Today we welcome back Bob Probasco. Bob directs the Low-Income Taxpayer Clinic at Texas A&M University School of Law in Fort Worth. In this post Bob discusses the Paresky case in the Court of Federal Claims and follows up on issues he discussed in his post last month on the Pfizer case and the difficult issues arising from suits for overpayment interest. For good measure this terrific post sweeps in Bernie Madoff, equitable tolling and the possibility of some refund suits with no statutes of limitation. Les
I wrote a blog post recently on a jurisdictional issue in the Pfizer case, concerning claims for overpayment interest. The district court for the Southern District of New York denied the government’s first motion to dismiss (based on lack of jurisdiction) but granted its second motion to dismiss (based on expiration of the statute of limitations). Pfizer appealed and we’re still waiting to hear from the Second Circuit.
In the meantime, the Court of Federal Claims issued its decision on August 15th in the case Paresky v. United States, docket no. 17-1725, another suit for overpayment interest that involved essentially a mirror image of the jurisdiction issue in Pfizer. It also had some other interesting procedural twists and turns.
Here’s a recap of what the CFC called “[t]wo different, divergent, and conflicting jurisdictional paths . . . proffered by the parties.” The first jurisdictional path is that set forth in 28 U.S.C. § 1346(a)(1)– district courts and the CFC have concurrent jurisdiction over
Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.
Let’s call this “tax refund jurisdiction,” because that is its primary use – although Pfizer argued about whether that is the only use.
any claim against the United States . . . founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.
What about statutes of limitation? There is a general six-year statute of limitations for actions in federal courts – 28 U.S.C. § 2401 or 2501, for district courts and the CFC respectively. The Code also sets forth a statute of limitations. Specifically, Section 7422 of the Code requires a refund claim be filed first for any suit
for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected.
And Section 6532 precludes a suit under Section 7422 begun more than 2 years after the IRS mails a notice of disallowance of the claim.
One might infer a link between the jurisdictional grant itself, for “tax refunds” or under the Tucker Act, and the corresponding statute of limitations. That is, suits brought under the “tax refund” jurisdictional grant would be subject, based on similar language, to Code sections 7422 and 6532. Suits brought under the Tucker Act, however, would be subject to the general six-year statute of limitations for the district courts and the CFC. However, the plaintiffs in both of these cases argued for a disconnect – either “tax refund” jurisdiction + the general six-year statute of limitations, or Tucker Act jurisdiction + the Code’s refund suit statute of limitations. And there is actually a footnote in E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005) stating that the similarity of the language in Section 7422 and 28 U.S.C. § 1346(a)(1) doesn’t necessarily mean they are interpreted the same way.
(Some cases have applied both statutes of limitations to tax refund suits, so the statute of limitations doesn’t remain open indefinitely when the IRS doesn’t issue a notice of disallowance of the claim. See, e.g., Wagenet v. United States, 104 A.F.T.R.2d (RIA) 2009-7804 (C.D. Cal.). The Court of Claims, on the other hand, held that the six-year statute of limitations doesn’t apply to tax refund suits and allowed a refund suit filed 2 years after the notice of disallowance, which wasn’t issued until 28 years after the original refund claim. Detroit Trust v. United States, 131 Ct. Cl. 223 (1955). The IRS agrees with the latter position. Chief Counsel Notice 2012-012. But we’re wandering far afield from the issues in Pfizer and Paresky.)
Pfizer brought its suit in district court under tax refund jurisdiction. Its issue revolved around whether a taxpayer is entitled to overpayment interest when: (a) the IRS issued a refund within 45 days of the claim (when overpayment interest is not required under the exception in Section 6611(e)), (b) the check was not received, and (c) a replacement check was issued more than 45 days after the refund claim. Pfizer wanted to rely on a favorable Second Circuit precedent on this issue, so it wanted to file in the SDNY rather than the CFC, but Tucker Act jurisdiction for district courts is limited to claims for $10,000 or less. Thus, Pfizer filed its suit asserting tax refund jurisdiction.
Because Pfizer filed its suit late under the Section 6532 statute of limitations, it argued that its “tax refund suit” was subject instead to the general six-year statute of limitations. The SDNY agreed that suits for overpayment interest qualified for tax refund jurisdiction, following Scripps. So the taxpayer won on the government’s first motion to dismiss. But the court concluded tax refund jurisdiction carries with it the Section 6532 statute of limitations. So the taxpayer lost on the government’s second motion to dismiss. On appeal, Pfizer continues to argue for tax refund jurisdiction + Tucker Act statute of limitations.
Enter the Pareskys
The Pareskys had a different problem. They filed their suit in the CFC as a Tucker Act claim. But in their case, the two-year statute of limitations in Section 6532 was still open although the six-year statute of limitations for Tucker Act claims was not. Two years is less than six years, but the two different limitation periods began running at different times. So the Pareskys argued that a Tucker Act claim was nevertheless subject to the statute of limitations for tax refund suits. Again, they argued for one jurisdictional grant coupled with a statute of limitations apparently applicable to a different jurisdictional grant. As with Pfizer, but in reverse.
The Pareskys’ problems traced back to investments with Bernie Madoff. They reported substantial income for 2005 through 2007 that turned out to be fictitious. On their tax return for 2008, they claimed a net operating loss from the Ponzi scheme. Revenue Procedure 2009-20 provides an optional safe harbor method of treating losses from investments in fraudulent schemes. That method precludes double-dipping: taxpayers claim the entire loss in the year the fraud was discovered but cannot file amended returns to exclude the fictitious income (never received) that was reported in taxable years before the discovery year.
The Pareskys did not follow the optional Revenue Procedure method. Instead, in October 2009, they filed amended returns on Forms 1040X for years 2005 – 2007, to exclude the fictitious income reported in those years. The claimed a loss on their 2008 tax return, when they discovered the fraud. In December 2009, they filed Form 1045s, claiming tentative carryback refunds under Section 6411for years 2003 – 2007, by carrying back the net operating loss from 2008. But the net operating loss was reduced by the amount of the fictitious income for 2005 – 2007, so there was still no double-dipping. The overpayment interest claim involves solely the tentative carryback refunds, not the refunds associated with the amended returns on Forms 1040X.
The refunds claimed on Forms 1045 for tentative carrybacks, totaling almost $10 million, were issued in April and May of 2010, just a few months after the Pareskys filed the Forms 1045 in December 2009. The government paid no interest on those refunds, even though it issued the refunds more than 45 days after it received the Forms 1045, because it argued the applications were not in processible form when originally submitted. The Pareskys, of course, disagreed.
The IRS examination of the Pareskys’ tax liabilities for 2003 through 2008, trigged by the amended returns, also included the refunds sought on the Forms 1045 as well as the Pareskys’ claim for overpayment interest on the Form 1045 refunds. The examination continued until October 2011, during which time the parties agreed to an extension of the limitations period. In October 2011, the IRS began preparing a report to the Joint Committee on Taxation (JCT), required under Section 6405 for large refunds. (Section 6405(a) prohibits the IRS from issuing such large refunds until 30 days after the IRS submits the report to JCT, but that restriction does not apply to refunds made under Section 6411. Section 6411 provides for only a “limited examination” of the tentative carryback applications before issuing the refund.) The IRS submitted the report to JCT on January 25, 2013, stating that the refunds sought on the Forms 1045 had been approved.
The Pareskys filed a protest with the IRS on June 6, 2014, concerning the resolution of the examination. Appeals determined, on September 4, 2014, that no overpayment interest was due on the Form 1045 refunds because the refunds were issued within 45 days after the applications were submitted in processible form. That determination letter instructed the Pareskys to file a formal claim on Form 843 by September 12, 2014, which they did. The claim was denied on September 24, 2015, and the Pareskys filed their complaint in the CFC on September 15, 2017.
Was it timely?
The government argued that, under the Tucker Act, the claim accrued in May 2010 and the plaintiffs did not file suit within the six-year statute of limitations. The plaintiffs asserted three alternative arguments. First, they argued that the tax refund statute of limitations, rather than the six-year period applicable to Tucker Act claims, applied and began running when their claim was denied on September 24, 2015. Second, they argued that if the six-year limitations period applied, their claim didn’t accrue until the report to JCT on January 25, 2013. Finally, they argued that under the “accrual suspension rule” the claim doesn’t accrue until the plaintiff is aware of the claim. The court rejected all three arguments.
The Sixth Circuit in Scripps and the SDNY in the Pfizercase agreed that taxpayers could bring a suit for overpayment interest under the “tax refund jurisdiction” provision. But the CFC didn’t buy that argument. There were too many precedents in that court, the Federal Circuit, or the Court of Claims to the contrary. The Federal Circuit might decide to overrule those, but the CFC would not.
The court also rejected the argument that the suit was filed within the six-year limitations period. The claim accrued when the underlying tax refunds were “scheduled.” There was an evidentiary dispute regarding when the refunds had been scheduled; the Pareskys therefore argued that the date of the report to JCT was the earliest moment when it was certainthat the refunds had been allowed. But the government pointed out that the report to JCT has nothing to do with the date a tentative carryback refund is allowed, and the court found the government’s evidence sufficient to establish that the refunds were scheduled in early 2010.
The accrual suspension rule didn’t save the Pareskys either. The IRS may not have explicitly disclosed to the taxpayers the date that the refunds were scheduled, but they received the refunds and knew they did not include overpayment interest. Those were the relevant facts that established their claim and the IRS did not conceal those.
Equitable tolling or estoppel?
In both Pfizer and Paresky, the IRS sent the taxpayers a letter stating a different statute of limitations than the court determined applied to their respective situations. Appeals sent Pfizer a letter stating that the six-year statute of limitations applied, presumably because the claim involved overpayment interest, without addressing the impact of which jurisdictional grant Pfizer would rely on. The Pareskys received the determination by Appeals concerning their protest and also a denial of their subsequent refund claim, both of which stated the Section 6532 statute of limitations, without addressing potential different treatment for claims involving overpayment interest.
That misinformation certainly seems to provide a potential factual predicate for equitable tolling or estoppel of filing deadlines, but many courts have been resistant to that. Carl Smith and Keith Fogg are continuing their quest to overcome that resistance including by filing an amicus brief in Pfizer, which I am shamelessly paraphrasing for the following summary.
In brief, statutory deadlines that are “jurisdictional” cannot be waived or extended for equitable reasons. Unfortunately, as the Supreme Court observed in 2004, courts have been careless in applying that label. “Clarity would be facilitated if courts and litigants used the label ‘jurisdictional’ not for claim-processing rules, but only for prescriptions delineating the classes of cases (subject-matter jurisdiction) and the persons (personal jurisdiction) falling within a court’s adjudicatory authority.” Kontrick v. Ryan, 540 U.S. 443, 455 (2004). The Supreme Court has also held that time periods in which to act are almost never jurisdictional, unless Congress makes a “clear statement” to that effect. In particular, if the filing deadline and the jurisdictional grant are not part of the same provision, that likely indicates that the time bar is non-jurisdictional. United States v. Wong, 135 S. Ct. 1625 (2015).
Carl and Keith are arguing in Pfizer that Section 6532’s statute of limitations is not jurisdictional and is subject to estoppel under the standard set forth in recent Supreme Court decisions. The Supreme Court has never ruled on whether the Section 6532(a) deadline is jurisdictional or subject to estoppel or equitable tolling. However, before the recent Supreme Court decisions, the Second Circuit applied estoppel to prevent the government from arguing that the filing deadline barred the court from hearing the case. Miller v. United States, 500 F.2d 1007 (2nd Cir. 1974). Although some other circuits had disagreed, the Second Circuit could rely on that precedent to estop the government in the Pfizer case.
Theoretically, the same result should apply to the six-year filing deadline in 28 U.S.C. § 2501. Alas, this argument would not work for the taxpayers in the Pareskycase. The Supreme Court has not ruled on Section 6532’s deadline but it has ruled on 28 U.S.C. § 2501, and concluded that it was jurisdictional and therefore not subject to equitable tolling or estoppel. John R. Sand & Gravel Co. v. United States, 552 U.S. 130 (2008). However, that was more a matter of stare decisisbecause the Court had called the deadline jurisdictional in a number of opinions over decades. In the Wongcase, the Court held that the FTCA filing deadline in 28 U.S.C. 2401(b) was non-jurisdictional and subject to equitable tolling, while observing that the John R. Sand & Gravel Co.did not follow the Court’s current thinking because of those precedents.
So – hopefully Carl and Keith will persuade the Second Circuit in Pfizer, as well as other courts in other cases. The National Taxpayer Advocate also proposed, in her most recent annual report to Congress, a legislative fix by amending the Code to provide that judicial filing deadlines are non-jurisdictional. We wish them well!
Where do we go from here?
The Court of Federal Claims agreed to transfer the case, at the plaintiffs’ request and over the government’s objections, so the Pareskys are headed to the Southern District of Florida. They hope to persuade the SDF that a suit for overpayment interest fits within “tax refund jurisdiction” and the suit therefore would be timely under the tax refund statute of limitations in Section 6532. There is a split between the Federal Circuit and the Sixth Circuit – add the Second Circuit if it affirms the District Court in the Pfizer case. Neither party cited precedents from the Eleventh Circuit, so it’s at least possible that the SDF will follow Scrippsand find it has jurisdiction.
Meanwhile, Pfizer is still waiting for a ruling by the Second Circuit. Paresky offers arguments for both sides in Pfizer. Paresky held that the six-year statute of limitations applies (good for Pfizer) but that tax refund jurisdiction is not available (bad for Pfizer). Pfizer has requested, if the Second Circuit affirms the SDNY, that it also transfer the case to the CFC. It seems that court would clearly have jurisdiction under the Tucker Act, and Pfizer met the six-year statute of limitations, so the CFC apparently would hear the merits of the case. The favorable Doolin precedent in the Second Circuit wouldn’t carry as much weight in the CFC but Pfizer might still prevail on the merits.
The government stated in its brief that it may or may not oppose transfer, depending on whythe Second Circuit (hypothetically) rules against Pfizer. If the Second Circuit rules that “tax refund jurisdiction” does not apply to suits for overpayment interest, the government would not oppose transfer. But if the Second Circuit agrees that “tax refund jurisdiction” applies to the case and rules against Pfizer only on the basis that Pfizer did not file its suit within two years of the notice of disallowance, the government asked that transfer be denied.