Court Reverses District Court on Summary Judgment Holdings That (i) Taxpayer Owed Tax and Was Not Due a Refund and (ii) that, Even if Taxpayer Owed Tax, Taxpayer Did Not Owe Interest Because of Reasonable Cause (11/24/24)

In Rockwater, Inc. v. United States, ___ F.4th ___, 2024 U.S. App. LEXIS 29135 (11th Cir. 2024), CA11 here and GS here, the Court (i) reversed the district court’s summary judgment holding that the taxpayer’s peanut trailers were not “off-highway transportation vehicles” exempt from the federal excise tax on the first sale, (ii) reversed the district court’s holding on summary judgment that the taxpayer had reasonable cause not paying and thus was not subject to interest on the tax liability, and (iii) let stand the district court’s holding on summary judgment that, even if the taxpayer owed the tax, it had reasonable cause that exempted it from the penalty delinquency penalty. The Government did not appeal the latter penalty holding.

The Government appealed the liability holding ((i) above) but did not separately appeal the interest holding, on the basis that, interest on underpaid tax is mandatory and not subject to any reasonable cause exception; in other words, should the Government prevail on the tax due holding, it necessarily required it to have interest on the tax thus due.

The taxpayer’s liability for the tax offers no particularly interesting tax procedure issues. The case was a straight-forward refund suit. However, I did note one point in the majority opinion that seems to be a feint rather than necessary or even appropriate to explaining its holding.  The Court says at the beginning of its section explaining its holding: 

          In tax refund lawsuits, the IRS Commissioner's assessment has "the support of a presumption of correctness." Welch v. Helvering, 290 U.S. 111, 115 (1933). "[E]xemptions from taxation are to be construed narrowly." Mayo Found. for Med. Educ. & Rsch. v. United States, 562 U.S. 44, 59-60 (2011) (citation and quotation marks omitted).

The Court reaches its holding of liability for the tax based on straight-forward interpretation of the statute and regulation, with no seeming need for or benefit from any presumption of correctness or narrow construction for exemptions.

This is a similar phenomenon often appearing in Tax Court cases where, sometimes at significant length, the Tax Court thrashes around burden of proof principles sometimes without nuance but then holds that, in any event, that thrashing around was not really necessary because it finds all the dispositive facts by a preponderance of the evidence. (Thus, although not technically necessary, the thrashing around on burden of proof does signal to the Court of Appeals that the Tax Court judge thought about burden of proof, but at the risk that a Court of Appeals may not be particularly impressed if the thrashing around is not consistent with the Court of Appeals’ or some panel member’s thinking on burden of proof.)

Judge Luck’s dissent to the interest holding is interesting. Judge Luck would have denied the Government interest because it had not specifically contested the lower court holding denying interest on the tax due. As readers of this blog know, interest is automatically imposed by the statute if tax is due. Period. For that reason that interest is automatic if tax is due, the majority thought devoted a whole section, spanning Slip Op. 17-20 (somewhat repetitive) to address Judge Luck’s argument based on principals of appellate procedure as to how parties preserve arguments on appeal. The majority’s key points are: (i) the taxpayer never asked at trial or appellate level for the interest holding to be sustained if the tax were held to be owed and (ii) the statute requires interest. The majority says the dissent is “nonsensical.”

I understand the dissent’s reasoning but not sure how the seeming conflict should be resolved—a result contrary to law (no interest) because of a perceived procedural foot-fault where no one contested the clear requirement of law. I do understand the concept that parties should preserve arguments. But where the law is so clear that tax requires interest, an entry of judgment denying the principal tax refund should necessarily require denial of a refund for the interest paid on that tax due. It seems to me that this is not a case for applying procedural foot faults. But he is the judge and I am not; except that he is dissenting.

Judge Luck’s Wikipedia page is here. He seems to be a well-qualified judge and was so rated by the ABA.