Last week the Federal Circuit issued its opinion in Dougherty Electric, Inc. v. United States, a tax case we have been following because it attracted an amicus brief. In this case, Dougherty Electric appealed a dismissal by the Court of Federal Claims of a tax refund suit for lack of subject matter jurisdiction. In an opinion authored by Judge Prost and joined by Judges Lourie and Taranto, the court affirmed-in-part, vacated-in-part, and remanded the case. This is our summary of the opinion.
Judge Prost began by outlining the factual and procedural background:
Taxpayers must file their refund claims with the IRS within a certain timeframe (or “period of limitation”), which [26 U.S.C.] § 6511(a) generally governs. The specifics of § 6511(a) are unimportant here; what matters is that, as the parties do not dispute, the deadline for DE’s [Dougherty Electric] refund claim with the IRS was December 11, 2017. . . .
In 2007, Mr. Dougherty was indicted for, among other things, tax evasion relating to a payroll scheme at DE. He pleaded guilty to most of the charges in the indictment, including tax evasion for the nine calendar quarters from the third quarter of 2003 through the third quarter of 2005 (the “quarters at issue”). In 2008, the U.S. District Court for the Eastern District of Pennsylvania entered judgment on Mr. Dougherty’s guilty plea and ordered him to pay restitution to the IRS. The calculation of this criminal restitution included unpaid DE employment taxes (and interest thereon) for the quarters at issue. . . .
On December 7, 2017, just four days before the December 11 deadline, DE submitted a letter to the IRS titled ‘PROTECTIVE CLAIM FOR REFUND.’ . . .
This submission, by asserting that the IRS could not assess interest or fraud penalties on a criminal restitution, raised what we refer to as the “Klein theory” (after the referenced Tax Court case by that name).
Then, on April 10, 2018, after the deadline had passed, DE submitted another letter to the IRS. This one, titled ‘MODIFIED PROTECTIVE CLAIM FOR REFUND.’ . . .
This untimely submission thus ‘further assert[ed],’ in addition to the Klein theory, that the fraud penalties (and any associated interest) should be refunded because those penalties did not receive appropriate supervisor approval—what we refer to as the ‘supervisor theory.’ . . .
In September 2020, DE sued the government in the Court of Federal Claims, seeking a refund of fraud penalties and interest it had paid for the quarters at issue. . . .
DE relied on this court’s Computervision opinion, where we articulated four ‘doctrines’—i.e., the informal claim doctrine, the waiver doctrine, the general claim doctrine, and the germaneness doctrine—that could render [26 U.S.C.] § 7422(a)’s pre-suit filing requirement satisfied ‘despite [the taxpayer’s] failure to timely file detailed formal claims with the IRS.’ . . .
Accordingly, with the court treating § 7422(a)’s pre-suit filing requirement as jurisdictional and deeming it not satisfied as to any theory, it dismissed for lack of subject-matter jurisdiction.
Before reaching the merits of the dispute, Judge Prost “first address[ed] whether the § 7422(a) compliance issue that the Court of Federal Claims identified deprived it of subject-matter jurisdiction.” She determined that the court “need not resolve this issue here, . . . because it makes no difference to our ultimate disposition.” She explained that, “[e]ven if complying with § 7422(a)’s pre-suit filing requirement (by filing a refund claim with the IRS that is both timely and otherwise deemed proper) is unnecessary for a court’s subject-matter jurisdiction, it is necessary for a taxpayer’s refund claim in court.” As a result, she said, “failure to comply renders the claim in court subject to dismissal anyway, for failure to state a claim upon which relief can be granted.”
Judge Prost then turned to the merits of the dispute by “first articulat[ing] the framework relevant here for evaluating whether a pre-suit refund claim with the IRS satisfies § 7422(a).” She explained that the court has two theories, the Klein theory and the supervisor theory, that have “articulated four doctrines that could render § 7422(a)’s pre-suit filing requirement satisfied ‘despite [the taxpayer’s] failure to timely file detailed formal claims with the IRS.'” These are the “informal claim doctrine,” the “waiver doctrine,” the “general claim doctrine,” and the “germaneness doctrine.” Judge Prost then explained that, while there “is no dispute here that DE’s December 7, 2017 submission (its only timely one) was defective,” the actual “question is whether, in light of the subsequent proceedings at the IRS, one of the four aforementioned doctrines nonetheless renders § 7422(a) satisfied.”
Judge Prost began by analyzing the submissions under the Klein theory. She determined that “the general claim doctrine applies . . . because DE’s timely December 7, 2017 submission raised [a relevant theory of the general claim doctrine], and any missing specifics or formalities in that submission regarding that theory were rectified with DE’s formal claims (filed before the IRS’s rejection).” According to Judge Prost, while the “government makes just two arguments for why the general claim doctrine does not apply,” “[n]either is persuasive.” She said “the fact that DE’s December 7, 2017 submission was not ‘formal,’ or that it raised a specific theory, does not prevent the general claim doctrine from applying.”
Judge Prost next addressed the four doctrines under the supervisor theory. Here she explained that, while the “Klein theory concerns the extent to which interest or fraud penalties could be assessed on a criminal restitution,” the “supervisor theory concerns [26 U.S.C.] § 6751(b)(1) and the extent to which the fraud penalties received any necessary supervisor approval.” Judge Prost determined that, “because the supervisor theory simply was not germane to the Klein theory,” “the germaneness doctrine does not apply.” She then determined that, because “DE’s December 7, 2017 submission (again, its only timely one) said nothing that would have fairly apprised the IRS of the supervisor theory” and already “raised a specific theory (i.e., the Klein theory),” neither the informal claim doctrine nor the general claim doctrine apply. Lastly, Judge Prost explained, the “waiver doctrine does not apply” because, first, “any IRS waiver of formal requirements (and corresponding consideration of the claim on its merits) must have occurred within the limitations period; and second, any such waiver and merits consideration must have been clear and unmistakable.”
As a result of Judge Prost’s analysis, the panel affirmed-in-part, vacated-in-part, and remanded the case. It vacated the lower court’s dismiss and remanded for further proceedings as to the Klein theory, where the lower court “should take up the government’s merits-related arguments for dismissal.” The panel, however, affirmed “as to the supervisor theory,” finding that DE “failed to state a claim upon which relief can be granted.”