Carl wrote last summer about a 9th Circuit case in which a return preparer failed to take advantage of the special rule for filing a refund suit under IRC 6694. Les wrote about the same issue last winter. As a result of failing to take advantage of the special path to contesting a refund claim under IRC 6694, the return preparers in the cases described by Carl and Les fell back into the full payment rule of Flora which we have discussed at some length in earlier posts such as the ones here and here.
Now another 6694 case has come to the same sad ending where the return preparer paid the 15% which would have triggered the exception to the Flora rule, but did not file the complaint timely, resulting in a dismissal with a remonstration to fully pay the tax before coming back to have the court take a look at the merits. The return preparer in Riter v. United States, No. 2:17-cv-01265 (D. Utah March 15, 2019) did not give up easily. He made arguments challenging the Flora rule and requesting equitable tolling, but he lost all of his arguments. The case points out once again the somewhat tricky exception to Flora created by IRC 6694 (also created in IRC 6703) and the carefully prescribed steps a penalized return preparer must take to comply. The existence of three cases with the same problem in one year points out that the perceived benefit of the Flora exception in IRC 6694 can be somewhat illusory unless you follow the precise steps Congress set out for this section alone. While it’s worth asking why Congress created a unique path to refund litigation for one section, these cases show why it’s not worth litigating the issue to ask the court to answer that question.
Mr. Riter may be a subscriber to this blog because he makes an equitable tolling argument not made in the prior two cases mentioned above. Before getting to his argument and the court’s response, here is the succinct statement of the facts set out in the magistrate judge’s report:
In this case, on June 27, 2016, the United States assessed Mr. Riter penalties under 26 U.S.C. § 6694(b) for tax years 2010 through 2014 in the amount of $5,000 for each year, or a combined total of $25,000. (Compl., ¶ 13, ECF No. 2.) In compliance with § 6694(c)(1), Mr. Riter, on July 22, 2016, filed a claim for refund and paid $750, or 15% of the total penalty, for each tax year, totaling $3,750 for the five tax years. (Id., ¶ 15.) However, Mr. Riter did not satisfy the prerequisites of § 6694(c)(2). That provision required Mr. Riter to file his lawsuit by the earlier of either (1) thirty days after the United Sates denied his refund claim, or (2) thirty days after six months from the date he filed his refund claim. The United States denied Mr. Riter’s refund claim on November 16, 2017. (Id., ¶ 26.) Thirty days after this date is December 16, 2017. Mr. Riter filed his refund claim on July 22, 2016. Thirty days after six months from July 22, 2016 is February 27, 2017. February 27, 2017 is clearly the earlier of the two dates. However, Mr. Riter did not file this lawsuit seeking a refund of the penalties until December 8, 2017, (see id.), well beyond the February 27, 2017 deadline to do so. After February 27, 2017, the 15% limited exception to the full payment rule “cease[d] to apply with respect to such penalty,” meaning that the full payment rule applied after that time. 26 U.S.C. § 6694(c)(2). However, Mr. Riter admits he paid only 15% of the penalties, (see Compl., ¶ 15, ECF No. 2), thereby conceding he did not comply § 1346(a)(1) and Flora’s full payment requirement.
If not before then certainly by the time the IRS filed its motion to dismiss for lack of jurisdiction, Mr. Riter knew that he had not followed the very precise rules required to satisfy the exception to the Flora rule available in IRC 6694. In order to move his case forward, he did not argue that he complied with the IRC 6694 provisions, but instead argued that they were claims processing rules rather than a jurisdictional requirement. He cited to United States v. Wong, 575 U.S. __, 135 S. Ct. 1625, 1632 (2015), arguing that because IRC 6694 does not use the word jurisdictional, the court has the ability to determine that his late performance of the requirements of IRC 6694 could be excused under the principle of equitable tolling.
Responding to this argument, the magistrate judge stated:
…as the United States points out, Wong involved a failure to comply with the Federal Tort Claims Act statute of limitations, and § 6694(c) is not a statute of limitations similar to the one at issue in Wong. (Reply in Supp. of Pl.’s Mem. in Opp’n to United States’ Mot. to Dismiss for Lack of Subject Matter Jurisdiction 4, ECF No. 12.) Significantly, Mr. Riter does not cite to any case law finding that § 6694(c) or the nearly identical § 6703(c) constitute merely claims processing rules.
The fact that 6694 is in the Internal Revenue Code and not the Federal Tort Claims Act should not control the outcome, nor should the fact that no one had previously successfully argued the claims processing issue. The specificity of the statute and the fact that Congress knew it was creating an exception to a jurisdictional rule support the court’s conclusion. I am troubled by the court’s view of the statement that Congress must make about jurisdiction. It stated “If the Supreme Court considers § 6694(c) a claims processing rule and not jurisdictional, it will need to state as much explicitly before a lower court can make such a finding.” This reverses the normal rule which requires Congress to make it clear a provision is jurisdictional and not make it clear that one is not. The court gets to this twist because it views the law as well established that Flora is a jurisdictional requirement and sees 6694 as an exception to that requirement.
Going beyond the claim processing issue, Mr. Riter does not appear to have offered the court much, if any, reason that he missed the statutory time periods. For his argument to succeed, assuming he were to get past the jurisdictional issue, he still must show the court why it should give him relief. Just saying a statute is a claims processing rule does not win the day. Someone who misses the deadline for a claims processing rule must still demonstrate a reason why they deserve relief. He does not seem to have done this.
In losing, Mr. Riter shows that he learned from the earlier cases and made arguments attacking the standard interpretation of the statute. Unfortunately, his argument was unsuccessful, perhaps because he did not have the facts to support the equitable tolling. The case reminds us again of the care required from individuals assessed a penalty under IRC 6694 or 6703 if they wish to contest the penalty without fully paying it.