Unanimous Supreme Court Bars Tax Refund Suit

Reversing the Court of Federal Claims, the Supreme Court held that the Claims Court was without jurisdiction to hear the taxpayer’s refund claim since the taxpayer had not complied with refund procedures articulated in the Internal Revenue Code. U.S. v. Clintwood Elkhorn Mining Co., et al., No. 07-308; 4/15/08; Certiorari.

[IRC §7422 provides that prior to bringing suit against the government for taxes illegally assessed, an administrative claim must be filed within 3 years of the filing of the tax return, or within 2 years of the date when the tax was paid, whichever is later. Elkhorn Mining paid tax on coal exports under a Code provision later held to be unconstitutional. However, Elkhorn Mining had not complied with refund procedures in the Code.]

Writing for a unanimous Court, Chief Justice Roberts stated that the time limits for filing administrative claims were set forth in the Code in “unusually emphatic form.” Noting that the term “any” appeared five times in one sentence (i.e., “[n]o suit . . . shall be maintained in any court 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, until a claim for refund . . . has been duly filed with” the IRS), the Court concluded that Congress intended that the statute have “expansive reach.”

Although the taxpayer argued that its claim arose under the Tucker Act (enacted in 1887, the U.S. waived sovereign immunity from constitutional claims where the government was a contractual party) which provided for a longer six-year limitations period, the Court held that the shorter period provided by the Code was appropriate because claims for recovery of taxes “impede the administration of the tax laws.” If such suits were allowed, the “refund scheme in the Code would have no meaning.” The Court concluded that even where the constitutionality of a tax is challenged, Congress should not be deprived of its power to protect its taxing interest.

In C.M. Ballard v. CIR, CA-11, 2005-2 USTC ¶50,621, the 11th Circuit remanded a Tax Court determination for a second time.  The case involved an executive who participated in a kickback scheme resulting in unreported income. Tax Court Rule 183 authorizes the Tax Court to assign a case involving a deficiency of more than $50,000 to a special trial judge who prepares a report. After parties are given an opportunity to file objections to the report, the case is decided by a regular Tax Court judge. The report of the special trial judge absolved the taxpayers from deficiencies and penalties. However, this determination was reversed by the Tax Court judge. On appeal, the 11th Circuit found that the Tax Court judge, in rejecting the special trial judge’s report, had made independent determinations, thereby violating Rule 183(d), which provides that due regard must be given to the determination of credibility and findings of fact of the special trial judge. Holding that the findings of the special trial judge were supported by the record, the 11th Circuit ordered the Tax Court to vacate the opinion of the Tax Court judge, and adopt the report of the special trial judge as the opinion of the Tax Court.

The Fifth Circuit, affirming a district court decision, held that the IRC §7520 actuarial tables must be used to value annuities received by virtue of a structured settlement of a personal injury lawsuit. Anthony, Administratratrix v. U.S. (CA 5 3/4/2008).

[James Bankston was the beneficiary of three annuities which guaranteed payment for at least 15 years. The annuities could not be “sold, assigned or encumbered.” After Bankston’s death in 1996, his estate determined the present value of the annuities to be worth $468,078, using IRC §7520 actuarial tables, which provide an interest factor and a mortality factor. After an IRS audit (resulting in additional tax of $142,605) and payment of  taxes in installments between 1997 and 2001, the Estate made a claim for refund to the IRS which was denied. The Estate then brought a refund suit in district court, which it lost. The instant appeal followed.]

On appeal, the Estate argued first that the restrictions on transfer caused the structured settlement to constitute a “restricted beneficial interest” under Regs. §20.7520-3(b)(1)(ii) whose value could not be determined under the annuity tables. The court rejected this argument, holding that the restricted beneficial interest exception applied only where the income stream from the annuity was itself in jeopardy, noting also that the Regs made no mention of “marketability” or “transferability” restrictions.

The second argument was that annuity tables were inapplicable because they would produce an “unreasonable and unrealistic” result. Some Circuits have justified departure from the IRC §7520 actuarial tables in the context of lottery payouts. However, the Fifth Circuit, in Cook (2003, CA5) AFTR 2d 2003-7027, has not, and was controlling in the instant case. Cook held even an alleged disparity between the fair market value of the lottery winnings (which were assignable) and the value determined under IRC §7520, did not justify departure from the actuarial tables.

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In fiscal year 2006-2007, the NYS Division of Tax Appeals rendered 100 determinations. Of those, 65 sustained the deficiency asserted by the Department of Taxation. In the other 35 cases, the deficiency was cancelled or modified in some respect (e.g., reduction in tax, waiver of penalty or reduction of audit period). In 12 of those 35 cases, the deficiency was cancelled outright. Either the taxpayer or the Department may appeal all or part of a determination to the Tax Appeals Tribunal by filing a “Notice of Exception.” In fiscal year 2006-2007, the Tribunal issued 36 decisions. Of those, 26 (72.2%) sustained the deficiency or other action taken by the Department, while in 10 cases (27.8%), the Tribunal cancelled (4 cases or 11.1%) or modified the deficiency (6 cases or 16.7%). (NYS Division of Tax Appeals Annual Report Fiscal Year 2006-2007.)

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