Recently, there seems to have been a higher number of cases than usual coming down from courts regarding Tax Court jurisdictional issues. My colleague Parker Durham covered a few of them in a recent article.[1] In a recent case out of the Court of Federal Claims, yet another jurisdictional issue arose.[2] In the present case, the taxpayer, Ms. Wallace, filed a refund claim in the Court of Federal Claims for the tax years 2013, 2015, and 2021. Ultimately, the Court never needed to address the merits or other jurisdictional issues raised because Ms. Wallace had previously filed Tax Court Petitions for all three years at issue which precluded the Court of Federal Claims from having jurisdiction over the case.
Federal Tax Litigation Avenues
As a primer to this, it might be helpful to review the various options a taxpayer has to litigate a federal tax dispute once it has made its way through the audit process and been assessed. In general, there are three avenues the taxpayer can take, one being in the Tax Court and the other two being refund suits.[3]
Tax Court
First, the taxpayer may file a Petition to have their case heard in the United States Tax Court. Once the IRS makes an adjustment at the conclusion of an audit, the IRS will issue the taxpayer a Notice of Deficiency[4], often called a 90 day letter. The date of this letter is crucial as the taxpayer then has 90 days to file a Petition with the Tax Court[5], or they lose out on the ability to have their case heard by the Tax Court. This happened in several of the jurisdictional cases mentioned above, some of which are discussed in my colleague’s prior article. Once the 90 days has passed, the Tax Court is no longer an option. While I will not get into strategy as far as choosing between the three avenues for a federal tax dispute, the Tax Court is the only option where the taxpayer does not have to first pay the tax[6] and then sue for a refund. The refund claim route is often called the “pay to play” route, since as discussed in the analysis below, full payment of the tax is generally required prior to getting in the door. So, if the taxpayer is not willing to pay the tax first, then the Tax Court is the only option.
Refund Suit – United States District Court (Jury Trial Available)
Second, the taxpayer may pay the tax and then sue for a refund in the United States District Court. Prior to doing this, as discussed below, the taxpayer must first submit an administrative claim for a refund and have it denied. Once denied, the door is open to sue in the United States District Court.
Refund Suit – United States Court of Federal Claims (No Jury Trial Available)
Third, the taxpayer may pay the tax and then sue for refund in the United States Court of Federal Claims, the Court which handed down the opinion discussed in this article. The requirements to get in the door of the Court of Federal Claims are the same as for getting in the door of the United States District Court.
Facts
As noted above, this case arose when Ms. Wallace filed a refund claim in the Court of Federal Claims for the tax years 2013, 2015, and 2021. Prior to the filing of the refund claims for the relevant tax years, Ms. Wallace had also filed Tax Court Petitions for each year. In fact, at the time the case was decided in December of 2023, she was docketed for trial during the February 2024 Tax Court session in Dallas. Other relevant facts raised are that Ms. Wallace did not first file an administrative claim for 2015 and had not paid the tax assessed for 2021.
Analysis
In its analysis, the Court made quick work of Ms. Wallace’s jurisdictional issues. The Court noted from the outset that it need not even address the administrative claim or tax payment issues raised by the government due to the applicability of §7422(e). Under §7422(e), “[i]f the taxpayer files a petition with the Tax Court, the district court or the United States Court of Federal Claims, as the case may be, shall lose jurisdiction of taxpayer’s suit to whatever extent jurisdiction is acquired by the Tax Court of the subject matter of taxpayers’ suit for refund.” The Supreme Court addressed and clarified this statue, stating that “[u]nder § 7422(e) … a claimant [such as plaintiff] is given the option of pursuing [her] suit in the District Court or in the Tax Court, but [she] cannot litigate in both.”[7] Once the Tax Court Petition is properly filed for a respective tax year, then the Court of Federal Claims is precluded from hearing the case. The Court noted that the government’s status reports and the Tax Court docket itself were clear evidence that Ms. Wallace had indeed filed Tax Court Petitions for the years at issue and was even scheduled for trial.
While the Court noted that it need not even go further past §7422, it went on to address the failure to file the administrative claim for 2015 or the full payment rule for 2021. Under §7422(a), an administrative claim for refund must first be filed before suing for a refund in either the United States District Court or the Court of Federal Claims. Ms. Wallace was unable to show this for the 2015 tax year. As for 2021, the so called “full payment rule” under Flora requires that the tax be paid in full prior to filing a refund suit, and Ms. Wallace had not paid the 2021 tax assessment. Thus, irrespective of 7422(e) discussed above, Ms. Wallace was precluded from filing a suit for refund for 2015 and 2021. The tax year 2013 was not addressed here but was precluded under §7422(e) above.
Conclusion
In any litigation, including federal tax litigation, procedural rules and certain requirements must be met for a Court to have jurisdiction. There are any number of missteps in federal tax litigation that may preclude a taxpayer from litigating a tax dispute in one venue or another. As seen in the Nguyen case[8] (discussed in my colleague’s article cited above), something as small as using the wrong delivery service and thus resulting in a Tax Court Petition arriving one day late can oust a taxpayer from jurisdiction. Other cases have been bounced because a taxpayer filed the Petition on the very last day at 11:05PM, Central Time Zone, which was 12:05AM, Eastern Time Zone, and thus late since the Tax Court sits in the Eastern Times Zone.[9] Other missteps such as those made by Ms. Wallace, namely filing in multiple courts but also failing to file an administrative claim for refund and/or pay the tax in full in a refund suit can oust a taxpayer from court due to jurisdictional issues as well. Taxpayers seeking to contest federal income tax assessment would be wise to seek competent counsel to help avoid procedural missteps and also strategize as to the best avenue to take among the various options available.
While it’s not clear why Ms. Wallace was pursuing these claims on parallel tracks via the Tax Court and the Court of Federal Claims, the result here was a total ouster of Ms. Wallace’s claims by the Court of Federal Claims. Nevertheless, it appears she will get her day in court via the Tax Court hearing scheduled for February 2024, perhaps she will fare better there.
[1] https://esapllc.com/nguyen-case-2023/.
[2] Wallace v. US, 132 AFTR 2d 2023-XXXX (Ct. Fed. Cl.).
[3] Technically there is a fourth option that I will not go into, but federal tax disputes may also be litigated in US Bankruptcy Court under certain circumstances.
[4] §6212. This is referred to as the CP3219N by the IRS.
[5] §6213. Note the deadline is extended to 150 days for notices that are addressed outside of country.
[6] In general, the tax must be paid in full, though for employment tax cases, paying the tax in full for one employee for one quarter is enough to get in the door rather than paying the total tax across all quarters. See Flora v. US, 362 U.S. 145 (1960) for the “full payment rule”. See also Steele v. US, 280 F2d 89 (8th Cir. 1960) and Boynton v. US, 566 F2d 50 (9th Cir. 1977).
[7] Flora v. US, 362 U.S. 145 (1960).
[8] Nguyen v. Comm’r, T.C. Memo 2023-151.
[9] Nutt v. Comm’r, 160 T.C. No. 10 (2023).
