On December 11, 2016, I posted an 11th hour plea for assistance with a project to file refund claims for individuals who had received monetary awards resulting from wrongful incarceration. A provision of the December 2015 PATH Act, amending IRC 139F, allowed the exclusion of qualifying payments for wrongful incarceration and provided a one-year window to claim federal tax refunds for those individuals who had previously received such an award and paid taxes on it before the passage of the exclusion. Thank you to those who responded to the plea for assistance.
Kelley Miller, the leader from the group making the plea for assistance, the Exonerees Tax Assistance Network, told me that several PT readers stepped forward to help. At the time of the plea the clock was about to run for making the refund requests. In addition to trying to submit all of the refund claims before the deadline established by the PATH Act, an effort was underway to get an extension of time within which individuals with the refund possibility might make their requests. Kelley also told me that “the extender legislation got through the House on the consent calendar but time ran out in the Senate—the bill got to Committee and never got out. Ironic, sadly, as Senator Schumer was one of the original main supporters of the legislation. There may be efforts to re-introduce before the end of the month.”
A recent case interpreting the legislation and an FAQ on the issue from the IRS give me the opportunity to discuss the issue further in case you have a client who has made one of these claims or you have a client who would like to make one of these claims should the time get extended.
The IRS published an FAQ on June 16, 2016 explaining the circumstances in which someone would qualify for the refund. It explained that the exclusion applied to compensatory or statutory damages and restitution received by a wrongfully incarcerated individual in connection with the covered offense. It set out three requirements for qualification one of which must be met: 1) receipt by the taxpayer of a pardon, grant of clemency or grant of amnesty for the covered offense due to innocence of the charge; 2) reversal or vacation of the judgment of conviction for the covered offense and dismissal of the indictment, information, or other accusatory instrument; or 3) reversal or vacation of the covered offense and a finding of not guilty after a new trial. The legislation allowed for an exclusion from federal taxes for any payment received by the taxpayer even if received in a prior year which essentially opened up the statute of limitations for claiming refunds during the window created by Congress in the PATH Act. The FAQ also explains the way the taxpayer should make the claim, where it should be sent and the time limit for making the claim which was December 19, 2016. In addition, it states that an award received by a spouse, child, parent, or other individual for a derivative claim can also qualify for the exclusion. This last issue presented itself in the case of Elkins v. United States (N.D. Ohio December 16, 2016).
In Elkins, the district court heard an appeal from the bankruptcy court in which the wife and child of the individual incarcerated brought an action for a refund based on the derivative loss of consortium due to wrongful incarceration. The Circuit Court considering an earlier phase of the case provided a detailed discussion of the underlying facts concerning the wrongful incarceration. Elkins v. Summit County, Ohio, 614 F.3d 671 (6th Cir. 2010). Because thinking about the way criminal cases can go wrong is important to understanding why excluding monetary awards to exonerees is important, I provide some of those details here.
In 1998, Mr. Elkins’ mother-in-law was raped and murdered in her home in Ohio. Mr. Elkins’ six-year-old niece was also assaulted and raped. Based on the six-year-old’s statement, the perpetrator looked like her uncle, Mr. Elkins, and the police arrested him. Shortly afterward, Mr. Elkins was indicted on charges of aggravated murder, attempted aggravated murder, rape, and felonious assault.
While the Elkins investigation was ongoing, another man, Mr. Mann, was arrested. During the arrest, Mr. Mann – who was drunk – asked an officer, “Why don’t you charge me with the Judy Johnson murder?” The patrol offer wrote an interdepartmental memorandum, in compliance with his training and protocol, regarding Mr. Mann’s statement which was directed to the department in charge of the Elkins investigation. However, the memorandum was not disclosed to Elkins or the prosecution, and was never produced.
At trial, the six-year-old identified Mr. Elkins as the perpetrator; however, Mr. Elkins presented substantial evidence that someone else committed the crime. Mr. Elkins’ then-wife testified that Mr. Elkins had been at home with her, forty miles away, at the time of the crime. Other witnesses testified that they had spent time with Mr. Elkins throughout the evening until just before the time the murder occurred. Moreover, police officers recovered hairs from the scene that did not match Mr. Elkins’ DNA. The officers were unable to find a match, and a jury convicted Mr. Elkins on all of the charges, sentencing him to life imprisonment without parole.
In 2002, the six-year-old (or, thirteen-year-old) recanted, yet the state did not reverse Mr. Elkins’ conviction. Mr. Elkins began to suspect that Mr. Mann – who was in the same prison facility – was the person responsible for the murder, and was able to obtain a DNA sample from him. Subsequent DNA testing revealed that Mr. Mann’s DNA matched the DNA found at the scene. After an investigation, Mr. Elkins was released from prison, after having served seven years, Mr. Mann pled guilty to the murder, and the case against Mr. Elkins was dismissed. The Summit County Court of Common Pleas found that Elkins was wrongfully imprisoned, and in a wrongful imprisonment settlement, the State of Ohio awarded him $1,075,000.
In the bankruptcy case in which the debtor’s claim arose, the IRS argued that Mr. Elkin’s wife and son did not qualify for a refund because they claim they sought to exclude from income and on which they based their claim for refund did not meet the definition of the statute because it was based on loss of consortium rather than wrongfully incarceration. The bankruptcy court agreed with the IRS, and the claimants appealed.
The claimants argued that the language of the statute applies to all civil damages and awards related to wrongful incarceration and not just those awards given to the individual wrongfully incarcerated. The district court upheld the determination of the bankruptcy court, finding that the statutory language which stated “in the case of any wrongfully incarcerated individual” defined the person to whom the statute applies and limits the special rule excluding the award from tax to the incarcerated individual and not to derivative claimants. The court reached this determination based on the plain language of the statute.
Alternatively, the claimants argued that because their proof, as derivative claimants, for damages under state law mirrored the proof required by the wrongfully incarcerated individual they should recover for that reason. Since state law did not distinguish between direct and derivative claimants, they argued that the tax law should not treat them differently. The district court pointed out that the tax result at issue here was a federal tax result stemming from a federal statute that had a distinct basis for existence from the underlying state based claim for damages. The court, therefore, rejected this argument as well. The claimants made two more similar arguments which the court rejected as well. The court noted that only one other case mentions IRC 139F. I do not know if the claimants will appeal the district court decision to the circuit.
Unless Congress does extend the statute, all of the claims have now been filed but it could take a couple of years to work out the litigation that will accompany the claims where the IRS issues a denial. Kelley’s group is already working on one case in which the claim was denied. They are waiting to see if the other claims filed will result in refunds or if additional litigation will be necessary. The group is also continuing to seek a statute extension because one year was not enough time for them to reach all of the exonerated individuals and advise them of their right to file a claim