Tax Procedure: The Impact of Bankruptcy on Refund Claims

bankruptcy-tax-returnLast week, a district court addressed a series of refund claims that had an unusual jurisdictional complication: The Taxpayers initiated the refund claims while they were debtors in a Chapter 7 bankruptcy case, and the refunds they sought were property of the bankruptcy estate. The government sought to dismiss their refund action on a variety of grounds; while the motion was denied, the resulting opinion addresses a number of interesting issues concerning the complications that a bankruptcy case can add to a refund claim. Martin v. United States, No. 3:13-cv-03130, 2017 U.S. Dist. LEXIS 1285 (C.D. Ill. Jan. 5, 2017).… Read More

Tax Procedure: More on Divisible Taxes and the Full Payment Rule

divisible-taxes-and-the-full-payment-ruleNot all federal tax assessments are subject to the Tax Court’s jurisdiction, which means that in some cases the taxpayer is left with a refund claim as the sole source of judicial review. Full payment of the disputed tax assessment is a jurisdictional prerequisite for a refund claim. Flora v. United States, 362 U.S. 145, 150-51 (1960). There is a limited exception to this requirement: If a tax is divisible, then a payment of the tax for one or more individual transactions will suffice to establish jurisdiction. See, e.g., Psaty v. United States, 442 F.2d 1154, 1159 (3d Cir.… Read More

Tax Procedure: Think Carefully About Jurisdiction – It’s Important

JurisdictionAn individual who has been assessed with the trust fund recovery penalty for failure to collect, account for or pay over employment taxes generally cannot obtain review in Tax Court. Instead, judicial review is available by means of a refund claim, which can be heard either in district court or the Court of Federal Claims. Normally, jurisdiction over a refund action requires full payment of the tax. Flora v. United States, 362 U.S. 145, 150 (1960). For someone who is challenging the imposition of the trust fund recovery penalty, this rule is relaxed: because the tax is divisible, jurisdiction is established if the plaintiff has paid the withheld tax for one employee for one quarter.… Read More

Jurisdiction: A Refund Action Runs Afoul of Flora, Part II.

Last week, I reported on Diversified Group, Inc. v. United States, 2015 U.S. Claims LEXIS 1101 (Aug. 26, 2015), a case on divisible taxes and jurisdiction, but I did not examine the cases that the taxpayer relied upon in the detail that they deserved.

Two cases were central to the taxpayer’s divisibility argument: Noske v. United States, 911 F.2d 133 (8th Cir. 1990), and Humphrey v. United States, 854 F. Supp. 2d 1301 (N.D. Ga. 2011). See Diversified Group, 2015 U.S. Claims LEXIS 1101, slip op. at *19. The Court of Federal Claims concluded that neither supported the taxpayer’s jurisdictional argument.… Read More

Jurisdiction: A Refund Action Runs Afoul of Flora.

A taxpayer who wants to pursue a refund claim must “pay first and litigate later.” Flora v. United States, 375 U.S. 63, 75 (1958) (citations omitted). Some taxes, however, are divisible, including the trust fund recovery penalty imposed under Section 6672 of the Internal Revenue Code. Pstay v. United States, 442 F.2d 1154, 1159 (3d Cir. 1971). Because the trust fund recovery penalty is a divisible tax, the payment of a single assessment relating to a single employee is sufficient to create jurisdiction over a refund claim, and the government counterclaims for the balance.

Last week, the Court of Federal Claim considered an interesting argument over the full payment rule of Flora.… Read More

Think Before You Sue: Bad Planning Leads to Bad Results.

When taxpayers have a dispute with the federal government concerning the appropriate amount of income tax due, they have a broad array of choices. Assuming that the case involves a notice of deficiency, the taxpayer can file a petition for tax court review; alternatively, the taxpayer can pay the disputed tax and file suit for a refund in either district court or the Court of Federal Claims.

Selecting the appropriate forum should involve careful thought and planning, but cases arise where the taxpayer appears not to have thought the issue through carefully. Recently, the Court of Federal Claims addressed a refund claim brought by a taxpayer that could not make up its mind and pursued overlapping cases in tax court, district court and the Court of Federal Claims.Read More

Abstention in a Tax Case? The IRS Meets Colorado River.

Federal courts are supposed to hear any case that is properly before them. But there are exceptions: a series of abstention doctrines govern situations in which it is proper to refuse to hear a case. Describing the various doctrines is better suited to a book than a blog, but in broad brush strokes most of them involve competing federal and state interests where a state interest is important enough that a federal court should stay its hand instead of acting. Recently, the United States District Court for the Eastern District of New York issued a very interesting opinion in a tax collection case brought by the government; the district court concluded that it should abstain from hearing the government’s case under Colorado River abstention.Read More

Consistency, Hobgoblins and Esoterica: A Look at Interpleader in Tax Levy Cases.

A recent case from the Western District of New York highlights a fairly esoteric issue: interpleader of funds subject to an IRS tax levy. The case is also interesting because of a governmental flip-flop on the power of a federal court to entertain an interpleader case involving a fund that has been the subject of a federal tax levy: first the IRS told a state court that only a federal court could address the priority of its lien, but when the entity holding the fund obliged by filing an interpleader action in federal court, the government balked and move to dismiss, arguing that no federal jurisdiction existed.Read More

Refund Claims for Holders of Partnership Interests, a Cautionary Tale.

What would you do if you realized that a tax return filed in the past three years treated an item as ordinary income that qualified for capital gains treatment? Generally, if you decided that the  amount was worth the trouble, you would file an amended return and seek a refund.

But there is one situation where that is not the right move: when the income came from a partnership covered by TEFRA. The Fifth Circuit recently issued an opinion that illustrates the point nicely. Rigas v. United States, 2012 U.S. App. LEXIS 17636 (5th Cir. Aug. 21, 2012).

In Rigas, the taxpayers had an interest in a limited liability company known as Odyssey Energy Capital, LLC (“Odyssey”) that managed oil and gas assets and had elected to be taxed as a partnership.Read More

Good Faith Deposits in Final Partnership Administrative Adjustment Cases.

A partner in a partnership that is the subject of a Final Partnership Administrative Adjustment has the right to judicial review in district court or the Court of Federal Claims under Section 6226 of the Internal Revenue Code. The court’s jurisdiction can only be invoked, however, if the partner makes a deposit with the IRS in an amount equal to the increase in tax liability that the partner would have if the court sustains the administrative determination and the partnership items on her return were adjusted in a manner consistent with the Final Partnership Administrative Adjustment. See I.R.C. § 6226(e)(1). The Code also provides that this requirement can be satisfied if the Court rules that “there has been a good faith attempt to satisfy such requirements and any shortfall in the amount required to be deposited is timely corrected.” Id.Read More