Earlier this month, the Federal Circuit heard oral argument in a tax case, Dougherty Electric, Inc. v. United States. In this case, Dougherty Electric appeals a dismissal by the Court of Federal Claims of a refund suit for lack of subject matter jurisdiction. Judges Lourie, Prost, and Taranto heard the oral argument. This is our argument recap.
Matthew A. Hughes argued for Dougherty Electric. He opened by emphasizing that Dougherty “gave the IRS all the information that it had,” supplemented its refund claim submissions as information became available, and “filled out all the necessary paperwork.” Hughes argued the IRS ultimately considered the claims “on the merits, and rejected them.” This, he argued, demonstrated that the refund submissions were adequate.
A judge asked Hughes to address why Dougherty did not identify the relevant tax periods in its refund letter, calling the omission “pretty basic.” Hughes answered by arguing the IRS’s response itself showed the “tax period wasn’t necessary for the IRS analysis.” Furthermore, Hughes asserted, the IRS necessarily knew which quarters were at issue because the IRS was able to calculate and provide a “restitution schedule” even before Dougherty identified the tax periods.
Another judge questioned whether the IRS’s possession of information can alleviate the taxpayer’s obligation to articulate details in a duly filed claim. Hughes argued Supreme Court precedent requires only that the IRS “be adequately apprised of the basis of the claim.” The judge followed up on the question, asking whether Dougherty was still relying on a “theory based on interest and restitution,” or a theory based on the “failure to get supervisory approval.” Hughes maintained Dougherty was relying on both theories, because the “substance of those claims would be appropriate on remand” and “both were adequately preserved.”
Another judge asked Hughes to confirm that the legal dispute is the “adequacy of the claim,” even though the lower court “didn’t talk about adequacy.” Hughes confirmed adequacy was the only live dispute, emphasizing the question was “not whether or not we made” a claim and “not that it was a request for a refund” that was timely. When asked whether the analysis would differ under Rule 12(b)(6), Hughes argued the analysis would change, and argued dismissal under Rule 12(b)(1) deprived Dougherty of the chance to amend its pleading. Hughes said “that alone is a basis for reversal.”
Rachel Wollitzer argued for the United States. Wollitzer began by arguing the Supreme Court has held the “filing of a timely refund claim is a jurisdictional requirement for a refund suit.” A judge asked whether there is any “meaningful argument that equitable tolling that would not be available for a jurisdictional point.” In response, Wollitzer suggested “it is an academic question whether the complaint is subject to dismissal under jurisdictional grounds or for failure to state a claim.”
After one of the judges suggested the claim, in the government’s view, “wasn’t specific enough to be an informal claim, but it was too specific to be a general claim,” the judge asked Wollitzer how the United States was “reconciling those two” views. Wollitzer answered by arguing a taxpayer can make a specific claim “after the limitations period.” But, she continued, if the IRS “still has jurisdiction over the claim,” the taxpayer can “make a formal amendment raising a new legal theory that is germane to the original claim.” Wollitzer asserted Dougherty “made the specific claim,” but then tried to “amend it out of time with a theory that isn’t germane to that” claim.
Wollitzer also argued Dougherty’s theory fails because it rests on a misunderstanding of what occurred. She contended a “restitution-based assessment” is a “specific [statutory] term of art” and permits the IRS to assess tax “against the criminal defendant in the amount of restitution judgment.” Wollitzer argued, however, that no restitution-based assessment existed when Dougherty submitted its claim letter. A judge countered, suggesting Wollitzer was making a “merits argument,” which was not before the court. Wollitzer argued the point was still relevant because “it shows the IRS did not have enough information” to know Dougherty was “seeking a refund of assessed tax penalties assessed after a civil audience audit.”
In his rebuttal, Hughes argued that, “when you raise grounds in an informal claim” and “additional information only available to the IRS is disclosed during the dispute,” then that additional information “can be the basis of additional grounds for a refund.”
We will continue monitoring this case and report on developments.