Government Argues Couple Failed to File Timely Refund Claim

ALI M. TAHA, on behalf of his deceased brother and his brother's wife,
Plaintiff-Appellant
v.
UNITED STATES,
Defendant-Appellee

IN THE UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT

ON APPEAL FROM THE JUDGMENT OF THE
UNITED STATES COURT OF FEDERAL CLAIMS IN
NO. 17-1174; SENIOR JUDGE CHARLES F. LETTOW

BRIEF FOR THE APPELLEE

DAVID A. HUBBERT
Acting Assistant Attorney General

JOAN I. OPPENHEIMER  (202) 514-2954
MATTHEW S. JOHNSHOY (202) 616-1908
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

May 10, 2021

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TABLE OF CONTENTS

Table of contents

Table of authorities

Statement of related cases

Glossary

Jurisdictional statement

Statement of the issue

Statement of the case

Summary of argument

Argument

Conclusion

Addendum

Certificate of compliance

TABLE OF AUTHORITIES

Cases:

Adelson v. United States, 737 F.2d 1569 (Fed. Cir. 1984)

Agostini v. Felton, 521 U.S. 203 (1997)

Anderson v. United States, 966 F.2d 487 (9th Cir. 1992), superseded by regulation, Treas. Reg. § 301.7502-1(e)(2)

Auer v. Robbins, 519 U.S. 452 (1997)

Baldwin v. United States, 921 F.3d 836 (9th Cir. 2019), cert. denied, 140 S. Ct. 690 (2020)

Bozeman Financial, LLC v. Federal Reserve Bank of Atlanta, 955 F.3d 971 (Fed. Cir. 2020)

Casa de Cambio Comdiv S.A., de C.V. v. United States, 291 F.3d 1356 (Fed. Cir. 2002)

Cenex, Inc. v. United States, 156 F.3d 1377 (Fed. Cir. 1998)

Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984)

Computervision Corp. v. United States, 445 F.3d 1355 (Fed. Cir. 2006)

Corus Staal BV v. United States, 502 F.3d 1370 (Fed. Cir. 2007)

Crook v. Commissioner, 173 F. App'x 653 (10th Cir. 2006)

Davis v. United States, 230 F.3d 1383, 2000 WL 194111 (Fed. Cir. Feb. 16, 2000)

Deutsch v. Commissioner, 599 F.2d 44 (2d Cir. 1979)

Diaz v. United States, 853 F.3d 1355 (Fed. Cir. 2017)

Erfurth v. Commissioner, 77 T.C. 570 (1981)

F.D.I.C. v. Meyer, 510 U.S. 471 (1994)

Facebook, Inc. v. Windy City Innovations, LLC, 973 F.3d 1321 (Fed. Cir. 2020)

Fitzgerald v. Dep't of Homeland Sec., 837 F.3d 1346 (Fed. Cir. 2016)

Henke v. United States, 60 F.3d 795 (Fed. Cir. 1995)

Hillman v. Maretta, 569 U.S. 483 (2013)

Hollmer v. Harari, 681 F.3d 1351 (Fed. Cir. 2012)

Jones v. United States, 226 F.2d 24 (9th Cir. 1955)

Kelley v. Secretary, U.S. Dept. of Labor, 812 F.2d 1378 (Fed. Cir. 1987)

Kisor v. Wilkie, 139 S. Ct. 2400 (2019)

Lockheed Martin Corp. v. United States, 210 F.3d 1366 (Fed. Cir. 2000)

Maine Medical Center v. United States, 675 F.3d 110 (1st Cir. 2012)

Estate of Mann v. United States, 731 F.2d 267 (5th Cir. 1984)

Martinez v. United States, 101 Fed. Cl. 688 (2012)

Mayers v. Merit Systems Protection Board, 693 F. App'x 902 (Fed. Cir. 2017)

Merlo v. Commissioner, 492 F.3d 618 (5th Cir. 2007)

Miller v. United States, 784 F.2d 728 (6th Cir. 1986)

Montgomery v. Commissioner, 127 T.C. 43 (2006)

Moyer v. United States, 190 F.3d 1314 (Fed. Cir. 1999)

Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967 (2005)

Ottawa Silica Co. v. United States, 699 F.2d 1124 (Fed. Cir. 1983)

Philadelphia Marine Trade Assoc.-Int'l Longshoremen's Ass'n Pension Fund v Commissioner, 523 F.3d 140 (3rd Cir. 2008)

Prussner v. United States, 896 F.2d 218 (7th Cir. 1990)

Rios v. Nicholas, 490 F.3d 928 (Fed. Cir. 2007)

Rockwell Int'l Corp. v. United States, 549 U.S. 457 (2007)

Rosengarten v. United States, 181 F. Supp. 275 (Ct. Cl. 1960)

Sage Prods., Inc. v. Devon Indus., Inc., 126 F.3d 1420 (Fed Cir. 1997)

SAS Institute, Inc. v. Iancu, 138 S. Ct. 1348 (2018)

Savitz v. Peake, 519 F.3d 1312 (Fed. Cir. 2008)

Schlafly v. Saint Louis Brewery, LLC, 909 F.3d 420 (Fed. Cir. 2018)

Sorrentino v. Internal Revenue Service, 383 F.3d 1187 (10th Cir. 2004)

Stephens v. United States, 884 F.3d 1151 (Fed. Cir. 2018)

Syed v. M-I, LLC, 853 F.3d 492 (9th Cir. 2017)

Taha v. United States, 757 F. App'x 947 (Fed. Cir. 2018)

TRW Inc. v. Andrews, 534 U.S. 19 (2001)

United States v. Chestman, 947 F.2d 551 (2d Cir. 1991)

United States v. Dalm, 494 U.S. 596 (1990)

United States v. Generes, 405 U.S. 93 (1972)

United States v. Home Concrete & Supply, LLC, 566 U.S. 478 (2012)

United States v. Johnson, 529 U.S. 53 (2000)

United States v. Lombardo, 241 U.S. 73 (1916)

Walby v. United States, 957 F.3d 1295 (Fed. Cir. 2020)

Whipple v. Commissioner, 373 U.S. 193 (1963)

Estate of Wood v. Commissioner, 909 F.2d 1155 (8th Cir. 1990)

Statutes:

15 U.S.C. § 1681p

Internal Revenue Code (26 U.S.C.):

38 U.S.C. § 7266

Technical Amendments Act of 1958. Pub. L. No. 85-866, 72 Stat. 1606, 1665, § 89(a)

Miscellaneous:

Treasury Regulations (26 C.F.R.):

§ 1.166-(5)

§ 1.166-1(c)

§ 1.166-5(b)

§ 1.166-5(b)(2)

§ 1.172-(3)(a)(2)(ii)

§ 1.172-(3)(a)(3)(ii)

§ 1.172-(3)(a)(2)

§ 1.172-(3)(a)(3)

§ 301.6402-2(b)(1)

§ 301.6402-3(a)(5)

§ 301.7502-1

§ 301.7502-1(c)(1)(iii)

§ 301.7502-1(c)(2)

§ 301.7502-1(e)

§ 301.7502-1(e)(2)

§ 301.7502-1(e)(2)(i)

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STATEMENT OF RELATED CASES

This case was previously before this Court as No. 18-1879 and was decided by Judges Reyna, Taranto, and Hughes. See Taha v. United States, 757 F. App'x 947 (Fed. Cir. 2018).

Counsel for the United States are unaware of any other related cases or any case that may directly affect or be directly affected by this Court's decision in the pending appeal.

GLOSSARY

Acronym	Definition
Appx	Joint Appendix
Br.	Appellant Ali Taha's opening brief on appeal filed on behalf of Mohamad Taha (deceased) and Sanaa Yassin
CFC	United States Court of Federal Claims
the Code	Internal Revenue Code (26 U.S.C.)
Government	United States-Defendant-Appellee
I.R.C.	Internal Revenue Code (26 U.S.C.)
IRS	Internal Revenue Service
RCFC	Rules of the United States Court of Federal Claims
Taxpayers	Mohamad Taha and Sanaa Yassin
Treas. Reg.	Treasury Regulation (26 C.F.R.)

JURISDICTIONAL STATEMENT

Mohamed Taha and Sanaa Yassin (“taxpayers”) timely filed joint income tax returns for 2002 and 2003. (Appx980-985, Appx989-992, Appx1150-1160.)¹ Taxpayers filed an amended 2002 tax return seeking a refund for 2002 in November 2007. (Appx996-997.) Taxpayers also allege they filed an amended 2003 tax return that sought a refund for 2003 at the same time. In December 2007, the IRS disallowed the 2002 refund claim. (Appx981.) The IRS has not disallowed the 2003 refund claim. On November 1, 2009,  taxpayers filed an amended 2004 tax return seeking a refund of the taxes paid in 2002 and 2003. (Appx998-1000.) The IRS disallowed the 2004 refund claim in 2012. (Appx987.) 

On May 10, 2017, taxpayers sued in district court for a refund of taxes paid in 2002 and 2003, based on their 2002, 2003, and 2004 refund claims. (Appx14, Appx35.) The case was transferred to the Court of Federal Claims (“CFC”). (Appx14.)

The CFC dismissed the case for lack of subject-matter jurisdiction as to all years and later clarified its order as to 2003. (Appx175-184.) Taxpayers appealed. (Appx16.) This Court affirmed the CFC's dismissal for 2002 and 2004 but reversed and remanded for 2003. (Appx100-111.) Taha v. United States, 757 F. App'x 947 (Fed. Cir. 2018) (“Taha I”).

On April 1, 2020, the CFC held that taxpayers had not proved they had timely filed a claim for refund for 2003 and dismissed the case for lack of jurisdiction. (Appx1-10.) Taxpayers' first motion for reconsideration was timely filed on April 23, 2020, and denied on May 1, 2020. (Appx23-24.) Taxpayers timely appealed on June 26, 2020. (Appx25.) This Court has jurisdiction pursuant to 28 U.S.C. § 1295(a)(3).

STATEMENT OF THE ISSUE

Whether the CFC properly dismissed the 2003 refund claim for lack of jurisdiction.

STATEMENT OF THE CASE

A. Overview

Taxpayers filed a refund suit as to tax years 2002, 2003, and 2004 that the CFC dismissed for lack of jurisdiction. (Appx175-184.) Taxpayers appealed that dismissal, and this Court affirmed as to 2002 and 2004 but reversed and remanded as to 2003. (Appx100-11.) Taha v. United States, 757 F. App'x 947 (Fed. Cir. 2018) (“Taha I”). After a trial as to 2003, the CFC again held that it lacked subject matter jurisdiction over 2003. (Appx1-10.) Taxpayers appealed. (Appx25-27.)

B. Background

Taxpayers resided in California from 2002 through 2004, during which time Mohamad Taha was unemployed.² (Appx317, Appx989-990, Appx1150-1160.) In 2002, Mohamad Taha was given a 10% interest in Atek Construction, Inc. (“Atek”), an S Corporation, by his brother, Ali Taha. (Appx199, Appx305-308.) Mohamad Taha's only role with Atek was as a shareholder; he did not receive a salary, hold any titles, or provide any services to the company. (Appx317-319.)

Mohamad Taha had income from Atek in 2003, but Atek retained all shareholder earnings that year. (Appx314, Appx1152-1153.) Taxpayers paid income tax of $5,604 in 2003 based on Mohamad Taha's share of Atek's retained earnings. (Appx1151.) Atek experienced financial difficulties in 2004 and was eventually dissolved without ever paying additional amounts to shareholders. (Appx201-202, Appx237, Appx337-338.)

Taxpayers timely filed a joint income tax return for 2003 in April 2004. (Appx1150-1160.) They also claimed to have filed an amended 2003 return in November 2007 that would have served as a claim for refund for 2003 at the same time they filed an amended 2002 return. (Appx202, Appx213, Appx264-65.) Taxpayers assert that the shareholder's earnings retained by Atek for 2003 constituted loans to the company, represented by a promissory note (Appx1165), that became worthless in 2004 when Atek experienced financial difficulties. (Appx201-202, Appx237, Appx320-324, Appx337-338.)

Since the IRS has no record of receiving taxpayers' amended 2003 return, the Government denies that taxpayers ever filed a claim for refund for 2003. (See Appx983-85 (certified account transcript for 2003).) Thus, the Government does not contend that the IRS ever disallowed a 2003 claim for refund.

C. Initial proceedings before the Court of Federal Claims

Taxpayers filed a refund suit in district court for tax years 2002, 2003, and 2004 that was transferred to the CFC. (Appx14.) Taxpayers subsequently filed an amended complaint with the CFC. (Appx572-607.) The Government moved to dismiss the amended complaint for lack of jurisdiction, and the CFC granted the motion and entered judgment. (Appx15, Appx175-183.) The CFC held taxpayers' suit was untimely. (Appx182-83.) After a Government motion, the court clarified its ruling. (Appx15-16, Appx184.) Taxpayers appealed. (Appx16.)

D. This Court's remand with respect to 2003

In Taha I, this Court affirmed the CFC's dismissal of years 2002 and 2004 but vacated and remanded for additional factual findings as to 2003. (Appx110-111.) It explained that “[w]hether the Claims Court has jurisdiction over the 2003 claim depends on three factual questions: (1) whether [taxpayers] filed the 2003 claim, (2) whether the 2003 claim was timely, and (3) whether the IRS disallowed the 2003 claim.” (Appx107.) As to timely filing, this Court acknowledged in a footnote that there was no dispute between the parties that no claim for refund was filed “within the standard three-year limitation period provided by § 6511(a).” (Appx108 n.4.) In another footnote, this Court stated that taxpayers “may be able to show that the claim was timely mailed” and cited to the Ninth Circuit's decision in Jones v. United States, 226 F.2d 24, 27 (9th Cir. 1955). (Appx108 n.3.) This Court ultimately held the “timeliness of the 2003 claim . . . depends on whether it relates to 'business' bad debt, such that the longer [time] period [under I.R.C. § 6511(d)(1)] applies.” (Appx108.)

As to whether taxpayers could demonstrate they have a claim for business bad debt, this Court explained that “[w]hether bad debt should be characterized as 'business' or 'non-business' is a question of fact to be resolved by the trial court” and noted that the CFC did not “resolve this factual issue.” (Appx105, Appx109.) This Court also explained that “[d]ebts arising from mere investments in a corporation do not rise to the level of 'business' debts.” (Appx105 (citing Whipple v. Commissioner, 373 U.S. 193, 202 (1963).) The Court ultimately remanded “for further proceedings.” (Appx111.)

E. The CFC's dismissal for lack of jurisdiction

After a trial, the CFC held that taxpayers had not proved they filed an amended 2003 return. The CFC explained that for the “2003 amended tax return Form 1040X to be considered filed, [taxpayers] must be able to show that the form was actually delivered to the IRS or that they otherwise met the requirements of I.R.C. § 7502.” (Appx7.) Section 7502(a)(1) treats timely mailing as timely filing as of the postmark date, provided the document is ultimately delivered.

The CFC rejected taxpayers' argument that they could rely on the common law mailbox rule and use Ali Taha's testimony regarding mailing to prove delivery of their amended return to the IRS. (Appx7.) In so ruling, the CFC relied not only on the CFC's prior precedents but also on Treas. Reg. § 301.7502-1, which provides that the exceptions under Section 7502 are the sole exceptions to the delivery rule. (Appx7.)

The CFC also explained that the Ninth Circuit's recent decision in Baldwin v. United States, 921 F.3d 836, 839-40 (9th Cir. 2019), cert. denied, 140 S. Ct. 690 (2020), upholding the validity of Treas. Reg. § 301.7502-1 “effectively overturned” the Ninth Circuit's prior decision in Jones v. United States, 226 F.2d 24, 27 (9th Cir. 1955), which had been cited in Taha I. (Appx7.) Because taxpayers could not show either physical delivery of the amended 2003 return or that they fell within the exceptions of Section 7502, the CFC held taxpayers had not shown they “filed a claim for refund with the IRS as required for jurisdiction in this court pursuant to I.R.C. § 7422.”³ (Appx8.) Therefore, the CFC held it did not “have subject-matter jurisdiction over [taxpayers'] 2003 tax refund claim.” (Appx8.)

The CFC also held that, even if taxpayers could show they filed a claim for refund for 2003, such filing was nevertheless untimely because it would not qualify for the longer time period to file claims for refund under Section 6511(d) for two reasons.⁴ (Appx8-9.) First, to qualify for the longer time period under Section 6511(d), taxpayers needed a “debt” that was deductible under Section 166. But taxpayers' purported “debt” was “capital, not debt” because “[t]he money at issue was Mr. Mohamad Taha's earned pass-through income from his pro rata shares in Atek.” (Appx8.) “That Mr. Mohamad Taha's earnings were proportional to his ownership share suggests that this money was capital, not debt.” (Appx8.) The court added that the “traditional indicia of debt, viz., calculated interest and a payment schedule, are not present in the transaction at issue, again suggesting that this money was a capital contribution, not debt.” (Appx8.)

The CFC added that, even if taxpayers could show that the purported debt was debt (and not capital), they could not “show that this money was business debt, as required for non-corporate taxpayers.” (Appx8 (citing I.R.C. § 166(d)).) The CFC explained that “[taxpayers] cannot show that Mr. Mohamad Taha's debt was proximately related to his trade or business, see Treas. Reg. § 1.166-5(b)(2), as they cannot show that Mr. Mohamad Taha was engaged in the trade or business of Atek.” (Appx8.) In fact, the CFC found that “Mr. Mohamad Taha performed no services for Atek.” (Appx8.)

Thus, the CFC held that “Mr. Mohamad Taha's role as only a shareholder makes his interest non-business for purposes of Section 166.” (Appx9 (citing Whipple v. Commissioner, 373 U.S. 193, 202 (1963).) This necessarily meant taxpayers could not “meet the requirements of Section 166 and thus are not entitled to the extended seven-year limitations period provided by Subsection 6511(d).” (Appx9.) Therefore the 2003 claim, “if considered filed, would be untimely.” (Appx9.)

The CFC then dismissed the case for lack of jurisdiction and entered judgment. (Appx9-10.) Taxpayers' motions for reconsideration were denied or rejected. (Appx23-24.)

SUMMARY OF ARGUMENT

1. The timely filing of a claim for refund is a jurisdictional requirement in a refund suit. Before the enactment of I.R.C. § 7502, tax documents had to be physically received by the IRS by the applicable due date to satisfy filing requirements. To mitigate the harshness of the physical delivery rule, some courts departed from it and created an evidentiary presumption known as the “common law mailbox rule.” Under this rule proof of proper mailing, including by testimonial or circumstantial evidence, gives rise to a rebuttable presumption that the document was physically delivered to the addressee in the time such a mailing would ordinarily take to arrive.

I.R.C. § 7502(a)(1), enacted in 1954, treats timely mailing as timely filing as of the postmark date, provided the document is ultimately delivered to the IRS. After this enactment, there developed a circuit court split as to whether Section 7502 provides the exclusive means to prove timely filing without proving physical delivery, and some circuits, other than this Court, allowed taxpayers to prove filing by utilizing the common law mailbox rule.

To resolve this circuit split, the IRS amended Treas. Reg. § 301.7502-1(e)(2)(i) in 2011 to provide: “Other than direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a duly designated [private delivery service] . . ., are the exclusive means to establish prima facie evidence of delivery of a document. . . .” The regulation emphasizes this point by stating: “No other evidence of a postmark or of mailing will be prima facie evidence of delivery or raise a presumption that the document was delivered.” Id. The regulation is valid; the Ninth Circuit in Baldwin, supra, has recently upheld it as a reasonable construction of the statute, thus foreclosing the use of testimonial evidence and the common-law mailbox rule to prove timely filing.

In this case, the IRS never received taxpayers' claim for refund for 2003. Thus, their claim of timely filing depends exclusively on testimonial evidence. Based on the Treasury Regulation and Baldwin, the CFC correctly held that this evidence could not be considered and that it lacked subject matter jurisdiction over the refund suit for 2003.

2. The CFC also correctly held that, even if taxpayers could show they filed a claim for refund for 2003, such filing was nevertheless untimely because it would not qualify for the longer time period to file claims for refund under Section 6511(d). Section 6511(d)(1) provides, inter alia, that claims “under section 166 or section 832(c), of a debt as a debt which became worthless, or, under section 165(g), of a loss from worthlessness of a security” must be submitted within “7 years from the date prescribed by law for filing the return for the year with respect to which the claim is made.” A claim based on the effect of a carryback of a loss to a prior year receives a slightly longer period if the loss is attributable to a worthless security or a bad debt.

Taxpayers do not have a claim for the carryback of a business bad debt that would qualify for an extended filing period. As the CFC correctly found, their purported “debt” was “capital, not debt” because “[t]he money at issue was Mr. Mohamad Taha's earned pass-through income from his pro rata shares in Atek.” (Appx8.) The CFC also correctly found that, even if Atek owed Mohamad Taha a debt, the purported debt was not a business debt because it did not relate to Mohamad Taha's trade or business, but only to his status as a shareholder. These factual findings were fully supported by the record, and taxpayers do not argue that they are clearly erroneous.

On their second appeal, taxpayers for the first time, assert two new grounds for the purported timeliness of their refund claim. They claim a carryback from 2004 to 2003 of a deduction for a nonbusiness bad debt that qualifies for an extended time to file claims under Section 6511(d). They also claim a carryback from 2004 to 2003 of a deduction for worthless securities that would qualify for this extended period. Both new theories are barred by the substantial variance doctrine, which precludes a taxpayer from presenting claims in a tax refund suit that substantially vary from the legal theories and factual bases set forth in the tax refund claim presented to the IRS. In addition, both arguments were waived by taxpayers' failure to assert them earlier. The theories are meritless in any event.

The CFC correctly dismissed this action.

ARGUMENT

Standard of review

This Court reviews the CFC's decision to dismiss for lack of jurisdiction de novo. Diaz v. United States, 853 F.3d 1355, 1357 (Fed. Cir. 2017). Factual findings made by the CFC in determining its own subject matter jurisdiction are reviewed for clear error. See Moyer v. United States, 190 F.3d 1314, 1318 (Fed. Cir. 1999).

As plaintiffs in the CFC, taxpayers had the burden to establish jurisdiction. Diaz, 853 F.3d at 1357. Although a court may grant leniency to a pro se litigant “with respect to mere formalities,” such as the form of a complaint, “a court may not similarly take a liberal view of [a] jurisdictional requirement and set a different rule for pro se litigants only.” Kelley v. Secretary, U.S. Dept. of Labor, 812 F.2d 1378, 1380 (Fed. Cir. 1987).

This Court reviews issues of statutory interpretation de novo, “except to the extent that deference to an agency's construction of a statute it administers is required under the two-step analysis set forth in Chevron.” Fitzgerald v. Dep't of Homeland Sec., 837 F.3d 1346, 1353 (Fed. Cir. 2016) (quotation marks and citations omitted); see Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). This Court has explained, however, that “ '[e]ven under Chevron, [it] owe[s] an agency's interpretation of the law no deference unless, after employing traditional tools of statutory construction, we find ourselves unable to discern Congress's meaning.'” Facebook, Inc. v. Windy City Innovations, LLC, 973 F.3d 1321, 1338 (Fed. Cir. 2020) (quoting SAS Institute, Inc. v. Iancu, 138 S. Ct. 1348, 1358 (2018)).

I. The CFC lacked jurisdiction because taxpayers did not timely file a claim for refund for 2003, as required by Section 7422(a)

A. Introduction

The United States, as sovereign, may not be sued without its consent, and the terms of its consent define the court's jurisdiction. F.D.I.C. v. Meyer, 510 U.S. 471, 475 (1994); United States v. Dalm, 494 U.S. 596, 608 (1990). In order to bring a refund suit, a taxpayer must first “duly file[ ]” a proper claim for refund with the IRS. I.R.C. § 7422(a). This requirement is a jurisdictional prerequisite. Dalm, 494 U.S. at 601-02; Stephens v. United States, 884 F.3d 1151, 1156 (Fed. Cir. 2018) (“The Tucker Act waives sovereign immunity for lawsuits seeking tax refunds, but only when the jurisdictional requirements in the Tax Code for bringing such suits are met.”); but see Walby v. United States, 957 F.3d 1295, 1299-1301 (Fed. Cir. 2020) (suggesting filing requirements should not be considered jurisdictional).

To be duly filed within the meaning of I.R.C. § 7422(a), “[t]he claim [for refund] must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof.” Treas. Reg. § 301.6402-2(b)(1). A taxpayer's properly executed amended income tax return requesting a refund is treated as a claim for refund. Treas. Reg. § 301.6402-3(a)(5).

To be duly filed, the claim for refund must also be timely. Under Section 6511, administrative claims for refund must generally be filed with the IRS “within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later.” I.R.C. § 6511(a).

Some types of claims, however, receive extended time periods. Section 6511(d)(1) provides, inter alia, that claims “under section 166 or section 832(c), of a debt as a debt which became worthless, or, under section 165(g), of a loss from worthlessness of a security” must be submitted within “7 years from the date prescribed by law for filing the return for the year with respect to which the claim is made.” Section 6511(d)(1) also provides that a claim based on the effect of a carryback of a loss to a prior year receives a slightly longer period: “7 years from the date prescribed by law for filing the return for the year of the net operating loss which results in such carryback or the period prescribed in paragraph (2) of this subsection, whichever expires the later.” I.R.C. § 6511(d)(1) (emphasis added).

The overarching question in this case is whether taxpayers have timely filed a claim for refund for 2003. Taxpayers, who have the burden of proving both filing of a claim and timeliness, have no tangible evidence that they submitted a claim for refund for 2003. As we demonstrate below, the CFC correctly held that they could not rely on Ali Taha's testimony to prove timely filing because the use of testimonial evidence is foreclosed by I.R.C. § 7502 and Treas. Reg. § 301.7502-1(e)(2)(i).

B. Section 7502 and Treas. Reg. § 301.7502-1(e)(2)(i)

1. The adoption of Section 7502

Before the enactment of Section 7502 in 1954, it was well established that, to satisfy filing requirements, tax documents not only had to be physically received by the IRS, but also had to be timely received. See United States v. Lombardo, 241 U.S. 73, 76 (1916). “This physical delivery rule left taxpayers who mailed their documents vulnerable to the vagaries of the postal service; documents could be delayed or not delivered at all through no fault of the taxpayer.” Baldwin v. United States, 921 F.3d 836, 840 (9th Cir. 2019). This also meant the risk of non-delivery, and consequent non-filing, was squarely on the taxpayer.

To mitigate the harshness of the physical delivery rule, some courts departed from this rule and created an evidentiary presumption known as the “common law mailbox rule.” Id.; Davis v. United States, 230 F.3d 1383 (Table), 2000 WL 194111, at *2 (Fed. Cir. Feb. 16, 2000). “Under the common-law mailbox rule, proof of proper mailing — including by testimonial or circumstantial evidence — gives rise to a rebuttable presumption that the document was physically delivered to the addressee in the time such a mailing would ordinarily take to arrive.” Baldwin, 921 F.3d at 840.

In 1954, Congress enacted Section 7502 to establish a uniform rule that would alleviate the harshness of the timely physical delivery requirement for documents delivered by U.S. mail to the IRS and the Tax Court. Baldwin, 921 F.3d at 840; H.R. Rep. No. 83-1337, at A434-35 (1954), reprinted in 1954 U.S.C.C.A.N. 4017, 4853; S. Rep. No. 83-1622, at 615 (1954), reprinted in 1954 U.S.C.C.A.N 4621, 5266. The primary exception to the timely physical delivery requirement is that timely mailing is treated as timely filing as of the postmark date, provided the document is ultimately delivered. I.R.C. § 7502(a).

Section 7502(c)(1) contains a second exception to the timely physical delivery rule. It provides that, if a document or payment is sent by U.S. registered mail, such registration shall be prima facie evidence that the document was delivered, and the date of registration shall be deemed the postmark date. Delivery is not required. Under Section 7502(c)(2), which was enacted later, the IRS was allowed to adopt a third exception for certified mail, which is now treated similarly to registered mail if the sender's certified mail receipt is postmarked.⁵ See Treas. Reg. § 301.7502-1(c)(2).

2. The circuit split

The courts of appeals have split on whether the Section 7502 statutory exceptions to timely physical delivery are the exclusive exceptions or whether the common law mailbox rule that had been applied by some courts still applies. The first circuits to address the issue, the Second and Sixth Circuits, held that Section 7502 provides the exclusive exceptions to the physical delivery rule. See Deutsch v. Commissioner, 599 F.2d 44, 46 (2d Cir. 1979); Miller v. United States, 784 F.2d 728, 730-31 (6th Cir. 1986). Thereafter, the Third, Eighth, and Ninth Circuits held that Section 7502 did not displace the common law mailbox rule as a method to prove timely filing. See Philadelphia Marine Trade Assoc.-Int'l Longshoremen's Ass'n Pension Fund v Commissioner, 523 F.3d 140, 147 & n.5, 148-153 (3d Cir. 2008); Estate of Wood v. Commissioner, 909 F.2d 1155, 1160-62 (8th Cir. 1990); Anderson v. United States, 966 F.2d 487, 490-91 (9th Cir. 1992), superseded by regulation, Treas. Reg. § 301.7502-1(e)(2), as recognized by Baldwin, supra.

The Tenth Circuit also addressed the issue in Sorrentino v. Internal Revenue Service, 383 F.3d 1187 (10th Cir. 2004). However, the Sorrentino panel issued three conflicting opinions, from which it is difficult to discern that circuit's ultimate position. See Crook v. Commissioner, 173 F. App'x 653, 657 (10th Cir. 2006) (stating the Tenth Circuit has “not yet decided whether § 7502 provides the exclusive method by which timely mailing can be proven,” and describing Sorrentino as “equivocal at best”).

3. This Court's law

This Circuit has not yet taken a position on the proper interpretation of Section 7502. See Davis v. United States, 230 F.3d 1383 (Table), 2000 WL 194111, at *2-*3 (Fed. Cir. Feb. 16, 2000) (acknowledging the circuit split). In Davis, this Court discussed the circuit split but found no need to resolve the question because Mr. Davis's “own uncorroborated testimony would be insufficient” to allow him to invoke the common law mailbox rule. Id. at *3. The Davis opinion also explained that prior courts that had adopted the common law mailbox rule had required “more than mere proof of mailing, such as direct proof of postmark which is 'verifiable beyond any self-serving testimony of a taxpayer who claims that a document was timely mailed.'” Id. at *3 (quoting Wood, 909 F.2d at 1161).

This Court's prior opinion in this case, Taha I, also touched on the common law mailbox rule. This Court stated, in a footnote: “The mere fact that IRS records do not show receipt of the 2003 claim is not dispositive of this issue, meaning that Appellants may be able to show that the claim was timely mailed.” (Appx108 (citing Jones v. United States, 226 F.2d 24, 27 (9th Cir. 1955)). Given the brevity of this discussion and its appearance in a footnote, this statement is apparently not a legal ruling that the common law mailbox rule applies in this case (or in this Circuit), especially since such a ruling would reverse the long-standing view of the Court of Federal Claims that Section 7502 provides the only exceptions to the physical delivery rule. See Martinez v. United States, 101 Fed. Cl. 688, 692 (2012) (collecting cases).⁶

4. The amendment of Treas. Reg. § 301.7502-1 to resolve the circuit split

The IRS amended Treas. Reg. § 301.7502-1(e) in 2011 to resolve the circuit split. Treas. Reg. § 301.7502-1(e)(2)(i) establishes that Section 7502 provides the “exclusive means” to prove delivery “other than [by] direct proof of physical delivery.” The regulation provides:

Other than direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a duly designated [private delivery service] as provided for by paragraph (e)(2)(ii) of this section, are the exclusive means to establish prima facie evidence of delivery of a document to the agency, officer, or office with which the document is required to be filed. No other evidence of a postmark or of mailing will be prima facie evidence of delivery or raise a presumption that the document was delivered.

Id. See also T.D. 9543, 2011-2 C.B. 470. Thus, the common law mailbox rule can no longer be used to create an evidentiary presumption of delivery for the filing of tax documents covered by Section 7502.

C. Treas. Reg. § 301.7502-1(e) warrants Chevron deference

Chevron established a two-step procedure for determining the validity of an agency's statutory construction:

First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.

Chevron, 467 U.S. at 842-43 (footnotes omitted; emphasis added).

Section 7502 is silent on the question presented here: if the IRS did not actually receive a tax document, can a taxpayer who chose to send a tax document by regular mail establish a prima facie case that a tax document was delivered? In other words, Section 7502 contains a gap on the question of the common-law mailbox rule's applicability; the statute neither explicitly displaces the common-law mailbox rule, nor adopts it as an alternative method of proving delivery. And because the statute does not directly and precisely address the common-law mailbox rule's viability, step one of the Chevron test is satisfied. Baldwin, 921 F.3d at 842 (“At step one of the analysis, we conclude that IRC § 7502 is silent as to whether the statute displaces the common-law mailbox rule.”)

The regulation satisfies Chevron step two. It is a reasonable construction of the statute because the statute can reasonably be read as supplanting the common-law mailbox rule. The statute sets out a system of objective rules under which the questions whether and when a document is filed are determined by designated objective indicia. Regarding the date of delivery, the postmark is the primary objective indicia, but other indicia, such as the date of registration for a document sent by registered mail, or the date of certification for a document sent by certified mail, may act as substitutes. See I.R.C. §§ 7502(a)(1), (c) & (f).

In general, a postmark made by the United States Postal Service will bear the date an item was deposited in the mail. But there is a risk that an envelope containing a tax document may not be postmarked on the day it was deposited in the mail. See Treas. Reg. § 301.7502-1(c)(1)(iii) (contemplating this possibility). Taxpayers can guard against this risk by using substitute indicia of timely mailing, e.g., registered or certified mail. See I.R.C. § 7502(c)(1)(B); Treas. Reg. § 301.7502-1(c)(2) (“[T]he risk that the document or payment will not be postmarked on the day that it is deposited in the mail may be eliminated by the use of registered or certified mail.”). In other words, a tax document that is due on April 15 but postmarked April 16 is late unless the taxpayer produces a receipt for registered or certified mailing that shows that the document was deposited in the mail on April 15.

The system works in much the same way when it comes to establishing the fact of delivery. When a document is not received, the postmark is obviously unavailable. Thus, the authorized substitute objective indicia supply both evidence of the fact of delivery and of its timing. See I.R.C. § 7502(c)(1)-(2); Treas. Reg. § 301.7502-1(c)(2), (e)(2).

The common-law mailbox rule is directly at odds with I.R.C. § 7502's system of designated objective indicia for determining the fact and date of delivery of tax documents. See Deutsch, 599 F.2d at 46 (observing that I.R.C. § 7502 “demonstrate[s] a penchant for an easily applied, objective standard”). The common-law mailbox rule generally depends on testimonial and circumstantial evidence that something was placed in the mail to establish presumptively both the fact and timing of delivery. See Anderson, 966 F.2d at 491-92. Thus, because the common-law mailbox rule is not in harmony with I.R.C. § 7502, the Treasury Department reasonably concluded that, absent “direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a duly designated [private delivery service] . . ., are the exclusive means to establish prima facie evidence of delivery of a document. . . .” Treas. Reg. § 301.7502-1(e)(2)(i) (emphasis supplied).

The statutory canon of construction expressio unius est exclusio alterius provides additional support for this conclusion. This canon “provides that expressing one item of [an] associated group or series excludes another left unmentioned.” Schlafly v. Saint Louis Brewery, LLC, 909 F.3d 420, 425 (Fed. Cir. 2018) (quotation marks and citation omitted; alteration in original). The correct inference in such a situation “is that Congress considered the issue of exceptions and, in the end, limited the statute to the ones set forth.” United States v. Johnson, 529 U.S. 53, 58 (2000). This is particularly true concerning Section 7502, since the very purpose of the statute was to create a set of exceptions to the requirement of timely physical delivery in circumstances where a tax document (or payment) is delivered late or not at all.

Moreover, courts should be especially reluctant to create an implied exception that would swallow up an express exception. In TRW Inc. v. Andrews, 534 U.S. 19 (2001), the Supreme Court determined that the expressio unius canon counseled against application of a general rule in the face of a more specific one. Id. at 28-29. It reasoned that “incorporating a general discovery rule into [15 U.S.C.] § 1681p [of the Fair Credit Reporting Act] would not merely supplement the explicit exception contrary to Congress' apparent intent; it would in practical effect render the exception entirely superfluous in all but the most unusual circumstances.” Id. at 29.

So too here. If applicable, the common law mailbox rule would, as a practical matter, render the specific exceptions to physical delivery contained in Section 7502 superfluous. Under the common law mailbox rule, testimony that a tax document was mailed on a particular date would create a presumption that it was timely delivered, and serve as prima facie evidence of filing, even if there is no record of delivery. Thus, if the common law mailbox rule applied, the objective indicia required by Section 7502, e.g., the postmark date on delivered mail or the registered mailing receipt, would be redundant because they would merely give taxpayers protection that they already had under the common law mailbox rule. As described above, Section 7502 expressly creates a limited statutory mailbox rule by providing that particular objective indicia, such as a postmark date or registered mail receipt, can supply evidence of the fact and date of delivery. That Congress created a statutory exception to the physical-delivery rule strongly indicates that it did not intend there to be a further exception.

Relying on the expressio unius canon, the Ninth Circuit recently upheld the validity of the regulation. Baldwin, 921 F.3d at 843. It reasoned (id.):

As reflected by the circuit split that developed on this issue, Congress' enactment of IRC § 7502 could reasonably be construed in one of two ways: as intended merely to supplement the common-law mailbox rule, or to supplant it altogether. The Treasury Department chose the latter construction by interpreting IRC § 7502 to provide the sole means by which taxpayers may prove timely delivery in the absence of direct proof of actual delivery. That construction of the statute is reasonable in light of the principle that “where Congress explicitly enumerates certain exceptions to a general prohibition, additional exceptions are not to be implied, in the absence of evidence of a contrary legislative intent.” Hillman v. Maretta, 569 U.S. 483, 496, 133 S. Ct. 1943, 186 L.Ed.2d 43 (2013) (alteration omitted); see also Syed v. M-I, LLC, 853 F.3d 492, 501 (9th Cir. 2017). Given that the purpose of enacting IRC § 7502 was to provide exceptions to the physical-delivery rule, it is reasonable to conclude that “Congress considered the issue of exceptions and, in the end, limited the statute to the ones set forth.” United States v. Johnson, 529 U.S. 53, 58, 120 S. Ct. 1114, 146 L.Ed.2d 39 (2000).

The Ninth Circuit's decision is sound and should be followed.⁷

D. Taxpayers' arguments against deference to the regulation are meritless

1. The common law mailbox rule does not trump Treas. Reg. § 301.7502-1(e)(2)(i)

Taxpayers contend (Br. 14-42) that the common law mailbox rule should govern. First, they argue (Br. 15-21) that the text of Section 7502 does not state it was meant to be exclusive and that there is a presumption that statutory enactments are made against the background of the existing common law. But as discussed supra, pp. 26-29, Section 7502 also fits squarely within the competing cannon of construction, expressio unius est exclusio alterius, relied on by the Ninth Circuit in Baldwin. See 921 F.3d at 843. And as the Ninth Circuit observed in Baldwin, “[T]he mere fact that dueling principles of statutory interpretation support opposing constructions of a statute does not prove, without more, that the agency's interpretation is unreasonable.” 921 F.3d at 843.

That this Court in Rios v. Nicholas, 490 F.3d 928, 931-33 (Fed. Cir. 2007), relied on by taxpayers (Br. 38), applied the common law mailbox rule to the filing of notices of appeal to the Court of Appeals for the Veterans Court under 38 U.S.C. § 7266 does not compel the conclusion that the common law mailbox rule still applies after the enactment of Section 7502. To be sure, in its analysis, the Rios court “beg[a]n [its] analysis with the presumption that the mailbox rule applies, absent clear statutory abrogation thereof.” Id. at 931. In Rios, this Court held that the statutory postmark rule in 38 U.S.C. § 7266 “does not contemplate a scenario where the Veterans Court alleges that it never received a petitioner's NOA, and therefore cannot be abrogated or rendered useless by application of the common law mailbox rule.” Id. at 932.

In contrast, Section 7502 contemplates situations in which delivery is alleged not to have occurred. In those situations, the use of registered or certified mail under Section 7502(c) still allows the taxpayer to prove filing even without eventual delivery. Another distinction between Rios and this case is that Rios did not involve an applicable regulation construing 38 U.S.C. § 7266. Thus, Rios did not address whether Chevron deference is required to an agency's reasonable regulation interpreting a statute. Nor did Savitz v. Peake, 519 F.3d 1312 (Fed. Cir. 2008), on which taxpayers also rely (Br. 38), involve the validity of a regulation.

Furthermore, allowing a general judicial gap-filling presumption to trump an agency's regulation also runs afoul of the principles of Chevron itself, which espoused deference to reasonable agency interpretations filling statutory gaps. Chevron, 467 U.S. at 842-45. When a judicially created common law principle might otherwise fill a gap in a statutory scheme, the agency that administers the statute should nevertheless be allowed to supersede the gap-filling presumption the common law might provide. See United States v. Chestman, 947 F.2d 551, 558 (2d Cir. 1991) (en banc) (rejecting the notion that the common-law definition of “fraud” cabined the SEC's authority to define that term via regulation); Prussner v. United States, 896 F.2d 218, 225 (7th Cir. 1990) (en banc) (determining that while “common law supplementation of the tax code and regulations” can sometimes be appropriate, “a power of judicial supplementation should not be used to nullify valid regulations”).

2. Under Chevron, this Court must defer to an agency's reasonable interpretation of the statute where that statute is silent on an issue

Taxpayers argue repeatedly (see Br. 21, 23-24, 29, 32) that this Court must engage in a traditional tools analysis at Chevron step one. The United States does not disagree. Indeed, this Court has explained that “ '[e]ven under Chevron, [it] owe[s] an agency's interpretation of the law no deference unless, after employing traditional tools of statutory construction, we find ourselves unable to discern Congress's meaning.'” Facebook, 973 F.3d at 1338 (quoting SAS, 138 S. Ct. at 1358); see also Chevron, 467 U.S. at 843 n.9. The United States does, however, contend that while Section 7502 could be interpreted as unambiguously intended to create exclusive exceptions to the timely physical delivery rule for IRS documents, the same cannot be said of the opposite conclusion. If this Court determines that Section 7502 does not unambiguously create exclusive exceptions to timely physical delivery, then the statute is ambiguous or silent and under Chevron, deference must be given to the IRS's reasonable statutory interpretation.

Taxpayers also argue (see Br. 24-25, 28) that this Court should not defer to agency's interpretations in statutory silence cases. On the contrary, Chevron deference applies where a statute is silent or ambiguous, and therefore, Congress has left a gap in a statutory framework. See United States v. Home Concrete & Supply, LLC, 566 U.S. 478, 488 (2012) (“[A] statute's silence or ambiguity as to a particular issue means that Congress has . . . likely delegat[ed] gap-filling power to the agency[.]”). Put simply, under Chevron, this Court must defer unless it finds a statue is unambiguous, which means there is no gap to fill. Id. at 489-90; Chevron, 467 U.S. at 842-43.

Taxpayers also argue (p. 37) that the IRS has no special expertise in the common law — i.e., in methods of proving a proposition in federal court — that would warrant deference to its regulation. This argument gets the proper subject of the inquiry wrong. It is the meaning of Section 7502 that must be interpreted, not the common law. The proper question is whether the IRS has special expertise in interpreting the Internal Revenue Code. And clearly, the answer to that question is yes. See, e.g., I.R.C. § 7805(a) (requiring the Secretary of the Treasury “prescribe all needful rules and regulations for the enforcement of this title. . . .”).

3. Taxpayers rely on misquoted and irrelevant legislative history

Taxpayers quote a secondary source regarding some purported legislative history of an amendment to Section 7502 in 1968. But the language purportedly quoted from the legislative history, which taxpayers italicize, was not actually contained therein. The legislative history states that “[t]he taxpayer, of course, could also establish the date of mailing by other competent evidence.” H.R. Rep. No. 90-1104, at 14 (1968), as reprinted in 1968 U.S.C.C.A.N. 2341, 2354; S. Rep. No. 90-1014, at 19 (1968), as reprinted in 1968 U.S.C.C.A.N. 2354, 2373. Neither H.R. Rep. No. 90-1104 nor S. Rep. No. 90-1014 contains the additional phrase “(besides registered or certified mail receipts)” that was quoted in the secondary source cited by taxpayers and is emphasized in their brief. (Br. 22.)

Without that phrase, the legislative history does not appear to be referring to the common law mailbox rule. Instead, it appears to refer to alternatives to registered mail, which at that time would have included both certified mail and first-class mail that is eventually delivered with a timely postmark. See, e.g., H.R. Rep No. 90-1104, at 14, as reprinted in 1968 U.S.C.C.A.N. 2341, 2354. Also, the legislative history taxpayers cite applies to the mailing of tax deposits under Section 7502(e). Thus, the purported legislative history is not particularly relevant.

4. Brand X is inapplicable to this case because there is no contrary precedent of this Court for a regulation to supersede

Taxpayers argue at length against the wisdom of the Supreme Court's decision in Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 982 (2005) (“Brand X”). (Br. 21-29; see also Br. 30-42.) In Brand X the Supreme Court held that a circuit court must defer under Chevron to an agency regulation interpreting a statute even if that circuit court has already interpreted that statute, provided the circuit court did not find the statute to be unambiguous. Id. at 982-86. However, as taxpayers themselves admit, “This Circuit has never previously interpreted Section 7502.” (Br. 29.) Thus, this case presents a standard Chevron question and not a Brand X question of a court's deferring to an agency despite its own prior precedent. Brand X is simply not relevant to this case.⁸

To be sure, Brand X was relied on in Baldwin when the Ninth Circuit gave effect to Treas. Reg. § 7502-1(e)(2)(i) and overturned its prior, contrary precedent interpreting Section 7502 in Anderson. Baldwin, 921 F.3d at 843-44. But this Circuit is not in a similar posture because there is no contrary precedent in this Circuit regarding the interpretation of Section 7502. This Circuit must simply engage in a traditional Chevron analysis.

Taxpayers also argue (Br. 25-26) that Brand X subverts stare decisis not only by overruling prior cases but also by overruling the common law. This argument seeks to broaden Brand X well beyond its holding. In this case, there is no decision to overturn because this Court has not yet interpreted Section 7502. A principle of legislating against a common law background should not be stretched to suggest there somehow exists a default judicial determination that would be offended by Chevron deference in advance of this Court's having actually interpreted the statute in question. Where this Court has no precedent, Brand X has no special relevance and any issue of deference is simply a Chevron question.

5. Taxpayers' additional arguments regarding Brand X and Chevron were not raised below and lack merit

Taxpayers raise a number of additional arguments related to Brand X and Chevron, including: (1) that deferring under Brand X or Chevron violates the due process clause of the Constitution (Br. 29); (2) that deference under Brand X or Chevron impairs judicial independence under Article III (Br. 31); (3) that deference under Brand X or Chevron violates the constitution's separation of powers (Br. 33); (4) that judges can and perhaps “must opine” on Brand X's alleged failings (Br. 39-40); and (5) that judges who do not opine on Brand X's alleged failings or feel they must follow Brand X might violate the judicial code of conduct if they do not recuse themselves (Br. 41-42). Taxpayers did not raise any of these arguments in the lower court. Thus, they have been waived and not properly preserved for appeal. Sage Prods., Inc. v. Devon Indus., Inc., 126 F.3d 1420, 1426 (Fed Cir. 1997).

The Government is not aware of any precedent in the Supreme Court or in this Court holding Brand X or Chevron to be unconstitutional. Thus, these cases remain binding Supreme Court precedent and must be followed. See Agostini v. Felton, 521 U.S. 203, 237 (1997). In fact, taxpayers later admit that (Br. 40) “this Court cannot declare the Brand X doctrine unconstitutional.” Nor can this Court declare Chevron to be unconstitutional. Of course, any judge of any court remains free to opine on whether any precedent should be reconsidered. But prior to such reconsideration in the proper forum, precedents must be followed. Agostini, 521 U.S. at 237.

Finally, it is not an ethical violation or a violation of the judicial code of conduct for a judge to follow binding precedent (as they must) nor is following precedent a form of bias for which a recusal would be necessary.

E. Even if the common law mailbox rule could be considered, taxpayers' evidence is insufficient to prove mailing under that rule

As discussed above, the Treasury Regulation precludes the use of the common law mailbox rule to prove timely mailing of a claim for refund. But even if the testimonial evidence allowed by the common law mailbox rule could be considered, taxpayers cannot prevail due to the vague, uncorroborated testimony in this case.

As this Court acknowledged in its Davis opinion, prior courts that adopted the common law mailbox rule required “more than mere proof of mailing, such as direct proof of postmark which is 'verifiable beyond any self-serving testimony of a taxpayer who claims that a document was timely mailed.'” Davis, 2000 WL 194111, at *3 (quoting Wood, 909 F.2d at 1161). This Court also held in Davis that Davis's “own, uncorroborated testimony would be insufficient to prove timely filing. . . .” Id. at *3.

Here, taxpayers seek to prove mailing based solely on the uncorroborated testimony of Ali Taha, a relative of the deceased taxpayer and a representative who was substituted as the plaintiff in the case. Ali Taha testified at trial that taxpayers' amended 2003 return was mailed at the same time as their amended 2002 return but he could not confirm how either return was actually mailed or by whom. (Appx202, Appx262-265, Appx294-303). As to mailing, Ali Taha testified: “I know that for sure, they were filed simultaneously, and taken to the post office either by myself or my — whoever at the time, most likely myself, because plaintiffs didn't have transportation, and they didn't know where the post office is.” (Appx264.) As to Ali Taha's testimony, the CFC found: “Mr. [Ali] Taha recalls that based on his experience, the amended returns for each year were likely mailed in separate envelopes, but he could not testify affirmatively how the 2002 and 2003 [tax] returns specifically were mailed.” (Appx4.) Taxpayers do not argue that this finding was clearly erroneous.

This lack of any definitive testimony regarding mailing and postmarking distinguishes this case from Wood and Anderson, which this Court relied on in Davis. In both Wood and Anderson, eye-witness testimony was offered not only to establish mailing but also to establish that a postmark had been seen to be applied to the item being mailed. Wood, 909 F.2d at 1156-57, 116; Anderson, 966 F.2d at 489, 491. And in both Wood and Anderson, the testimony of mailing was also corroborated by a disinterested witness. Wood, 909 F.2d at 1156-57, 1161; Anderson, 966 F.2d at 489. Ali Taha's vague, uncorroborated testimony regarding mailing is not even close to the sort of testimonial evidence regarding mailing and postmarking that this Court demanded in Davis. See Davis, 2000 WL 194111, at *2-*3.

Taxpayers incorrectly claim that “[t]axpayers proved at trial that the postmark date for the 2003 refund claim was a few days before November 29, 2007.” (Br. 17.) As support, they cite the following CFC statement: “It is likely that plaintiffs' 2003 amended tax return would have been received by the IRS around the same time their 2002 amended tax return was received . . . November 29, 2007.” (Br. 17 n.6 (quoting Appx8).)

But taxpayers ignore the context of the CFC statement. Read in context, the CFC was assuming for sake of argument that taxpayers' amended 2003 return was mailed in order to determine whether it was timely. The CFC then concluded that, assuming that the 2003 amended return was received around November 29, 2007, it would have been untimely because it would have been received “well beyond the three-year limitation of I.R.C. § 6511(a).” (Appx8.) The CFC did not actually make a factual finding applying the common law mailbox rule, and it did not find that taxpayers' 2003 tax return was postmarked or mailed.

II. Taxpayers cannot assert new claims for refund during their second appeal

A. Introduction

In support of their timeliness claim, taxpayers argue (Br. 43) that the three-year period of I.R.C. § 6511(a) does not apply and a longer period under Section 6511(d) does. Section 6511(d)(1) provides, inter alia, that claims “under section 166 or section 832(c), of a debt as a debt which became worthless, or, under section 165(g), of a loss from worthlessness of a security” must be submitted within “7 years from the date prescribed by law for filing the return for the year with respect to which the claim is made.” Section 6511(d)(1) also provides that a claim based on the effect of a carryback of a loss to a prior year receives a slightly longer period: “7 years from the date prescribed by law for filing the return for the year of the net operating loss which results in such carryback or the period prescribed in paragraph (2) of this subsection, whichever expires the later.”⁹ I.R.C. § 6511(d)(1) (emphasis added). 

In the CFC, taxpayers urged that the extended time to file a claim for refund under Section 6511(d) applied because their claim was based on a business bad debt. (See, e.g., Appx469-470, Appx518, Appx522-523, Appx532, Appx810-811, Appx842.) Taxpayers assert two new legal theories in their opening brief as to why their claim for refund for 2003 is timely: (1) a deduction for nonbusiness bad debt under Section 166(d)(1)(B); and (2), a deduction for worthless securities under Section 165(g). (See Br. 46-47, 49 (nonbusiness debt); Br. 43-45, 47-49 (worthless securities).)

As we demonstrate below, the doctrines of variance and waiver preclude taxpayers from raising these new arguments for the first time on appeal. Moreover, taxpayers do not have a timely claim for refund under any theory.

B. The substantial variance doctrine prevents taxpayers from raising new legal theories not first raised in an administrative claim for refund

Section 7422(a) of the Code prohibits any proceeding in court unless a claim for refund has first been “duly filed” and complies with “the regulations of the Secretary established in pursuance thereof.” Treas. Reg. § 301.6402-2(b)(1) requires the refund claim to “set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof. . . . A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund or credit.”

This Court has explained that, together, Section 7422(a) and Treas. Reg. § 301.6402-2(b)(1) “bar[ ] a taxpayer from presenting claims in a tax refund suit that substantially vary the legal theories and factual bases set forth in the tax refund claim presented to the IRS.” Lockheed Martin Corp. v. United States, 210 F.3d 1366, 1371 (Fed. Cir. 2000) (quotation marks and citation omitted). Thus, “[a]ny legal theory not expressly or impliedly contained in the application for refund cannot be considered by a court in which a suit for refund is subsequently initiated.” Lockheed, 210 F.3d at 1371 (quotation marks and citation omitted). Litigation is limited “to those grounds the IRS has already had an opportunity to consider and is willing to defend.” Ottawa Silica Co. v. United States, 699 F.2d 1124, 1139 (Fed. Cir. 1983).

As applied to this case, the substantial variance doctrine means that taxpayers may only recover based on the legal theories raised in their two-page, amended tax return for 2003, if it was filed. (Appx1183-1184.) Neither of the new theories of recovery appears in their return, and their return certainly does not allege any carryback of a loss from 2004 to 2003 under any theory.¹⁰ Both new theories substantially differ from the original theory of recovery taxpayers asserted in litigation, i.e., the deduction for business bad debt under Section 166. Taxpayers are prohibited from raising new theories now by the substantial variance doctrine. See Lockheed Martin, 210 F.3d at 1371; see also Computervision Corp. v. United States, 445 F.3d 1355, 1363-64 (Fed. Cir. 2006) (collecting cases and discussing the “substantial variance doctrine”).

C. Taxpayers have waived any theories of recovery based on nonbusiness bad debt or worthless securities

“With a few notable exceptions, such as some jurisdictional matters, appellate courts do not consider a party's new theories, lodged [for the] first [time] on appeal.” Sage, 126 F.3d at 1426. This practice is a logical consequence of this Court being solely a court of review. Id. Thus, this Court has held that “[i]f a litigant seeks to show error in a trial court's overlooking an argument, it must first present that argument to the trial court.” Id. This Court has also held that new claims that are not properly raised in a complaint are considered waived on appeal. See Casa de Cambio Comdiv S.A., de C.V. v. United States, 291 F.3d 1356, 1366 (Fed. Cir. 2002). This Court may, however, choose to review issues not properly raised by the parties provided the issue was passed on by the lower court. See Hollmer v. Harari, 681 F.3d 1351, 1356 (Fed. Cir. 2012).

Before this second appeal, taxpayers never argued they had a claim for refund for nonbusiness debt or worthless securities. (See generally Appx572-607 (Am. Compl.), Appx119-174 (Obj. to Mot. to Dismiss), Appx115-118 (Pl.-Appellants' Informal Br.), Appx28-99 (Pl.-Appellants' Reply Br.), Appx805-872 (Pls.' Pre-Trial Br.), Appx468-511 (Pls.' Post-trial Opening Br.), Appx512-547 (Pls.' Post-trial Reply Br.)). Therefore, taxpayers have waived any claims other than one based on business bad debt by failing to assert them prior to this appeal.

Taxpayers suggest (Br. 47) that their pro se filings “invoked I.R.C. § 6511(d), thus preserving their Section 165(g) argument and preserving their argument that the refund claims were filed within the limitations periods given in I.R.C. § 6511(d)(1) or I.R.C. § 6511(d)(2)(A).” But citing to Section 6511(d) is insufficient to later invoke any possible legal theory to which the time limit contained therein would apply. Even a liberal pleading standard does not excuse failures to comply with jurisdictional requirements. See Kelley, 812 F.2d at 1380.

Taxpayers also argue (Br. 48) that “[This Court] should instead fully review the jurisdictional question de novo because a pro se filer's lack of awareness of or failure to flesh out all available jurisdictional arguments does not waive them.” They are mistaken. “[A] party's pro se status 'does not excuse [the pleading's] failures[.]'” Mayers v. Merit Systems Protection Board, 693 F. App'x 902, 903-04 (Fed. Cir. 2017) (quoting Henke v. United States, 60 F.3d 795, 799 (Fed. Cir. 1995)) (alterations in original). Thus, taxpayers, like all plaintiffs, must first raise any new claims for refund in the trial court and prior to appeal or such claims will be deemed to be waived. Sage, 126 F.3d at 1426; see also Corus Staal BV v. United States, 502 F.3d 1370, 1378 n.4 (Fed. Cir. 2007). Furthermore, the subject matter jurisdiction of a trial court is determined based on the operative complaint, which in this case was taxpayers' amended complaint. See Rockwell Int'l Corp. v. United States, 549 U.S. 457, 473-74 (2007). Because taxpayers did not assert their new “jurisdictional arguments,” in their amended complaint, raising them now is too late to convey subject matter jurisdiction on the CFC.

Furthermore, this Circuit has made clear that “where the question is the calculation of the time limitations placed on the consent of the United States to suit, a court may not similarly take a liberal view of that jurisdictional requirement and set a different rule for pro se litigants only.” Kelley, 812 F.2d at 1380. Thus, taxpayers, despite being pro se, must still show that they first raised their new claims for refund, i.e., their new “jurisdictional arguments,” in an administrative claim for refund prior to filing their suit. I.R.C. §§ 6511, 7422. Because taxpayers did not first raise their new claims for refund in an administrative claim for refund prior to filing suit, such claims were barred and could not be considered by either the CFC at trial or by this Court on appeal.

Taxpayers further suggest (Br. 47-48) that the Government distracted the CFC with its focus on the business bad debt theory under Section 166. But the CFC was not distracted; taxpayers' new theories were never pled nor argued. Taxpayers have waived any claim based on nonbusiness bad debt or worthless securities.

III. Taxpayers do not have a timely filed claim for refund for 2003 under any theory

Even if taxpayers prevail on all other issues, they still would not have a timely filed claim for refund for 2003 because none of the three theories on which they now rely qualify for an extended time period to file claims under either I.R.C. § 6511(d)(1) or (d)(2).¹¹

A. The business bad debt theory

Pursuant to Sections 166(a) and 166(d), individual taxpayers may offset against ordinary income a bona fide debt that has become worthless within the taxable year, but only if it is a “business” debt. Section 166(d) does not directly define the term “business debt,” but does define the term “non-business” debt. A nonbusiness debt is any debt other than (A) “a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer” or (B) a debt whose “worthlessness . . . is incurred” with a trade or business of the taxpayer. I.R.C. § 166(d)(2); Treas. Reg. § 1.166-5(b). Individual taxpayers must prove the debt for which they are seeking a deduction is a business debt. See I.R.C. § 166(d).

A bona fide debt is required by and defined in the applicable regulation as “a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money.” Treas. Reg. § 1.166-1(c); Cenex, Inc. v. United States, 156 F.3d 1377, 1381 (Fed. Cir. 1998). “Contributions to capital do not qualify as bona fide debt.” Cenex, 156 F.3d at 1381 (citing Treas. Reg. § 1.166-1(c)). Courts consider the following factors to determine whether a particular interest represents a capital contribution or a bona fide debt:

(1) [T]he names given to the instruments, if any, evidencing the indebtedness; (2) the presence or absence of a fixed maturity date and schedule of payments; (3) the presence or absence of a fixed rate of interest and interest payments; (4) the source of repayments; (5) the adequacy or inadequacy of capitalization; (6) the identity of interest between the creditor and the stockholder; (7) the security, if any, for the advances; (8) the corporation's ability to obtain financing from outside lending institutions; (9) the extent to which the advances were subordinated to the claims of outside creditors; (10) the extent to which the advances were used to acquire capital assets; and (11) the presence or absence of a sinking fund to provide repayments.

Id. at 1381-82 (citations omitted).

The Supreme Court has held that a debt incurred by a shareholder or mere investor is a nonbusiness debt because it does not relate to a taxpayer's own trade or business but instead relates to his investment activity. Whipple v. Commissioner, 373 U.S. 193, 202 (1963) (“[I]nvesting is not a trade or business and the return to the taxpayer, though substantially the product of his services, legally arises not from his own trade or business but from that of the corporation.”).

After a trial, the CFC concluded that taxpayers had not met their burden of showing that they are entitled to an extended period to file a claim for refund under Section 6511(d) because they had not met their burden of showing that the money at issue is a bona fide debt, or, if it was debt, that it was business debt. (Appx8.) The court found that taxpayers' purported “debt” was “capital, not debt” because “[t]he money at issue was Mr. Mohamad Taha's earned pass-through income from his pro rata shares in Atek.” (Appx8.) Other indicia of capital cited by the court were the proportionality of Mr. Mohamad Taha's earnings to his ownership share and the absence of the “traditional indicia of debt, viz., calculated interest and a payment schedule.” (Appx8.)

The CFC also held that even if taxpayers could show that the purported debt was debt (and not capital), they could not “show that this money was business debt as required for non-corporate taxpayers.” (Appx8 (citing I.R.C. § 166(d)).) The CFC explained that “[taxpayers] cannot show that Mr. Mohamad Taha's debt was proximately related to his trade or business, see Treas. Reg. § 1.166-5(b)(2), as they cannot show that Mr. Mohamad Taha was engaged in the trade or business of Atek.” (Appx8.) In fact, the CFC found that “Mr. Mohamad Taha performed no services for Atek.” (Appx8.)

Taxpayers have waived any potential challenge to the CFC's finding that they were not owed a debt by Atek (Appx8) by failing to challenge this finding in their opening brief.¹² See, e.g., Bozeman Financial, LLC v. Federal Reserve Bank of Atlanta, 955 F.3d 971, 974 (Fed. Cir. 2020). This alone should preclude a finding that taxpayers have a claim for a bad debt deduction or a claim for a net operating loss carryback on account of bad debt. Moreover, the record supports the CFC's finding because the purported debt was proportional to each owner's percentage share and there was no payment schedule or calculation of interest. (Appx227, Appx320, Appx 325, Appx331-333, Appx335-336.)

And even if taxpayers were owed a debt, taxpayers no longer have any plausible argument that their purported debt could be a business debt in light of the CFC's factual finding that any purported debt was not related to Ali Taha's trade or business, but instead, related only to his status as a shareholder. (See Appx8-9.) This finding, too, is well supported by the record. Mohamad Taha was unemployed from 2002 through 2004, he never worked at Atek in any capacity, and his only relationship to the company was as a shareholder. (Appx307-309, Appx316-319.) Thus, he did not have a trade or business. And as this Court previously recognized in Taha I, “mere investments in a corporation do not rise to the level of 'business' debts.” (See Appx105 (citing Whipple, 373 U.S at 202.)) Thus, the CFC correctly determined that Mohamad Taha's purported debt cannot be considered business debt under Section 166 that would qualify for a longer time period to file claims under I.R.C. § 6511(d)(1). Taxpayers do not challenge the Tax Court's findings as clearly erroneous.

Instead, taxpayers argue (Br. 65) that Whipple is not fatal to their claim for a business bad debt because this Court previously stated (Appx109) that, based on the pre-trial record, they could “plausibly” have a claim for a business debt under Section 166. But what was plausible based on the pre-trial record no longer matters; what matters now are the facts found at trial, namely, that Mohamad Taha was a mere shareholder and any interest he had was a nonbusiness interest.

Taxpayers also argue (Br. 65), that “this Court recognized,” that under Whipple it might be possible for a shareholder in a “family-run” business to have their interest classified as a “business bad debt.” (See Br. 65 (citing Appx109)). This argument distorts this Court's prior opinion, in which this Court apparently recognized that if Atek was a family-run business, then Mohamad Taha possibly was not a mere shareholder, but an employee in the family business. (Appx109.) This merely recognizes that an employee-shareholder may have two roles, and the interest at issue could be related to his role as an employee, and thus, his trade or business. See United States v. Generes, 405 U.S. 93, 95-96,102-103 (1972); see also Adelson v. United States, 737 F.2d 1569, 1573-74 (Fed. Cir. 1984).

But the undisputed record at trial reflects that Mohamad Taha did not work at Atek, and thus, his only relationship to Atek was as an investor or shareholder. (Appx307-309, Appx316-319.) Therefore, the CFC did not clearly err in finding that “[taxpayers] cannot show that Mr. Mohamad Taha was engaged in the trade or business of Atek” or that his “role as only a shareholder makes his interest non-business for purposes of Section 166.” (Appx8-9.)

B. The nonbusiness bad debt theory

As discussed above, taxpayers' first new, alternative argument on appeal (Br. 46-47, 49) is their alleged entitlement to a deduction for nonbusiness bad debt under Section 166(d)(1)(B). In making this argument, taxpayers identify 2004 as the year of the nonbusiness bad debt loss, they allege they can carryback this 2004 loss to 2003, and they allege such carryback claim is timely under the extended time period of Section 6511(d)(2)(A). (See Br. 46-47.) As a matter of law, taxpayers are mistaken for at least two fundamental reasons.

First, as already addressed above, taxpayers are not entitled to a deduction for bad debt of any type because they did not prove that Mohamad Taha was owed a debt. (Appx8-9.) And taxpayers have waived any argument on this point by failing to challenge as clearly erroneous the CFC's factual finding of no debt. Bozeman, 955 F.3d at 974. Without a debt, there can be no nonbusiness debt to generate a loss.

Second, taxpayers' arguments overlook the statutory limitations placed on individual taxpayers that prevent them from carrying back nonbusiness bad debt losses to prior years. Section 166(d)(1) prohibits non-corporate taxpayers from deducting a nonbusiness debt from ordinary income. Instead, a nonbusiness debt that has become worthless must be treated as a short-term capital loss, subject to the limitations placed on deductibility of such capital losses. I.R.C. § 166(d)(1)(B); Treas. Reg. § 1.166-(5). Unlike corporate taxpayers, individual taxpayers cannot carry back capital losses, they may only carry them forward. See I.R.C. § 1212(b).

Furthermore, non-corporate taxpayers are prohibited from including in their calculations of net operating losses either (1) capital losses in excess of their capital gains; or (2) nonbusiness losses in excess of their nonbusiness gains. I.R.C. §§ 172(d)(2)(A), (d)(4); Treas. Reg. § 1.172-(3)(a)(2), (3). Thus, individual taxpayers cannot carry back losses on nonbusiness debt. See Generes, 405 U.S. at 95-96 (“If the obligation is a nonbusiness debt, it is to be treated as a short-term capital loss subject to the restrictions imposed on such loss by § 166(d)(1)(B) and §§ 1211 and 1212, and its use for carryback purposes is restricted by § 172(d)(4).”); see also Merlo v. Commissioner, 492 F.3d 618, 623 (5th Cir. 2007) (explaining that “§ 172(d)(2)(A) works so that net capital losses are effectively excluded from the computation of [net operating losses]” and that while “unrecognized capital losses may be carried to subsequent tax years, they may not be carried back to prior taxable years” due to § 1212(b)); Estate of Mann v. United States, 731 F.2d 267, 272 n.7 (5th Cir. 1984); Montgomery v. Commissioner, 127 T.C. 43, 63-65 (2006).

Put simply, taxpayers in this case not only did not have a loss for a nonbusiness debt in 2004, but even if they did, as a matter of law, they could not carry that loss back to 2003 as either a capital loss or a net operating loss. I.R.C. §§ 172(d)(2)(A), (d)(4), 1212(b); Treas. Reg. §1.172-(3)(a)(2), (3). Therefore, as a matter of law, taxpayers do not have a claim for refund for 2003 for a loss on nonbusiness bad debt that would qualify for an extended period to file claims under Section 6511(d)(2).

C. The worthless securities theory

Taxpayers' second new argument on appeal — that they have a claim for the deduction for worthless securities under Section 165(g) that entitles them to an extended, seven-year period under Section 6511(d)(1)(see Br. 45) — is also meritless as a matter of law. Taxpayers have overlooked the statutory limitations placed on individual taxpayers that prevent them from carrying back a loss for worthless securities from 2004, which they claim is the taxable year of the loss (Br. 47), to 2003.

While Section 165(g) treats the loss from a security that becomes worthless during the taxable year as a capital loss, as discussed supra, ap. 56-58, individual taxpayers cannot carry back capital losses; they can only carry them forward. See I.R.C. §§ 172(d)(2), 1212(b). And to the extent capital losses are also nonbusiness losses, they are also subject to the limitation on nonbusiness losses creating net operating losses. I.R.C. § 172(d)(4), Treas. Reg. § 1.172-(3)(a)(2)(ii), (3); see Erfurth v. Commissioner, 77 T.C. 570, 575 (1981). See discussion supra, pp. 57-58. Thus, as a matter of law, taxpayers do not have a claim for refund for 2003 for a loss on worthless securities under Section 165(g) that would qualify for an extended period to file claims under Section 6511(d)(1).

CONCLUSION

The CFC's judgment is correct and should be affirmed.

Respectfully submitted,

DAVID A. HUBBERT
Acting Assistant Attorney General

JOAN I. OPPENHEIMER (202) 514-2954
MATTHEW S. JOHNSHOY (202) 616-1908
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

MAY 10, 2021