two of my four appointments.  I understand that Counsel may have difficulties with a case and hope that a volunteer will persuade a petitioner that a proposed resolution is reasonable.  And that happens sometimes even if the proposed settlement is a full concession by the petitioner; the petitioner may believe a volunteer who tells her that she should concede, but not trust Counsel who says the same thing.  Even though the petitioner isn’t any better off, the judicial process is.  The Court and Counsel both appreciate any intervention that results in resolution before trial. 

On the other hand, there are some cases for which it seems extremely unlikely from the very beginning that a volunteer will change either party’s point of view.  Is it worthwhile to invite those petitioners to a settlement day, whether in-person or virtual?  I didn’t think it would be in those two cases I assisted with, and I was surprised that they wound up at the VSD.  But in retrospect there was some movement (very slight) toward resolution, even if the cases would not settle.  And the petitioners hopefully got some useful information from me, even if not what they may have hoped for.  I wonder whether the petitioners and Counsel thought the VSD was beneficial for those cases.

Time:  Our Dallas settlement days were always held on Saturday mornings.  Several IRS attorneys and several pro bono volunteers would show up for the entire morning.  We could get through 10 – 15 meetings easily and typically no one was committed for more than four hours.  The VSDs were mostly held during the week and spread over several days.  That is probably more convenient for Counsel and LITCs, as this is part of their day job and most meetings were during our normal work hours.  The total time set aside was much more than the four hours for our Dallas in-person settlement days, but IRS attorneys and pro bono volunteers alike only had to be there for their meetings, rather than the whole time, so the total time commitment may have been similar.  It also seemed to be better for petitioners, at least if there was a Saturday option.  And no one had travel time to get there.

There is a possible downside for state bar pro bono volunteers, as most of the meetings were during the work week when they often have other commitments, rather than on the weekend.  Perhaps as a result, the volunteers may have been more likely to volunteer for only one or two appointments instead of handling four at an in-person settlement day.  Part of that may also be a result of more time set aside for VSD appointments and in-person, as the process can be a little bit slower. 

This is a balancing act and the plan for our VSDs may be the right one for VSDs going forward, but it’s something to think about.  Most importantly, the organizers for the pro bono volunteers may need to consider that more than the normal number of volunteers may be needed when moving from in-person to virtual.

Location:  This was a huge advantage of the VSDs.  The obvious advantage is eliminating travel time for everyone but there are two other aspects.  First, VSDs allowed Counsel to combine cases from more than one trial location.  We had done in-person settlement days for Dallas trial sessions.  But Dallas Counsel also handles Lubbock trial sessions.  Even if they organized an in-person Lubbock settlement day, travel costs for the Dallas IRS attorneys would have limited participation.  With a VSD, however, it was easy to invite petitioners with cases for both cities.  The second advantage of a VSD is that it facilitates getting pro bono volunteers.

Soliciting volunteers:  We had started to cast our net wider for the state bar volunteers even before COVID.  Last year, the Texas Tax Section started sending out blast emails to the entire membership inviting them to sign up as volunteers for calendar calls or settlement days or Adopt-a-Base training sessions.  (Rachael Rubenstein implemented this initiative for soliciting volunteers for us.)  It’s part of a balancing act between asking our “regulars” to stay involved and diversifying our volunteer base (expanding base, involving younger attorneys, etc.). 

When we switched from in-person settlement days to VSDs, though, that had an even greater reach.  Our Dallas VSD had eight state bar pro bono volunteers, of whom three were from Houston.  Our Houston and Austin VSDs in turn drew volunteers from Dallas.  We even got an out-of-state volunteer from D.C., who happened to be a member of the Texas bar.  (Thank you!)

We turned out to have more petitioners wanting to participant in the Dallas event than the volunteers could cover, and some never made it off the waitlist.  But that was primarily because we got a later start than for the Houston and Austin events.  The next time we do this, I think we’ll be able to get more volunteers.

It takes effort to solicit intrastate volunteers but the ability to serve more petitioners is worth it.  The program that Rachael started in Texas gave us a head start in that, although she also had to put in a lot of effort connecting the volunteers to the petitioners.  The time slots the volunteers asked for didn’t match exactly with the petitioner appointments.  I doubt if we would have had as many volunteers without that program already in place.  Other state bars may want to investigate something similar if they’re not doing it already. 

This advantage of a VSD in attracting volunteers who do not live in the area will also apply to calendar calls as the Tax Court starts its remote trial sessions.  We tend to need fewer volunteers at calendar calls then at settlement days, but the potential for interstate assistance can greatly help locations that do not have clinics or an established state bar program.  It will be more difficult to coordinate than intrastate volunteers, but Meg Newman at the ABA Tax Section is already doing some of this.  The Texas bar will be helping with a VSD, and possibly a calendar call, for Las Vegas later this year.

Technology:  We had some issues with WebEx during the Dallas VSD, although most of that may have been just temporary glitches rather than recurring problems.  However, I suspect many of the pro bono volunteers mostly use Zoom and are unfamiliar with WebEx; I know I was.  Even some of the individual IRS attorneys may not have been familiar with the full range of functionality used in a VSD – sharing documents, selecting a co-host, etc.  For that matter, petitioners might also struggle with sharing documents if they were unfamiliar with the technology.

We did get an instruction guide for signing in and a video tutorial in advance of the VSD.  That was helpful.  In retrospect, it might have been beneficial to have a live run-through to acclimate to the software.  But it’s hard to find time for this in everyone’s busy schedule.  This will get better over time, though, as everyone gains more familiarity.

Sharing information.  This is a disadvantage of VSDs, compared to in-person.  At the in-person events, petitioners and Counsel both often bring documents to the event and it’s easy to give them to the volunteers to look at those throughout the meeting with petitioners.  That’s harder to do through videoconferencing.  Petitioners may not have the documents in electronic format, for screen sharing, and holding a document up to the camera may not work well.  It can be awkward for the volunteer to refer back to documents during the discussion if petitioner or Counsel are sharing them through the screen.  And after Counsel leaves the meeting, any documents shared by them are – I assume – not available during the private conversation between volunteer and petitioner.

For the Dallas event, the invitation letter invited petitioners to send documents to Counsel in advance; a couple of days before the meeting, Counsel offered to put petitioner and volunteer in touch to discuss the case before the meeting.  I think there was little, if any, information shared ahead of time, though.  Maybe a more assertive approach, earlier in the process, would change that.  Perhaps when the petitioners respond to the invitation letter to schedule an appointment Counsel could: (a) explain the benefits of talking with the volunteer in advance; (b) strongly suggest that it would be beneficial to send documents to Counsel in advance and ask whether those could be shared with the volunteer; and (c) ask the petitioner if documents already filed with the court (e.g., petition/notice of deficiency, any pending motions, etc.) could be shared with the volunteer in advance.

At some VSDs, cases were “recalled” for later in the week or a subsequent week.  That can be a good solution for this issue and would likely work well for Counsel and clinic volunteers.  But it might be harder for state bar volunteers to squeeze a second meeting into an already busy schedule.  For clinic volunteers, there is also the option of entering an appearance in the case and continuing through resolution; state bar volunteers do that less rarely.  Of my three VSD cases that did not settle, I did that for one but chose not to for the other two.

This is certainly not a big issue.  We can get documents and information from the petitioner and Counsel during the virtual meeting, which is essentially what typically happens at an in-person settlement day or a calendar call.  But virtual seems slower than in-person and anything that helps speed up the process might help.

Parting thought

VSDs will take some getting used to, and they have some obvious challenges.  But they also offer significant advantages.  My experiences were definitely positive.  If you’ve been hesitant about participating in one, don’t be.  I think it would also make sense to continue offering at least some VSDs or virtual trial sessions even after COVID is long behind us.  Just like so many other things, the result of the pandemic may be a permanent and substantial change in how we work.

The Tide Keeps Going Out, Carrying Overpayment Interest Suits Away from District Courts

We welcome back regular guest blogger Bob Probasco. Bob is the director of the Low Income tax Clinic at Texas A&M University School of Law. Prior to starting the clinic at Texas A&M, Bob had a long a varied career in different tax positions. Before law school, he spent more than twenty years in various accounting and business positions, including with one of the “Big Four” CPA firms and Mobil Oil Corporation. After law school and a year clerking with Judge Lindsay of the Northern District of Texas, he practiced tax law with the Dallas office of Thompson & Knight. He left T&K in 2014 and started a solo practice before switching to full time academia. Keith

We return to the jurisdictional dispute over taxpayer stand-alone suits claiming additional overpayment interest in excess of $10,000.  The latest development, a decision on July 2nd by the Federal Circuit in Bank of America v. United States, docket number 19-2357, continues a trend that I’ve been following for two years now.  Until recently, the only decision on this issue at the Circuit Court level was E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005), which concluded that district courts can hear such claims.  For years, most lower courts followed the Sixth Circuit.  But recently the tide turned.  Here’s a timeline of recent cases illustrating the change.

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First, the lower courts follow Scripps and agree that district courts have jurisdiction over these claims:

  • October 31, 2016:  The Southern District of New York follows Scripps in Pfizer, Inc. v. United States, 118 A.F.T.R.2d (RIA) 2016-6405 (S.D.N.Y. 2016) and decides it has subject matter jurisdiction.  On May 12, 2017, the court dismissed the case for lack of jurisdiction for failure to timely file the refund suit.  Prior discussion here.  The taxpayer appeals.
  • July 1, 2019:  The Western District of North Carolina follows Scripps in Bank of America Corp. v. United States, 2019 U.S. Dist. LEXIS 109238, 2019 WL 2745856 (W.D.N.C. 2019), and denies the motion to transfer the case to the Court of Federal Claims.  Prior discussion here.  The government appeals.
  • August 30, 2019:  In the Southern District of Florida, the magistrate judge’s report and recommendation in Paresky v. United States, 2019 U.S. Dist. Lexis 149629, 2019 WL 4888689 (S.D. Fla. 2019) follows Scripps.  The magistrate judge concludes that the court has subject matter jurisdiction but recommends dismissal in part for failure to file timely refund claims. Prior discussion here.

And then a break, with cases now holding that only the Court of Federal Claims, not district courts, have jurisdiction over these claims:

  • September 16, 2019: The Second Circuit reverses the S.D.N.Y., in Pfizer, Inc. v. United States, 939 F.3d 173 (2d Cir. 2019) and concludes there is no subject matter jurisdiction.  Prior discussion here.  The court transfers the case to the Court of Federal Claims, docket number 19-1803. Plaintiff files a motion for summary judgment on April 30, 2020.
  • October 7, 2019:  The District of Colorado agrees with Pfizer, in Estate of Culver v. United States, 2019 U.S. Dist. LEXIS 173235, 2019 WL 4930225 (D. Colo. 2019).  The court transfers the case to the Court of Federal Claims, docket number 19-1941.
  • October 21, 2019:  In the Southern District of Florida, the district court judge in Paresky v. United States declines to adopt the magistrate judge’s report and recommendation and follows Pfizer, dismissing the case for lack of subject matter jurisdiction.  Prior discussion here.  The taxpayers appeal.
  • July 2, 2020:  The Federal Circuit agrees with Pfizer and reverses the WDNC, in Bank of America Corp. v. United States. It remands the case to the WDNC, to sever some of the claims and transfer them to the Court of Federal Claims.

So now we have the Sixth Circuit holding that district courts have jurisdiction over such suits while the Second and Federal Circuits disagree, with one more circuit court considering the issue.  Mr. and Mrs. Paresky’s case is currently pending in the Eleventh Circuit, docket number 19-14589.  Appellants filed their primary brief on May 27, 2020.  The government’s brief is due on July 27, 2020.

When only one circuit court has ruled on a difficult issue, district courts – even in other circuits – tend to follow that decision.  But once another circuit court disagrees, the better analysis tends to win out and lower courts change direction.  It’s possible that the magistrate judge in Paresky, and the district court in Bank of America, would have reached a different conclusion if they were deciding after Pfizer.  My guess is that the Eleventh Circuit will agree with the Second and Federal Circuits on this issue.  This is still a small sample size, but I suspect the tide has turned decisively.

Caveat:  Bank of America lost in the Federal Circuit but has a strong incentive (see below) to seek review by the Supreme Court.  Similarly, the government may want a ruling by the Supreme Court to overturn Scripps once and for all.  With a circuit split, and if both parties ask the Supreme Court to hear the case – well, the Court hates tax cases but might take this one.  If so, all bets are off.

How did we get here?

Before I get into the court’s decision, a brief reminder why Bank of America, appealed from the Western District of North Carolina, wound up in the Federal Circuit instead of the Fourth Circuit. The government had moved to dismiss the case, or in the alternative to transfer it to the Court of Federal Claims, on the basis that the district court did not have jurisdiction for such cases. The district court denied both alternatives, as the court concluded it had jurisdiction. However, if a district court issues an interlocutory order “granting or denying, in whole or in part, a motion to transfer an action to the United States Court of Federal Claims,” a party can make an interlocutory appeal and the Federal Circuit has exclusive jurisdiction. 28 U.S.C. § 1292(d)(4). The government could have done the same in Pfizer, when the district court ruled against it on the first motion to dismiss for lack of subject matter jurisdiction, but it chose not to do so. In the second motion to dismiss, based on failure to timely file the refund suit, the government did not request transfer, so Pfizer’s appeal was to the Second Circuit.

Statutory interpretation

The jurisdictional provision at issue in these cases is 28 U.S.C. § 1346(a)(1). It has no dollar limitation. That’s the statute we rely on when filing tax refund suits, so I think of it as “tax refund jurisdiction.”  The taxpayers in these cases argued that it also covers stand-alone suits for overpayment interest, although technically those are not refund suits.  The alternative jurisdictional provision for district courts, the “little Tucker Act” at § 1346(a)(2), provides jurisdiction for any claim against the United States “founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department . . . .” but is limited to claims of $10,000 or less.  The comparable jurisdictional statute for the Court of Federal Claims, § 1491(a)(1), has no such limitation.  So, if § 1346(a)(1) covers stand-alone suits for overpayment interest, taxpayers can bring suit in either district court or the CFC.  If it doesn’t, and the claim exceeds $10,000, the only option is the CFC.

Here’s what § 1346(a)(1) says, with the relevant language italicized:

Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws

The language is very similar to Section 7422(a), which sets forth requirements for tax refund suits.  Because those requirements – exhaustion of administrative remedies and a shorter statute of limitations than for the little Tucker Act – have frequently been held not applicable to these stand-alone overpayment interest suits, the government argues that § 1346(a)(1) doesn’t apply to such suits either.

Overpayment interest doesn’t fall within the first two categories because it is neither tax nor penalty.  But Scripps interpreted the third category, “any sum alleged to have been excessive,” as broad enough to cover overpayment interest suits.  After all, the Supreme Court had stated in Flora v. United States, 362 U.S. 145, 149 (1960): “One obvious example of such a ‘sum’ is interest.”  Scripps concluded that the amount was “excessive” if you looked at how much the government retained rather than collected and, more importantly, focused on the entire balance of the account rather just individual components such as the overpayment interest.  (I provided an illustration of this last point here.)  The comparison to section 7422(a) was inapt because section 7422(a) includes a qualifying header (“No suit prior to filing claim for refund”); § 1346(a)(1) does not and therefore could include both refund suits and “non-refund” suits.

Both the Second Circuit and the Federal Circuit disagreed completely with that analysis.  The comment in Flora, in context, referred to underpayment interest (which is assessed and collected) rather than overpayment interest (which is paid out).  The structure of § 1346(a)(1), including the first two categories in the list, and the use of the present-perfect tense “have been” made it clear that it referred to amounts that had been previously paid to, or collected by, the IRS.  And the statutory language mattered much more than the header for section 7422(a) versus lack of such for § 1346(a)(1).

Legislative history

Both parties in Bank of America also pointed the court to legislative history in support of their positions.  In its opening brief, the government pointed out that the final version of the provision was understood by courts to establish a narrow exception to the $10,000 limitation for “little Tucker Act” claims – only for tax refund claims.  The government also focused on the Supreme Court’s discussions of the legislative history in Flora v. United States, 357 U.S. 63 (1958), and Flora v. United States, 362 U.S. 145 (1960).

Here is a summary of the arguments in the taxpayer’s brief: 

  • The predecessor statutes to § 1346(a)(1) were designed to eliminate several distinctions and inequities.  For example, the earlier provisions (a) for district court jurisdiction, requiring suing the Collector and could not brought after he died; and (b) for Court of Claims jurisdiction, did not allow for awarding interest.  Thus, in some instances, a taxpayer would have no way to recover overpayment interest.  In a floor statement introducing an amendment to the Revenue Act of 1921, a Senator noted those issues and stated that the amendment was intended to eliminate the problems.
  • The Assistant Chief Counsel of the Bureau of Internal Revenue represented, in a 1953 Senate subcommittee hearing, his opinion that the language of § 1346(a)(1) already covered stand-alone overpayment interest suits.
  • In connection with that same hearing, Treasury later provided by letter a list of several cases in district court involving stand-alone claims for interest.    

In its reply brief, the government took issue with the taxpayer’s arguments based on legislative history:

  • The Senator who introduced amendments to the Revenue Act of 1921 was concerned about tax refund claims, on which overpayment interest might be paid, rather than stand-alone claims for overpayment interest.
  • It was not entirely clear that the Assistant Chief Counsel’s statement at the 1953 Senate subcommittee hearing concerned stand-alone claims for overpayment interest.  In any event, a witness from the ABA testifying at the same hearing disagreed with the Assistant Chief Counsel’s opinion that the existing statute covered stand-alone claims. 
  • None of the 14 cases listed on the letter from Treasury of district court litigation concerned jurisdiction under § 1346(a)(1) for stand-alone claims of overpayment interest, the issue in Bank of America.  Only six cases involved overpayment interest at all, of which: (a) two declined to exercise jurisdiction; (b) two didn’t question jurisdiction; and (c) two were based on different jurisdictional provisions and involved claims under $10,000.

This brief summary doesn’t do the arguments justice, of course.  For those interested in more details, I suggest a review of the parties’ briefs, which provide a detailed history of the evolution of the jurisdictional provisions.  I was impressed by the thoroughness of both sides’ work, scratching and clawing for anything they could find or infer in support of their respective positions.  They did the best possible with what little was out there.

I count myself among those who consider legislative history relevant in interpreting ambiguous statutes, and a good tax lawyer (or judge) can find ambiguity in almost anything if they want to.  Even so, I considered these examples unlikely to persuade a court that had not already decided for other reasons.  I went back and looked at some of the original sources when reading the district court decision and they didn’t persuade me in either direction.  The Federal Circuit didn’t seem impressed either.

Impact on Bank of America

When I originally looked at the case, I thought that “most” of Bank of America’s claim would be eliminated if it lost in the Federal Circuit.  The third amended complaint was for $163 million, of which $141 million related to interest netting.  The interest netting claims seemed particularly vulnerable if Bank of America had to litigate in the CFC (see below), based on a cursory review of the complaint.  Now that I’ve reviewed the motion to dismiss more carefully, it appears that “most” overstated the potential impact on Bank of America, although it’s still significant.

The benefits of interest netting – the section 6621(d) adjustments to eliminate the interest rate differential – can be effected two ways.  The government can pay additional overpayment interest to bring that rate up to the underpayment interest rate, or it can refund underpayment interest to bring that rate down to the overpayment interest rate. 

Over $95 million of the benefit from interest netting came from years in which the adjustments were for reductions/refund of underpayment interest. A claim for refund of excessive underpayment interest clearly fits with § 1346(a)(1); under section 6601(e)(1), underpayment interest is treated as tax, except that it is not subject to deficiency procedures. 

Thus, there would be no basis for transferring those claims to the CFC.  (There were small amounts of overpayment interest in those years, presumably interest on the claimed refund of underpayment interest rather than directly from interest netting.  That overpayment interest would not be a disallowed stand-alone claim for overpayment interest; it would be permitted under ancillary jurisdiction.)  The government sought to transfer only $67 million of the total complaint amount to the CFC, of which only $44 million involved interest netting.  Assuming that the non-interest netting claims are not at a particular disadvantage in the CFC, Bank of America’s loss from the Federal Circuit’s decision may be only $44 million, or even less.  Well, to the taxpayer losing the claim, “only” is an inappropriate adverb; that’s still a lot of money.

Interest netting

Most taxpayers are perfectly willing to litigate interest cases in the CFC.  The CFC judges tend to have more experience with interest issues and most large interest cases are litigated there instead of district courts. In fact, Bank of America has another interest netting case pending there now. Taxpayers tend to bring substantial stand-alone interest cases in district court only to: (a) take advantage of favorable precedent in that circuit; or (b) avoid unfavorable precedent in the Federal Circuit.  Pfizer was an example of the former.  It wanted to rely on a favorable precedent, Doolin v. United States, 918 F.2d 15 (2d Cir. 1990).  It won’t necessarily lose its case elsewhere; it might persuade the CFC to reach the same decision as the Second Circuit did in Doolin.  Based on the complaint, I suspect Bank of America is an example of the latter, in this case trying to avoid an unfavorable precedent regarding interest netting, Wells Fargo & Co. v. United States, 827 F.3d 1026 (Fed. Cir. 2016).  (Prior discussion here.) 

Wells Fargo involved interest netting claims between separate corporations that had merged.  The Federal Circuit decided that, in such contexts, interest netting is only permitted if the period of overlap (an underpayment balance for one period and an overpayment balance for another period) began after the date of the merger. Here’s an illustration:

Company A had a $2.5 million underpayment balance for its 2008 tax year outstanding from 3/15/2009.  Company B had a $2 million overpayment balance for its 2011 tax year outstanding from 3/15/2012.  If the balances were still outstanding until paid/refunded on 12/1/2016, there was a $2 million overlap from 3/15/2012 (when the second balance began) until 12/1/2016 (when both balances ended).  During that overlap period, there was an interest rate differential; corporations earned from 1% to 4.5% less on overpayments than they paid on underpayments, and in this scenario the difference would more likely be 4.5% than 1%. 

If the companies merged in 2010, $2 million of the respective balances could be netted to avoid that differential, for the entire period from 3/15/2012 to 12/1/2016.  But if the companies merged in 2013, under Wells Fargo those balances could not be netted at all.  I think a better interpretation of the law would allow interest netting for part of the overlap period, starting from the date of the merger.  But the CFC will rule based on Wells Fargo, not based on my interpretation.

As noted above, Bank of America’s claims that will now wind up in the CFC include $44 million of interest netting benefits.  I don’t know if the entire $44 million will be denied based on Wells Fargo.  But (a) those claims involve Merrill Lynch’s tax years 1987, 1990, 1991, 1999, 2002, 2003, 2005, 2006, and 2007 tax years; and (b) Merrill Lynch merged with Bank of America on October 1, 2013.  I didn’t try to review the interest computations attached to the motion to dismiss, but I anticipate Bank of America stands to lose the vast majority of the $44 million.  Worth a cert petition to the Supreme Court?

Impact elsewhere?

The above discussion concerns how this case impacts Bank of America and more broadly other companies that might prefer to bring stand-alone overpayment interest suits in district court.  That doesn’t mean the impact of this line of cases is limited to overpayment interest.  Pfizer and Bank of America identified a certain type of claim that arises under the Internal Revenue Code but is not a tax refund claim for purposes of jurisdiction.  This distinction might affect not only the available forum, which is what I’ve been focusing on here, but also other issues. For example, a “non-refund claim” under the little Tucker Act will not be subject to the requirement to exhaust administrative remedies and will have a different statute of limitation.

Are there other examples of “non-refund claims” arising under the Code?There may well be, and Carl Smith pointed out one prominent recent example that cited Pfizer. On June 19, 2020, the district court of Maryland decided in R.V. v. Mnuchin, 2020 U.S. Dist. LEXIS 107420 (D. Md. 2020), that the government had waived its sovereign immunity with respect to the CARES Act economic impact payments (EIPs).  The plaintiffs claimed jurisdiction under, among others, the little Tucker Act, § 1346(a)(2).  That jurisdiction requires a separate “money-mandating” statute, for which the plaintiffs pointed to section 6428.  The government argued that section 6428 is a tax statute; any challenge to the denial of a credit falls within the jurisdiction of § 1346(a)(1) instead of § 1346(a)(2) and is subject to the restrictions of section 7422.  The plaintiffs’ failure to exhaust administrative remedies was fatal to their claim. 

The court dismissed the government’s motion to dismiss without prejudice.  It stated: “The Government argues that 26 U.S.C. § 6428 is not a money-mandating statute because it is a tax statute.  True.  But the two are not mutually exclusive.”  It cited Pfizer for that proposition.  To put it another way, a tax statute authorizes refund claims, but it also may authorize claims that are not “tax refund claims” for purposes of § 1346(a)(1) and not subject to section 7422 but are money-mandating provisions sufficient to support a Tucker Act claim.

The Advance Premium Tax Credit under the Affordable Care Act would likely be another “non-refund claim.” As with the EIPs, it is reconciled on the taxpayer’s tax return, but it is paid in advance pursuant to a clear money-mandating statute. Michelle Drumbl points out that the U.S. at one time had an advance earned income credit and other countries currently have similar advance credits. If Congress ever enacted her proposal for a transition to periodic payments rather than when the tax return is filed, that would likely also qualify as a “non-refund claim.”

What about refundable credits that are not paid in advance? That might be a harder argument to make; it’s not clear whether there is a money-mandating provision other than section 6402(a), working with section 6401(b)(1). But “hard” doesn’t always mean “impossible.” I haven’t researched enough to know whether a taxpayer has ever tried filing suit for payment of refundable credits based on the little Tucker Act instead of § 1346(a)(1). It might be the only route for recovery for a taxpayer who filed a return claiming a refund (based on a refundable credit) more than three years after the due date. The six-year statute of limitations for a little Tucker Act suit might avoid the problem of the “look back” limitation of section 6511(b)(2). It might be worth a try if you have a client with the right facts.

After all, ten months ago we weren’t sure the government would convince a court that stand-alone overpayment interest suits are “non-refund claims” for which district court jurisdiction is only available under the little Tucker Act. Now, the government has won in the Second and Federal Circuits and seems to have momentum heading into the Eleventh Circuit.

Postscript

While I was working on this post, Jack Townsend posted on his blog concerning the Federal Circuit’s decision in Bank of America.  Jack’s observations are always worth reading.

Significant Changes For Tax Litigation

We welcome back frequent guest blogger Bob Probasco who writes about an announcement on Friday by the Tax Court setting forth the way forward in Tax Court cases.  The announcement does not tell us when the court will start holding trials again but now we have a process.  There is still much to unpack but Bob does a good job getting us started.  My first reaction is that the Court has produced a thoughtful way forward.  My one small disappointment in the path concerns the checklist “Getting Ready for Trial Checklist.”  I would have preferred the checklist include a line that pro se litigants should reach out to Low Income Taxpayer Clinics (LITCs) early to obtain assistance, but I suspect there may be more pre-trial conferences moving forward and that in those pre-trial conferences judges may make reference to the assistance taxpayers might receive from LITCs.  Keith

On Sunday, I was reviewing the Tax Court’s website and happened to notice a new press release that came out on Friday.  We’ve all seen previous changes to Tax Court operations as a result of COVID-19.  The court cancelled trial sessions, the clerk’s office closed, and the judges were working remotely, while encouraging the parties to continue trying to resolve cases.  Now the court is moving on to the next stage of adapting to the pandemic, as have other courts: remote trial sessions.

The press release itself was brief, just announcing the change and the issuance of orders with details:

The COVID-19 pandemic continues to present public health risks and challenges, particularly where multiple individuals come together in a courtroom. In response, and until further notice, Court proceedings will be conducted remotely. See Administrative Order 2020-02 regarding remote proceedings and Administrative Order 2020-03 regarding Limited Entries of Appearance. If you have any questions, contact the Public Affairs Office at (202) 521-3355.

Another press release the same day informed us that on June 1st the court will resume accepting requests for copies of documents from non-parties.  But the process will be more flexible than before; requests can be made by phone and received by email.  You won’t have to – because you can’t – visit the court building in person.

So, what all is changing and what is still unclear?  This is a preliminary, incomplete assessment – what stood out to me, based on a quick review.

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What we know so far

The decision to go to remote trial sessions is not surprising.  Most other courts are pursuing this as well, if they haven’t implemented yet.  The basic structure of remote trial sessions also will probably not be tremendously surprising if you’ve devoted much thought to it.  The court operated the way it did pre-COVID for (mostly) good reasons and those reasons would drive the design of remote sessions in a (mostly) foreseeable fashion.

Administrative Order 2020-02 moves the trial sessions to Zoom.  Parties scheduled for a particular trial session will receive, in the notice setting the case for trial, a meeting id and password.  Litigants will be able to access the trial session by computer without having a Zoom account; if they don’t have access to a computer, they apparently will be able to dial in by phone.  Just as non-parties are free to attend an in-person trial session, public access will be offered in the new regime.  That will be available by real-time audio; the court website will post dial-in information for each session.  (Presumably, the public access dial-in will only allow non-parties to listen, not to speak and participate.)

Some of the changes may have been harder to anticipate but will have significant effect on litigants.  The standing pretrial order (SPO) addresses these items, among others, specifically:

  1. Motions for summary judgment – no later than 60 days before the first day of the trial session.  This was not specified in the previous SPO, but is consistent with Rule 121.
  2. Motions related to discovery or stipulations – no later than 45 days before the first day of the trial session.  This was not specified in the previous SPO, but is consistent with Rule 70.
  3. Motions for Leave to File an Expert Report – no later than 30 days before the first day of the trial session.  This was not specified in the previous SPO, but is consistent with Rule 143(g).
  4. Motions for continuance – no later than 31 days before the first day of the trial session.  This was not specified in the previous SPO.  This seems stricter than Rule 133, which establishes only a presumption that a later motion would be deemed dilatory and denied.  Now parties would have to request an extension.
  5. Preparation for trial – the parties shall file either a Proposed Stipulated Decision, a Pretrial Memorandum, a Motion to Dismiss for Lack of Prosecution, or a Status Report, no later than 21 days before the first day of the trial session.  The Status Report appears designed only to report that the parties have settled but a Proposed Stipulated Decision could not be filed timely.  The previous SPO mentioned only a Pretrial Memorandum, if a basis for settlement had not been reached, no later than 14 days before the first day of the trial session.
  6. Stipulation of Facts – the parties shall file such no later than 14 days before the first day of the trial session.
  7. Proposed Trial Exhibits (not encompassed in the Stipulation of Facts) – may not be allowed into evidence unless filed not later than 14 days before the first day of the trial session.  This is consistent with the language in pre-trial orders for many years; however, the enforcement of this provision of the pre-trial order may become much more vigorous.

These requirements fall into three broad categories, all of which seemed designed to facilitate a quick, efficient calendar call.  There is only so much time you can spend in a Zoom meeting before your attention starts to flag.  First, simply making explicit in the SPO what was already in the Rules (items 1-3).  That seems to be the court trying to communicate those requirements to those who aren’t already familiar with the deadlines, hopefully only unrepresented taxpayers and not members of the tax bar.  Second, accelerating communications with the court from current timelines – the change from 14 days to 21 days before the trial session in item 5, and the stricter deadline in item 4. 

The third category establishes new deadlines for documents that sometimes were presented only at the calendar call itself: Motion to Dismiss for Lack of Prosecution (item 5), Stipulation of Facts (item 6), and unagreed trial exhibits (item 7).  Effectively, all documents will need to be filed in advance; handing the document to the trial clerk is no longer a simple process.  Along the same lines, Administrative Order 2020-03 requires representatives entering a limited appearance to file it electronically, unless exempt from e-filing requirements.  (There are also several other changes involving limited appearances from Administrative Order 2019-01, but that’s a topic for another day.)

The accelerated or new deadlines will take some getting used to for tax practitioners.  It may be significantly more difficult for petitioners, especially since the new Standing Pretrial Order for Small Tax Cases has similar requirements and deadlines.  The old Standing Pretrial Notice didn’t specify a deadline for the stipulation of facts and specified a Pretrial Memorandum only had to be submitted 7 days before the trial session.  And as we all know, very few unrepresented taxpayers filed a Pretrial Memorandum.

What don’t we know yet?

Probably a lot of things.  There are always a lot of problems that are not identified until after implementation of a new program and these changes certainly will encounter that.  The Tax Court judges put a lot of thought into these changes but it’s impossible to anticipate everything.  All you can do is prepare as best you can, implement, and then adapt when problems crop up.

But one “known unknown” did stand out to me on first reading Administrative Order 2020-02.  What do these changes mean for pro bono volunteers who attended in-person trial sessions to assist unrepresented taxpayers?

Pro bono volunteers don’t receive copies of the notice setting cases for trial unless they happen to already have a client scheduled for that trial session.  Will there be some process to disseminate the meeting id and password to them ahead of time?  Will they instead have to merely listen in through public access?  If so, how will they communicate to the judge or petitioners that they are present and available to assist?

Will separate Zoom meetings be set up, on the fly, to allow pro bono volunteers and petitioners to meet privately?  If so, who will match up this petitioner to that volunteer?  How will the meeting ids and passwords be communicated to them without allowing those listening in through public access to here and join the meeting?  How would the pro bono volunteer and petitioner invite Counsel into that private meeting in order to discuss possible settlement?

I assume the pro bono volunteers could, at the beginning of a private meeting, quickly e-file a limited entry of appearance and then gain access to documents filed in that case.  That would alleviate some of the problems associated with transferring documents between petitioner and volunteer.  Presumably that is one reason Administrative Order 2020-02 was issued concurrently with Administrative Order 2020-03.  Will someone e-filing a limited entry of appearance have immediate access to all documents on the docket?

This seems to have the potential to be a complicated, difficult process.  The court may have worked out these details already and we may hear more soon.  I’m currently part of groups working with IRS Counsel for two different Virtual Settlement Days, one for Dallas cases and the other for San Antonio and El Paso cases.  (Here is the Virtual Settlement Days Best Practices Guide, for those interested.)  Perhaps the process for those events can be adapted to the remote trial sessions. 

Or will the Virtual Settlement Days ultimately replace pro bono assistance at the trial sessions?  Particularly with the requirements in the new Standing Pretrial Orders, there will be an increasing need for assistance well in advance of the trial session.  That will be difficult to achieve; not all petitioners will independently contact a clinic based on the “stuffer notice” or request an appointment at a Virtual Settlement Day, even with the scarier Standing Pretrial Order.  But without early assistance, the Tax Court’s remote trial sessions will not work as effectively and low income, unrepresented taxpayers will be worse off.

Those are my observations and questions about the new regime.  What are yours?

Creating Tax Policy and Tax Procedure on the Fly

The current situation allows us to observe the creation of new tax procedures based on new polices in real time.  Listservs and web sites are alive with discussion of what to do as the IRS tries to figure out procedures in a matter of days after passage of legislation creating new and immediately applicable tax provisions in the middle of tax filing season with most of its employees sitting on the sidelines.  We all have empathy for the people at the IRS trying to push out procedures to address the new provisions while at the same time feeling frustration based on the lack of guidance. 

A recent exchange on the ABA Tax Section listserv for Pro Bono and Tax Clinics caught my eye as a good example of the types of issues practitioners seek to work out in order to guide clients.  Some of our recent posts written by Nina Olson, Carl Smith, Barbara Heggie and Bob Rubin also address these same types of concerns.  We welcome guest posts that raise procedural issues that need answers.  We hope that perhaps the blog can serve as another outlet for passing questions that need answering to those at the IRS trying hard to provide those answers. 

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It’s interesting, but not surprising, that many answers to the questions of procedure that require an immediate answer are driven not so much by policy as by computer capability.  Since the IRS has what some people might describe as a third world class computer system, some of the procedures that will apply will result from the quality, or lack thereof, of the computer system used by the IRS.  The computer capabilities at the IRS not only drive some of these decisions but are also hampering the IRS from having its employees work during this time when many are continuing to work from home.  Because many of the IRS employees do not have laptops they can use from home, they have been sent home not to work to help through this difficult time but just to sit.

Francine Lipman, William S. Boyd Professor of Law at University of Nevada, Las Vegas, William S. Boyd School of Law, writes first raising a few of the many unanswered questions concerning who will receive the rebates that the IRS will start sending out any day.

[w]e need guidance from US Treasury.

1) Will the IRS age adjust qualifying children to 2020? Or does a QC that is 16 in 2018 qualify for a $500 EIP if no 2019 tax return filed? And not qualify if a 2019 tax return is filed?

2) If one taxpayer claims a QC on her 2018 tax return and another claims the same QC on their 2019 tax return. What is the tie-breaker? 2019 > 2018? I do not believe they both get the $500 QC amount. What if someone else claims the QC in 2020?

3) If a taxpayer claims a 16 year old QC for 2018 and no 2019 tax return on record, will the 18 year old (former QC) nondependent get the full $1,200 when she files her 2020 income tax return or does she only receive $700 ($1,200 – $500)?

It seems to me that one long-standing rule of thumb that I believe will be applied to these EIPs is that the maximum amount of EIP per SSN will be $1,200. Thus, I believe these fact patterns will be interpreted to respect that long-standing guideline.

Responding to Francine, Bob Probasco, Director, Tax Dispute Resolution Clinic at Texas A&M University School of Law, responds.

Thanks, Francine.  There are those open questions and probably several others.

I suspect that the decisions – most of which have already been made or won’t be in time for advance refunds – will be driven by factors other than what makes sense from a tax law perspective.  They will be driven in part by:

● What has to be programmed now versus a year from now for processing 2020 tax returns

● Ease of programming in an antiquated system (Nina’s post on Procedurally Taxing, procedurallytaxing.com/…, Is particularly scary)

● What can be programmed and tested and have a relatively low likelihood of significant glitches when they flip the switch

That is, we need to think about these issues not just from a legal perspective and from looking at the desired results but also from a programming perspective, what can be accomplished.  That may turn out to be a bigger factor than equity and legal interpretation.

The IRS certainly was starting their programming efforts before the final legislation was enacted but I’m not sure how much of a jump they had.  And they’re aiming at sending out the first batch of payments (by direct deposit) in a week to 10 days.  That very likely means that the small teams of IT people and IRS attorneys and whoever else had to make very quick decisions without the normal level of vetting we expect for guidance.  They had no choice if they were going to meet the deadline.  They didn’t have time to think through and identify all the issues – heck, the experienced tax practitioners here are still identifying nuances and will be for quite some time – and some issues they identified may have been too difficult to program easily.

We can speculate, for example, whether the programming is structured to crunch all the information for all taxpayers, do cross-checks between different returns, before making the final decisions which returns get how much money.  That’s complex, but doable.  It might lead to inequitable results, of course. 

As a trivial example, right now when two divorced parents each claim the same qualifying child for the same tax year, the IRS may not identify the discrepancy and follow up until a year or so later.  At that point, there may be a correspondence exam and a long process – including Tax Court – before a final determination of which parent is entitled to claim the qualifying child.  Lots of due process.  We have a case like that now.  But in the context of the advance refunds, they need to make a determination before sending payments out this month.  There are only two choices that appear even feasible as a matter of programming.  A, apply the AGI tie-breaker rule automatically.  B, allow both parents the $500.  Alas, choice A (1) increases the complexity of the programming and (2) raises additional due process questions.  How does the losing parent challenge that?  That might be difficult to impossible other than through the audit process applied to the 2020 tax returns.  But that delays receipt of the money for someone who may really need it and may not even come up in 2020 if the qualifying child has “aged out.”  It also invites gaming the system, particularly since a parent who improperly claimed the qualifying child but got the $500 this month apparently would not have to give it back on the 2020 tax return.  (Is there an exception to the “no claw back” rule for improperly claiming a qualifying child, or was that primarily intended for changes in AGI?)

And I’m not at all sure what happens in that trivial example if the 2018 return was joint, parent A files a 2019 single return before the first batch of direct deposit advance refunds, and parent B files a 2019 single return after parent A receives the advance refund.  Is “first past the post” (in the horse racing, not electoral, sense) an equitable way to decide who gets the $500??

These kinds of issues abound.  The programming team won’t have identified all the issues, and won’t have identified all the nuances and potential problems arising from different solutions.  There’s no way they can/could in a very limited time.

They also will likely be pre-disposed to simple decision trees rather than complex, nuanced ones.  The latter is risky.  Several years ago, in my pre-law school career, I managed a small team (IT folks and accountants from the user group) on a systems development project.  That system was much more straight-forward than anything we’re talking about here and the volumes of data we were working with were several orders of magnitude less than what the IRS will be dealing with.  We spent over nine months on the project.  (Maybe more, this was at least 30 years ago and my memory is a little bit fuzzy.)  At the end, after extensive testing, we flipped the switch to go live – and it didn’t work.  The people at the IRS are a lot smarter than I am but the task they’re facing is also light years more difficult.  So I expect them to err on the side of simplicity rather than complexity/nuance.

A totally uneducated guess (and your guess is better than mine) for those examples you raised:

1. Seems the most likely to be addressed in the programming (not sure in which direction) if the age information is easily accessible from the Form 1040.  (I should know whether it is but I’m drawing a blank at the moment.)

2. Assuming they do a complete crunch of all the tax returns and cross-check before deciding the advance refund amounts – which itself is a herculean task – they can resolve that.  But it becomes a legal issue in addition to a programming issue, and either way they decide it will be subject to second-guessing.  What would be the logical basis for deciding one way or another?  I’m not sure there is one – it would have to be a fairly arbitrary choice.  They might even duck the question and give the credit to both; it will be – relatively speaking – a small subset of qualifying children, and overpaying might insulate them from a lot of criticism based on sympathetic taxpayers.  Then they will have more time to decide what to do when the 2020 tax return rolls around.

3. Depends on the resolution of #1?  I suspect that if this is an issue, they will take their time to decide what to do when the 2020 tax return rolls around.  This isn’t a decision that needs to be made this month.

And, one final thought.  We may not get “guidance” in the normal sense.  They’re making the decisions about the advance refunds – indeed, they already have.  We don’t need to know in order to apply for an advance refund in the normal sense of “apply.”  And I’m not sure they envision a mechanism for taxpayers to challenge the amount of their advance refunds.  In which case, we don’t need guidance in the normal sense for the challenge process.  All they do in the short term may be to tell us “if you can’t figure out how we arrived at the amount of the advance refund you received, here is our decision tree; but you can’t challenge it now.  We’ll provide more guidance in the next several months and by then it may have changed.”

Francine responded to Bob with the following brief message:

I agree 100% about [the] lack of forthcoming traditional “guidance.” Perfect is the enemy of the good here and the theory of second or even third, fourth best certainly applies now with a global pandemic and a corresponding economic free fall.

Thanks Bob and Francine for giving all of us issues to think about as we navigate how to guide clients in the absence of guidance from the IRS and thanks to everyone engaging in these types of discussions that may eventually impact decisions.  Thanks to the IRS employees working hard to implement legislation passed in the middle of the filing season and in the midst of extremely trying circumstances.  Do the best you can under a situation never faced before.

How Big Will My Recovery Rebate Be??

We welcome back guest blogger Bob Probasco.  Bob runs the tax clinic at Texas A&M but has many years of experience in accounting and law firms before taking on his current position.  This week we have been talking about offset and Bob raises another issue concerning offset that we have not discussed and that has not been discussed in the press concerning the CARES rebate.  We have made it clear that the CARES rebate passes by the normal offset provisions (except for child support) but Bob points out that maybe that overstates the way it will work.  Read on and let us know your thoughts.  Keith

PT has some recent outstanding posts by Carl Smith (Part I and Part II) and Nina Olson (Part I, Part II, and Part III) on the CARES Act, both generally and specifically concerning the Recovery Rebates (or “economic stimulus payments”).  If you haven’t read them yet, you should – I have a much better sense of the problems and likely results than I had before.  There has also been a lot of chatter recently on the Pro Bono & Tax Clinics community in ABA Connect, another great resource with very knowledgeable contributors from whom I’ve learned a lot.

Today, I want to discuss a question that I haven’t really seen mentioned elsewhere.  (Perhaps it has been, and I just haven’t been reading as widely as I’d like to during this hectic time.)  It concerns the amount of the advance refunds.  The impression many people have is that the advance refunds will only be offset against a taxpayer’s past-due child support obligations; otherwise, the taxpayer will receive the full amount. 

I’m not sure that’s correct.

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Section 2201(d) of the CARES Act states:

Any credit or refund allowed or made to any individual by reason of section 6428 of the Internal Revenue Code of 1986 (as added by this section) or by reason of subsection (c) of this section shall not be—

(1) subject to reduction or offset pursuant to section 3716 or 3720A of title 31, United States Code,

(2) subject to reduction or offset pursuant to subsection (d), (e), or (f) of section 6402 of the Internal Revenue Code of 1986, or

(3) reduced or offset by other assessed Federal taxes that would otherwise be subject to levy or collection.

That sounds pretty good and has rightly been praised as a huge improvement over the 2008 stimulus payments. 

Carl’s Part II post discusses how the IRS was able to keep those 2008 payments under the terms of offers in compromise (OICs).  The Second Circuit approved.  I’m not entirely sure whether the terms of an OIC would take precedence over § 2201(d) of the CARES Act, but it might.  However, there’s another possible exception to § 2201(d), resulting from the structure of the advance refunds.

New § 6428(f)(1) states that taxpayers who were eligible individuals for their 2019 tax return “shall be treated as having made a payment against the tax for [the 2019 tax year] in an amount equal to” what would have been allowed as a refundable credit for 2019 if § 6428 had applied to 2019.   Section 6428(f)(3)(A) then goes on to say:  “The Secretary shall, subject to the provisions of this title, refund or credit any overpayment attributable to this section as rapidly as possible.”  That’s the actual authority to make the advance refunds and seems patterned after § 6402(a).

Treating the advance refund amount as a payment and then authorizing a refund of any overpayment is the same method used for the 2008 stimulus payments.  (Carl quotes the 2008 version of § 6428 in the comments of his Part I post.)  There are some obvious advantages of this method.  The stimulus payments are classified as tax refunds and therefore: (a) not taxable income and (b) not “resources” for eligibility determinations for benefits and assistance under Federal programs or State programs partially financed by Federal funds.

It also appears to have a possible drawback.  It works well if there is no balance outstanding for the 2019 (or 2018 if no 2019 tax return was filed) tax year.  The advance refund amount, treated as a payment, is the same as the overpayment.  It also works well if there was a frozen refund for 2019, as the frozen refund would not be “attributable to” Section 6428; only the advance refund amount would be refunded.  But what if there were a balance owed by the taxpayer for 2019?

Here’s a simple example.  Sam has filed a tax return for 2019, which the IRS uses to determine the advance refund amount.  Sam wanted to file the return in order to get an advance refund but was unable to pay the entire tax liability shown on the return.  There was a $2,000 balance owed to the government.  The advance refund amount for Sam is $1,200, so the IRS records a $1,200 payment in the 2019 tax year.  And there is no overpayment to be refunded; instead, there is now an $800 underpayment.  Sam receives no money now or when filing the 2020 tax return because the $1,200 has been offset against the 2019 tax liability. 

That seems inconsistent with the spirit of § 2201(d) of the CARES Act, doesn’t it?  This is a time to get money to people who desperately need it, not to recover amounts they owe.  Is this an unintended consequence, that the drafters did not anticipate?  But the same thing can happen on the 2020 return, if there is no advance refund – the refundable credit will not be refunded in full if the return shows a net amount due from the taxpayer before the credit.  So, a similar result with the advance refund may be intentional, or at least a result that the drafters knew about.

Maybe I’m missing something here.  If not, this may be an unpleasant surprise for those taxpayers it affects – hopefully few in number – after hearing the information that has been shared publicly about the rebate and advance refund provision.