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Protective refund claim – possible tax recovery

No refund suit is allowed in the absence of a timely claim filed with IRS

U.S. v. Clintwood Elkorn Mining Co., (S Ct 4/15/2008) 101 AFTR 2d ¶ 2008696

Mike Habib, EA

The Supreme Court, reversing the Court of Appeals for the Federal Circuit, has held that the plain language of Code Sec. 7422(a) and Code Sec. 6511 requires a taxpayer seeking a refund of a tax assessed in violation of the Export Clause of the U.S. Constitution, just as for any other unlawfully assessed tax, to file a timely administrative refund claim with IRS before bringing suit against the Government.

Background. A manufacturers excise tax is imposed on coal mined from underground or surface mines located in the U.S. and sold or used by the producer. (Code Sec. 4121) In ’98, a district court (Ranger Fuel Corp v. U.S., (DC VA 1998) 83 AFTR 2d 99-375) held that the coal excise tax is unconstitutional to the extent it applies to exported coal based on the blanket prohibition imposed by the Export Clause of the U.S. Constitution and IRS acquiesced, in effect, in that decision by issuing guidance (Notice 2000-28, 2000-1 CB 1116) on how to claim a refund for coal excise tax imposed on exported coal.

A taxpayer must file a refund claim with IRS before starting a suit for refund (or credit). (Code Sec. 7422(a))
A taxpayer must file a claim for credit or refund of an overpayment within three years from the time the relevant return is filed, or two years from the time the tax is paid, whichever period expires later. (Code Sec. 6511(a)) No credit or refund is allowed if a claim is not filed within these time limits. (Code Sec. 6511(b))

Facts. The taxpayers, three coal companies, had all paid taxes on coal exports under Code Sec. 4121 since as early as ’78. After Code Sec. 4121 was held unconstitutional as applied to coal exports, the companies timely filed administrative claims for refund of coal taxes they had paid in ’97 through ’99. IRS refunded those taxes, with interest.

The companies also filed suit in the Court of Federal Claims seeking a refund of $1,065,936 in taxes paid between ’94 and ’96. They did not file any claim for those taxes with IRS. The Supreme Court noted that any such claim would of course have been denied, given the limits set forth in Code Sec. 6511. Notwithstanding the failure of the companies to file timely administrative refund claims, the Court of Federal Claims allowed the companies to pursue their suit directly under the Export Clause. Jurisdiction rested on the Tucker Act, 28 USCS 1491(a)(1), and the companies limited their claim to taxes paid within that statute’s 6-year limitations period. The Court of Federal Claims did not, however, allow the companies to recover interest on the taxes. (Andalex Resources, Inc. v. U.S., (2002 Ct Fed C) 90 AFTR 2d 2002-7393) The Court of Appeals for the Federal Circuit allowed the refund and also allowed interest. (Clintwood Elkhorn Mining Co v. U.S., (2007, CA Fed Cir) 99 AFTR 2d 2007-613)

Supreme Court reverses. The Supreme Court observed that the Code provides that taxpayers seeking a refund of taxes unlawfully assessed must comply with its tax refund procedures. Under those procedures, a taxpayer must file an administrative claim with IRS before filing suit against the Government. Such a claim must be filed within three years of the filing of a return or two years of payment of the tax, whichever is later.

The Supreme Court noted that the Tucker Act is more forgivingit allows claims to be brought against the U.S. within six years of the challenged conduct.

The question before the Court was whether a taxpayer suing for a refund of taxes collected in violation of the Export Clause of the Constitution could proceed under the Tucker Act, when the suit does not meet the time limits for refund actions in the Code. In a unanimous opinion, the Court said the answer is no.

The Court based its decision on the plain language of the pertinent Code provisions. The Court stressed that Code Sec. 7422(a) provides that no 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 until a claim for refund or credit has been duly filed with IRS. The Court said that the companies did not file a refund claim with IRS for the ’94 through ’96 taxes. Thus, they may bring no suit in any court to recover the taxes.

The Supreme Court further noted that the time limits for administrative refund claims apply to any tax imposed by the Code (Code Sec. 6511(a)) and that the Code provides that no refund shall be allowed after the expiration of those time limits. (Code Sec. 6511(b)) This language clearly covered the companies’ claim for refund of taxes imposed by Code Sec. 4121.

The companies nonetheless argued that their claims were exempt from the Code provisions’ broad sweep because the claims derived from the Export Clause of the Constitution. The Supreme Court said that there is no basis for treating taxes collected in violation of that Clause differently from taxes challenged on other grounds. Because the companies acknowledged that their claims were subject to the Tucker Act’s time bar, the question was not whether their refund claim could be limited, but rather which limitation applied. Their argument that, despite explicit and expansive statutory language, the Code’s refund scheme did not apply to their case as a matter of statutory interpretation was without merit. Accordingly, the Supreme Court reversed the Federal Circuit and denied the claim.

    Observation: If a taxpayer believes that a tax is unlawful, it should file a refund claim. If IRS denies the claim, the taxpayer can then challenge the tax in court. A taxpayer who does not intend to challenge a tax that it feels is unlawful should nonetheless file a protective refund claim if it is aware that another taxpayer is challenging the tax. The protective claim may serve to allow the taxpayer to recover the tax if the other taxpayer subsequently prevails in its suit against IRS.

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