FTPB Update 04 - District Court Litigation Types (10/22/19)

I am doing the Updates differently, principally because I have learned how to do footnote links in the blog entry itself.  Accordingly, I have determined that printing the Updates as blog entries rather than separate pdfs will make it more useful to most readers.  I have created a page (to the right), titled FTPB Cumulative Update List with Links, here, that collects all updates in the context of the Table of Contents.

Caveat:  (i) Students using the Student Edition should ignore the footnotes here (just as I do not provide footnotes in the Student Edition; and (ii) the footnote number begin with 1 here rather than the footnote numbers in the text being revised.

Section Affected	Edition page numbers
Ch. 12.  Litigation    II.  Choices of Courts       B.  District Courts  2. Types of Tax Litigation In District Courts Replace the entire section (I highlight in red the revised wording)	Practitioner Ed. pp. 621-622 Student Ed. pp. 429-430

                        2.         Types of Tax Litigation In District Courts.

            District courts are courts of limited jurisdiction, meaning they can only hear cases authorized by the United States Constitution or federal statutes.  District courts have original jurisdiction for any case arising under federal statutes, the Constitution, or treaties,¹ and are specifically conferred jurisdiction for tax refund suits against the United States.  28 U.S.C. § 1346(a)(1) and § 7422(a).  Historical note: Prior to 1966, refund suits could also be brought against the Collector based on illegal exactions without invoking § 1346(a)(1) which was subject to some limitations in earlier periods;² hence a number of leading tax cases from the pre-1966 period are refund suits brought against the Collector. E.g., Lewis v. Reynolds, 284 U.S. 281 (1932).³

            I also note prominently the collection suit.⁴  The Government may bring a collection suit in the district court to reduce an assessment to judgment and to obtain judicial remedies with respect to the tax liability.  If the taxpayer has not by that time judicially contested the underlying tax liability, he or she can do so in that collection suit. ⁵ Sometimes a collection suit is combined with a refund suit.  The classic case is the so-called divisible tax case–best exemplified by the fairly common trust fund recovery penalty under § 6672.  As I  note elsewhere (pp.  ff.), this penalty is usually litigated by a refund suit.  The putative responsible person will pay a small amount to meet the jurisdictional prerequisite that there be a payment which could be refunded.  In the resulting refund suit, the Government will typically file a counterclaim for the balance of the amount that has been assessed.  That counterclaim is a collection suit that could have otherwise been brought independently by the Government to obtain a judgment for the unpaid tax.  The Government will pursue the matter as a counterclaim in order to get the putative responsible person's liability for all quarters concluded in one litigation.

            In addition, the district courts have a potpourri of other jurisdiction, examples of which include jurisdiction to quash an IRS formal document request (“FDR”),⁶ to order more disclosure of a written determination,⁷ to consider petitions for readjustment of partnership adjustments,⁸ jurisdiction to approve a levy on a principal residence,⁹ general jurisdiction to enter orders and judgments necessary or appropriate for the internal revenue laws,¹⁰ jurisdiction over summons enforcement proceedings,¹¹ actions to enforce a lien and declare a sale,¹² certain injunctions against persons abusing the tax system,¹³ wrongful levy suits where a third party claims his or her property was levied upon to pay another taxpayer’s taxes,¹⁴ declaratory judgments for § 501(c)(3) organizations,¹⁵ review of jeopardy assessments and levies,¹⁶ and so on and on.¹⁷  I discuss some of these in other sections of this book.

            For purposes of this course in this section, please focus your attention on the refund suit jurisdiction and its collection suit counterpart.

Pfizer Suit for Overpayment Interest Transferred to CFC for Tucker Act Jurisdiction (9/12/19; 9/25/19)

I write today on the recent decision in Pfizer, Inc. v. United States, 939 F.3d 173 (2d Cir. 2019), here.  Pfizer involves overpayment interest, normally one of the more boring issues in the tax law.  It also involves some arcane rules, and finally involves taxpayer forum shopping, one of the arts of the tax litigator's trade (perhaps not exciting but certainly important).

I start with some basic background.  Section 6611(a), here, says unequivocally that "Interest shall be allowed and paid upon any overpayment in respect of any internal revenue tax."  There is no question that a taxpayer with an overpayment is entitled to interest on the overpayment -- at least generally (that qualifier "generally" suggests exceptions that play prominently in this blog entry).

Other rules that come in play are:

1.  § 6611(b)(2) says that interest is due 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."  This is called the "back-off" period and, as stated may be less than 30 days.  Most importantly, if the refund check is not accepted by the taxpayer upon tender, overpayment interest no longer accrues beyond the back-up date.  [JAT note:  This back-off period did not seem to apply in Pfizer, and I include it as a step to get to the applicable section discuss in paragraph 2.]

2.  § 6611(e)(1) says that no overpayment interest may be paid if the refund is made within 45 days of the due date (determined without regard to extensions), or, if later, the actual filed date of the return reporting the overpayment.

Pfizer filed a timely (on extension) 2008 return on 9/11/09 reporting a net overpayment of $499,528,499 (after application of an amount to its next year estimated tax).  The IRS prepared six checks for the overpayment aggregating to that amount.  The IRS apparently mailed the overpayment refund checks on or around October 19, 2009 (well within § 6611(e)(1)'s 45 day interest-free period from the date of filing, so the checks would have aggregated $499,528,499 without any overpayment interest), but the checks were never delivered to Pfizer.  Pfizer started contacting the IRS about the overpayment refund in December and continued thereafter, with the IRS canceling the checks and then depositing the amount of the overpayment refund claim ($499,528,499) directly into Pfizer's account on March 19, 2010 just over one year from the original overpayment (the due date of the return without extensions).

The interest on the period from the normal due date (March 15, 2009) to Pfizer's actual receipt of the overpayment funds was substantial ($8,298,048, even with the reduced rate for corporate overpayments), so Pfizer wanted to pursue the matter.  It did so by filing a claim for the overpayment interest "three years after receiving the refund."  (I note in the comments below some issues about how overpayment interest claims are made, but the Pfizer Second Circuit opinions do not address that issue, so I move on here; suffice it to say that, somehow, Pfizer made the claim for overpayment interest.  I will say that, at least potentially relevant to the concurring opinion, there is no explanation as to why Pfizer waited so long to present the formal claim, although the IRS apparently told Pfizer that the statute of limitations on the claim for overpayment interest was six years rather than the two year period for refund claims.)  The IRS denied the claim for overpayment interest based on the issuance of the overpayment checks in October 2009, which checks were apparently lost in the mail before delivery to Pfizer.  Pfizer then filed the suit for the overpayment interest.

There is no question that Pfizer could have filed the suit in the Court of Federal Claims (CFC) under Tucker Act jurisdiction.  (More on this later.)  Instead, Pfizer filed in the district court for SDNY.  The reason for that was to obtain favorable precedent in the Second Circuit, Doolin v. United States, 918 F.2d 15 (2d Cir. 1990), here, that held that a refund check not delivered to the taxpayer had not been tendered and thus did not suspend overpayment interest under § 6611(b)(2) (which stops interest after the refund check is tendered to the taxpayer whether or not the refund check is cashed by the taxpayer).  While Pfizer involved § 6611(e)(1), the same types of considerations as the Court invoked in Doolin would seemingly apply.  The CFC had no such favorable precedent, but also had no unfavorable precedent.  Still, if the taxpayer could find appropriate jurisdiction in the district court, then it had seemingly a winner under Doolin.  Pfizer is thus a classic example of taxpayer forum shopping.

District Court holds the § 6707 Tax Shelter Reporting penalty Not Divisible (3/12/16)

I previously reported on a case in the Court of Federal Claims, Diversified Group Inc. v. United States, 123 Fed. Cl. 442, 2015 U.S. Claims LEXIS 1276 (2015), here, appeal docketed, No. 16-1014 (Fed. Cir. October 6, 2015), here, that held that the § 6707 penalty was not divisible for purpose of the Flora, here, full payment rule for refund suits.  See Flora Full Payment Rule and the Rough Edges (Federal Tax Procedure Blog 9/17/15), here.  In Pfaff v. United States, Civil Action No. 14-cv-03349-PAB-NYW, 2016 U.S. Dist. LEXIS 30844 (D. Colo. Mar. 10, 2016) [no link available], in a much shorter opinion, the District Court reached the same result that, in my judgment, does not provide anything not covered in the Diversified Group opinion.

Court Rejects Duty of Clarity Argument Where IRS Had Provided Clarity (3/26/15)

In Bombardier Aero. Corp. v. United States, 2015 U.S. Dist. LEXIS 34801 (D. Tex. 2015), here, Bombardier Aerospace Corporation ("BAC") was a  provider of "management services to aircraft owners and leaseholders of fractional interests in aircraft (collectively, "Aircraft Owners") through its Flexjet program."  BAC was compensated by various fee arrangements, including monthly management fees ("MMF") for certain fixed costs -- "costs associated with ownership of the aircraft, such as insurance, inspection, crew salaries, crew training, aircraft hangaring, and scheduling costs."  The other fees BAC charged were variable operational costs dependent upon use.

Section 4261, here, imposes an excise tax on "taxable transportation."  In this discussion this is sometimes referred to as the "FET."  BAC paid the tax on the required the users to pay it the tax on the variable services and remitted those payments to the IRS.  BAC did not collect the tax from users to pay on the MMF and thus did not initially remit those taxes to the IRS.  In two prior audits, the IRS did not require MMF to pay the FET.  During the audit in question, however, the IRS determined that BAC was liable for the FET.  BAC paid a portion of the tax and sued for refund.  The Government counterclaimed for the balance.

The tax in question was not BAC's tax - it was the user's.  In cases where a collection agent is required to collect and pay over another person's tax, Section 6415(a), here, permits the collection agent to maintain a refund suit provided that the collection agent has either refunded the collected tax to the taxpayer upon whom it was imposed or obtained the consent of that taxpayer to obtain the refund.  Of course, the taxpayer -- the user -- had never paid the portion of the tax BAC paid, so BAC could not meet the first requirement.  And BAC had not obtained the consent of the taxpayers, so BAC failed procedurally to meet that requirement for a refund.  (There is some discussion of the issue of when the consent procedural requirement must be met, but I don't want to discuss that issue in this blog.)

I focus here on certain arguments that BAC made as to IRS past practice and IRS's failure to assert the tax in prior audits of BAC.

BAC's first argument was that the IRS was precluded "by the Duty of Clarity from recovering FET on MMF."  I don't recall that I had encountered the alleged "Duty of Clarity" before.  Apparently subsumed in this rubric was the following specifics:

Relationship Between Tax Court and Refund Fora - Burden to Prove Fraud (10/20/12)

In my Federal Tax Procedure course (and I presume similar courses taught by others), we cover the principal fora to litigate tax disputes.  Historically, tax disputes were litigated in the district courts and sometimes in the predecessor to the Court of Federal Claims.  With the enactment of the broader based income tax after the 16th Amendment, Congress felt that there were two key problems with the refund fora -- (i) the requirement of prepayment and (ii) the sometimes daunting technicalities of pleading and proof particularly in the district courts prior to adopt Federal Rules.  Accordingly, Congress created the Board of Tax Appeals to offer a prepayment tax litigation forum and a less technically daunting litigation experience.

The Board of Tax Appeals and its predecessor Tax Court occasionally struggled with the issue of the precise relationship of its jurisdiction to resolve tax disputes in comparison to that of the district court.  This struggled evidenced itself in the issue of whether the Tax Court had jurisdiction to consider equitable concepts such as equitable recoupment that district courts could apply in resolving tax disputes.  In our class, I assign Estate of Branson v. Commissioner, 264 F.3d 904 (9th Cir. 2001) here, that presents this issue well.  The Branson decision is by Judge Sneed (Wikipedia entry here), formerly a tax professor at several law schools and then Dean at Duke before being appointed to the Ninth Circuit.  There are technical jurisdictional issues involved because the Tax Court is a court of limited jurisdiction whereas the district court is a court of general jurisdiction.  However, I thought the issue should always turn upon whether, given the purpose of the Tax Court (and its predecessor Board of Tax Appeals), different substantive results should obtain in the district court than in the Tax Court when these equitable concepts otherwise could apply.  I think that there is no evidence that Congress intended such different results.  The Tax Court now has these powers.

Regarding the differences in the Tax Court and the refund fora, I just re-read a delightful decision by Judge Henry Friendly of the Second Circuit Court of Appeals.  Judge Friendly was one of the leading jurists of all time (Wikipedia entry here).  In Paddock v. United States, 280 F.2d 563 (2d Cir. 1960), here, the Court held that the same requirement that the Government prove fraud applied in the district court as applied in the Tax Court.  Congress expressly so provided as to the Tax Court in the predecessor to Section 7454(a) but did not make that provision applicable to the other fora.  So, in this refund case, the Government rotely chanted the "money had and received" refund burden in Lewis v. Reynolds, 284 U.S. 281 (1931), here, that the taxpayer must prove the right to refund, including the amount, and thus argued that the taxpayer must prove the absence of fraud where the taxpayer wants a refund of a civil fraud penalty he paid.  Essentially, working in the reverse, Judge Friendly was persuaded that Congress could not have wanted the IRS to bear that burden in a Tax Court case but not in a refund suit.

DOJ Tax Authority to Settle Tax Cases in Joint Committee Cases (9/18/12)

In United States v. United States District Court for the Northern Mariana Islands, ___ F.3d ___, 2012 U.S. App. LEXIS 19134 (9th Cir. 2012), here, the Ninth Circuit held that, under the facts, the district court had abused its discretion in ordering, in a large tax refund suit, that a Government official with authority to settle the case be present at a compulsory settlement conference.  At the district court, in opposing that order at the trial letter, the Government stated:

because of the size of Baldwin's claim, the lowest-ranking official authorized to settle this case was the officer in charge of the Tax Division of the Department of Justice, the Assistant Attorney General of the Tax Division ("Assistant Attorney General"), fn3 and her authority is limited by the requirement that the Congressional Joint Committee on Taxation ("Joint Committee") reviews and has no adverse criticism to the proposed refund or settlement. fn4 See 28 C.F.R. §§ 0.160-.0162; see also Rules and Regulations, 76 Fed. 1Reg. 15212-02 (Mar. 21, 2011). The government argued that the personal participation of the Assistant Attorney General should not be required and proposed instead that the settlement conference be personally attended by the trial attorneys with primary responsibility for the handling of the case, with the Section Chief of the Tax Division's Office of Review ("Section Chief") available for consultation by telephone during the settlement conference. The Section Chief is authorized to accept offers in compromise in cases against the United States in which the amount of the government's concession, exclusive of statutory interest, does not exceed $1.5 million. See Rules and Regulations, 76 Fed. Reg. 15212-02 (Mar. 21, 2011).