Th e Honorable Richard W. Goldberg, Judge, United States Court o f 1 International Trade, sitting by designation. Ida Raye Chernin is a part

y to this action only because joint federal tax returns 2 were filed by the couple during the year in question.



## United States Court of Appeals FOR THE EIGHTH CIRCUIT

___________ No. 97-1913/1972

___________ Marshall M. Chernin; * Ida Raye Chernin, *
* Cross-Appellants/Appellees, * * Appeal from the United States
v. * District Court for the * District of Minnesota. United States of America, * * Appellant/Cross-Appellee. *

___________ Submitted: March 11, 1998 Filed: July 10, 1998

___________ Before WOLLMAN and HANSEN, Circuit Judges, and GOLDB ERG, District Judge. 1

___________ GOLDBERG, District Judge.

This is a tax refund dispute. Marshall M. Chernin (“taxpayer”) and Ida Ray e C hernin, his wife, filed this action, seeking a refund for taxes levied and collected by the Internal Revenue Service (“IRS”) during the years 1979 to 1983. Taxpayer asserts 2-2-

that refunds are due for taxes paid on income reported in 1982 on two alternativ e grounds : either because (1) in 1982, he lost the unrestricted right to funds that he had previou sly claimed as income; or (2) in 1982 he transferred funds to contest a n “asse rted liability.” The United States counters that taxpayer does not qualify for a refund in the first instance because he never repaid the disputed funds that he ha d previously claimed as income. In the second ins tance, the United States maintains that if the tax payer is entitled to a refund for funds transferred to secure an “asserte d liability” that he contested, then (1) the refund should only be allowed for the tax year 1983, not 1982 ; (2) the deduction should be allowed as a non-trade loss, not as a business loss ; and (3) this court does not have jurisdiction to co nsider whether taxpayer is entitled to a refund for net operating losses carried back from 1982 to 1979. Th e district court first rejected taxpayer’s claim that a refund is due for funds to whic h ta xpayer allegedly lost an unrestricted right to use. However, the district court stil l granted summary judgment in taxpayer’s favor, concluding that a refund is due fo r fun ds transferred to contest an “asserted liability.” The district court also accepte d taxpayer’s claim that the

deduction is allowable as a business loss and that a refund is due for net operating losses. We affirm in part and reverse and remand in part.

I.

Taxpay er

served as the general manager for Long Prairie Packing Compan y (“LPP”), a Minnesota corporation, from 1978 through 1982. Taxpayer believed that under an oral agreement with LPP he was entitled to annual bonus payments as part of his compensation. The bonus payment amounted to ten percent of LPP’s annual pretax profits. Taxpayer distributed bonus payments to himself in accordance with the bonus plan throughout the years 1978 to 1981, and in Novemb er of 1982. Between 1978 and 1982, t axpayer’s bonus compensation totaled $965,482. Upon receipt of thes e payments, taxpayer deposited the bonus proceeds in two separate accounts with two banks in Texas. Virtually all of the funds deposited in the Texas banks derived from the bonus compensation taxpayer received from LPP.-3-

In November 1982, allegedly upon finding that taxpayer was app ropriating funds to himself in a manner unauthorized by any agreement oral or otherwise, LP P te rminated

taxpayer’s employment. To prevent taxpayer from disposing of the no w contested bonus payments, LPP initiated several civil actions in state courts. I n pa rticular, LPP filed suit in Minnesota state court in 1982, claiming taxpaye r misappropr

iated and embezzled funds from the company; taxpayer counterclaimed in this suit, alleging breach of contract. Simultaneously, LPP initiated a suit in Dalla s County, Texas state court. In this later action, LPP move d the court to issue temporary restra ining orders (“TROs”), prohibiting withdrawal of funds from the Texas ban k accounts. The Texas state court granted LPP’s motion and issued ten day TR Os, which

were e xtended on November 15, 1982 until the conclusion of a hearing on a prelimi nary injunction requested by LPP. The Texas banks filed counterclaims i n interpleader against both LPP and taxpayer on November 22, 1982. Shortly thereafter, on December 10, 1982, LPP also successfully persuaded the Texas court to issue a writ of garnishment against taxpayer’s accounts. The writ of garnishment specificall y named the two Texas banks as garnishees of taxpayer’s accounts.

Bef ore the Texas state actions could run their course, however, LPP an d taxpayer reached an interim settlement agreement in April 1983 whereby all the Texas state actions were dismissed, and the disputed funds from the Texas bank account s were transferred to First National Bank in Minneapolis, Minnesota. In accordance with the April 1983 settlement agreeme nt, these funds were placed in an escrow account to be h eld pending the outcome of the Minnesota state embezzlement litigation initiated by L PP. The funds placed in escrow pursuant to the settlement agreement totale d $1,066,570. A jury ultimatel y vindicated taxpayer in December 1990, finding that he properly distributed bonus payments tohimself during the years 1978 to 1982 and that LPP breached its employment contract with taxpayer. Following the jury trial, LPP and taxpayer entered a settlement agreement whereby the funds in escrow, then totalin g nearly $1 .8 million, were released to taxpayer and damages in the amount of $6. 5 million were awarded to taxpayer.26 U.S.C. § 6511(a) provides that a claim f or refund must be filed with the IRS 3 within three years of the time the tax return was filed or two y ears from the time the tax was paid. Here, taxpayer paid his tax for the years 1980 to 1983 on Feb ruary 12, 1991, and filed his refund claim on August 29, 1991, well within the alter native two-year time limit.
The IRS granted one portion of taxpayer’s 1983 claim. Specifically, the IR S

4 allo wed a claim under section 1341 for the proceeds of the sale of taxpayer’s Florida condominium that were then transferred to LPP pursuant to a separate settlemen t agreement. Taxpayer had purchased the Florida condominium with bonus funds.

-4- After prevailing in the embezzlement litigation, taxpayer paid in full his income tax for the years 1980 to 1983 . Soon thereafter, in August 1991, taxpayer timely filed

a Form 104 0X amended return for 1982 with the IRS, seeking a $642,768 refund. 3 Taxpayer base d his claim for refund on 26 U.S.C. § 1341, arguing that the TROs and the writ of garnishment inhibited his unrestricted right to the disputed funds in th e Texas accoun ts. In his Form 1040X refund claim, taxpayer made clear that th e
ame ndedreturn included a claim for deductions in prior years, specifically 1978 t o 1981. In addition, taxpayer timely filed an ame nded return in October 1992 for the tax year 1983, seeking a refund of $560,145. Taxpayer also based this claim on section 1341; he also noted

that the claim included amended deductions for the years 1978 to 1982. At a conference held in November 1992 between taxpayer and the IRS, th e applicability of 26 U.S.C. § 461(f) as the basis for a refund in either 1982 or 1983 was discussed as well as the applicability of section 1341. On Nove mber 17, 1992, the IRS concludedthat under either section 461(f) or section 1341, taxpayer failed to qualify for a refund of taxes paid for the year 1982 or 1983. 4

Tax payer challenged this ruling by filing suit in the district court in Octobe r 1994. T he court below issued an opinion on August 6, 1996 on cross-motions fo r summary judgment. The court first ruled tha t taxpayer is not entitled to a refund under section 1341 because he never actually repaid LPP the funds from the Texas accounts. The court concluded that an actual restoration of f unds to an obligee must occur before-5-

a taxpayer may obtain relief under section 1341. According to the court, neither th e TRO s or garnishment proceedings in Texas nor the transfer of funds to the escro w account in Minnesota operated to restore the disputed funds to LPP, the allege d oblig ee, and, hence, relief under section 1341 was not available to the taxpayer. The court then held, however, that taxpayer is entitled to a refund under section 461(f). The court n oted that taxpayer meets all four statutory requirements for relief delineated in

s e ction 461(f), including the transfer requirement. Specifically, the court ruled that a tran sfer occurred when the parties agreed to place the disputed funds in an escro w account in April 1983. The court also re jected the United States’ alternative argument that, assuming section 461(f) applies, the deduction allowable is as a loss incurred in

a transa ction entered into for profit, though not connected with a trade or business , under 26 U .S.C. § 165(c)(2), not as a trade or business loss under 26 U.S.C. § 165(c)(1).

Inits opinion, the district court did not set the amount of refund due taxpayer. Instead, the court encouraged the parties to reach agreement as to the proper amount of the refund. Unable to reach a settlement, however, the par ties submitted to the court their respective claims for the proper refund amount. The United States used the tax year 1983 as the basis for its refund calculation, concluding that the transfer giving rise to the deduction allowable under section 461(f) occurred by w ay of the escrow account in April 1983. Taxpayer based his refund calculation on the tax year 1982, concluding that the TROs and the writ of garnishment issued in 1982 amo unted to a transfer within the meaning o f section 461(f). Taxpayer also included in his claim a refund for ne t operating losses carried back from 1982 to 1979. Without further opinion, on January 29, 1997, the court entered summary judgment in favor of taxpayer for $1,536,768, an
amountco nsistent with taxpayer’s claim for refund. The United States appeals an d taxpayer cross appeals from this decision.-6-

II.

We review the district court’s grant of summary judgment de novo. See , e.g. , Bremen Bank & Trust Co. v. United States , 131 F.3d 1259, 1263 (8th Cir. 1997)

. Summary j udgment is appropriate when there is no genuine issue of material fact and the moving pa rty is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c)

. Because the parties have stipulated to the rele vant facts, the questions on appeal solely concern whether the district court’s judgment should be affirmed as a matter of law.

A. The Record Demonstrates that a Transf er Within the Meaning of Section 461(f) Occurred in 1982.

Ingeneral, an accrual basis taxpayer may not deduct an expense until (1) al l events have occurred that de termine the fact of liability; (2) the amount thereof can be determined with reasonable accuracy; and (3) economic performance h as occurred with respectto the expense. See Treas. Reg. § 1.461-1(a)(2). See also Dixie Pine Prods. Co. v. Commission er , 320 U.S. 516 (1944) (holding that an expense is not deductible where the outcome of a liabilit y is contingent upon the outcome of a contested lawsuit because th e fact and amount of the expense cannot be ascertained). In 1961, th e Supreme Court followed this general rule in Uni ted States v. Consolidated Edison Co. , 366 U.S. 380 (1961), when it held that a contested liability, though paid, was no t deductible until the outcome of the contest was determined. 366 U.S. at 390-92. In response to the Supreme Court’s decision in Consolidated Edison , Congress carved out a narrow exception to the general rule through section 461(f). SeeS.S upp.Rep.No. 830 (1964), reprinted in

1964 U.S.C.C.A.N. 186 8, 1913. This section of the tax code now provides that a taxpayer may take a deduction in the year of a transfer equal to th e amount transferred if the taxpayer satisfies the following four requirements:

(1) the taxpayer contests an asserted liability, (2) the taxpayer transfers money or other property to provide for th e satisfaction of an asserted liability,-7- (3) the contest with respec t to the asserted liability exists after the time of the transfer, and (4) but f or the fact that the asserted liability is contested, a deductio n would be allowed for the taxable year of the transfer . . . .
26 U.S.C. § 461(f).

The Un ited States concedes that taxpayer meets the first, third, and fourth requirements for favorable treatment under section 461( f). Moreover, the United States does not con test that portion of the district court’s opinion which held that a transfe r with the mea ning of section 461(f)(2) occurred in 1983 when the parties agreed t o transfer the disputed funds to the escrow account at the First National Bank i n Minn eapolis in April 1983. The United States, however, argues that the district court

erre d when it granted summary judgment to taxpayer in the amount of $1,536,768, an amount that gave effect to taxpayer’s claim that a transfer occurred in 1 982. The United States contends no event gave rise to a “transfer” within the meaning of sectio n 461(f)(2) in 1982 and, hence, taxpayer i s only entitled to a deduction under this section forth e tax year 1983. Specifically, the United States points to Treasury regulation § 1.461-2(c) as support for the proposition that neither the TROs nor the writ o f garnishme nt

issued in 1982 constitutes a transfer within the meaning of sectio n 461(f)(2). Section 1.461-2(c) provides as follows:

(c) Transfer to provide for the satisfaction of an asserted liability.
(1) In general – A taxpayer may provide for the satisfaction of a n assert ed liability by transferring money or other property beyond hi s control (i) to the person who is asserting the liability, (ii) to an escrowee
or trustee pursuant to a written agreement . . ., or (iii) to an escrowee o r trustee pursu ant to an order of the United States, any state or subdivision thereof, or any agency or instrumentality of the foregoing, or a court . . . . A taxp ayer may also provide for the satisfaction of an asserted liability by transferring money or other propertybeyond his control to a court with jurisdicti on over the contest. . . . In order for money or other property to-8-

be beyond the control of a taxpayer, the taxpayer must relinquish al l authority over such money or other property. Treas. Reg. 1.461-2(c). Based principally on t he language of the regulation, the United States claims taxpayer failed to take any action in 1982 that satisfies the transfe r requirement.

We disag ree. It is true that in its written opinion, the district court neve r examined whe ther taxpayer met the transfer requirement of section 461(f) for the year 1982. However, the district court effectively adopted this proposition when it issue d a summary judgment order t hat gave effect to taxpayer’s claim that a transfer occurred in 1982. From our review of the record, we are sa tisfied that the district court correctly adopted taxpayer’s claim that a transfer within the meaning of section 461(f) occurred in 1982.

Section 461( f) is silent on the mechanics of the transfer requirement. And, i n such situations, deference is generally accorded the interpre tation of the agency charged withenforcing the statute. See , e.g. , Commissioner v. South Texas Lumber Co. , 333 U.S

. 496, 501 (1948) (stating that Treasury regulations in particular are entitled t o deference as administrative interpretations of a s tatute). We agree and substantively do give deference to the existing regulation. Yet, this is not the end of the matter. Th e subti tle to the regulation explicitly begins, “[in] general.” Treas. Reg. 1.461-2(c)(1)

. Both this circuit and the Ninth Circuit have refle cted on the nomenclature preceding the regulation and reasoned that the provision thereby of fers only an illustrative, rather than exhaustive, l ist of events that should be considered “transfers” for purposes of section 461(f)(2 ). See Varied Invs., Inc. v. United States , 31 F.3d 651, 653 (8th Cir. 1994) ; Chem Aero, Inc. v. United States , 694 F.2d 196, 198 (9th Cir. 1982) (“ phrase preceding the listed methods of transfer, suggests that [the methods] are merely illustrative, not allinclusive”). In line with this precedent, we continue to hold that-9-

events oth er than those described in Treasury regulation 1.461-2(c)(1) may satisfy the transfer requirement of section 461(f)(2).

We n ow turn to the question of whether the TROs or the writ of garnishment , both issued in 1982, qualify as events outside the ambit of the re gulation that still satisfy the statuto ry transfer requirement. As our framework for analysis, we employ the test set forth in Chem Aeroand V aried Investments . In Chem Aero , the Ninth Circuit held that a taxpayer who posted an appeal bond was entitled to section 461(f) treatment. 694 F.2d at 198-200. In reaching this conclusion, the Ninth Circuit reasoned that by posting the appeal bond, the taxpayer tran sferred funds beyond his control in a manner that did not raise the specter of tax abuse. Id. at 199-200. Similarly, in Varied Investments , this court considered whether an escrow account set up to secure an appeal bond and only signed by one party satisfies the transfer requ irement, notwithstanding that it is not

a meth od delineated in Treasury regulation 1.461-2(c). Adopting the Ninth Circuit’ s formula in Chem

Aero , this court reasoned that the escrow account set up by taxpayer removed the funds from taxpayer’s control. Varied Invs. , 31 F.3d at 654-55. Also, the court noted in Varied Investments that no evid ence suggested taxpayer purposefully set up the escrow account t o limit tax liability. Id. at 655. Thus, we consider whether the transfer requirement is satisfied by looking to see if the funds are “irrevocably parted with, provided that the manner of transfer is not open to the possibility of tax abuse.” Chem Aero , 31 F.3d 653-54.
In this case, because we conclude the writ of garnishment st anding alone satisfies the tr ansfer requirement, the effect of the TROs is not probed. Here, the writ o f garnishment issued by the Texas court effectively forced taxpayer to transfer funds

. Inde ed, the writ of garnishment did more than simply place the funds temporaril y beyo ndtaxpayer’s control. The writ of garnishment shifted actual control over th e funds from th e taxpayer to the garnishees, the Texas banks. See Tex. Civ. Code Ann. § 4084 (West 1966) (after issuanc e of a writ upon the garnishee, “it shall not be lawful for the garnishee to pay to the defendant any debt . . . .”). See also IntercontinentalIn t his sense, it is worth noting that the transfer effected by the writ o f 5 garnishme nt

falls within the methods of transfer listed in the regulation. That is, th e funds were placed beyond ta xpayer’s control and under the control of a court because the writ transferred control of the funds from the ta xpayer to an officer of a court. See Treas. R eg. 1.461-2(c) (providing that transfer of funds from the taxpayer to a court pending the outcome of a contest satisfies the transfer requirement).

-10- Terminals Co. v. Hol lywood Marine, Inc. , 630 S.W.2d 861, 863 (Tex. Ct. App. 1982) (citing Gause v. Cone , 11 S.W. 162, 163 (Tex . 1889) (“Once a writ of garnishment has been s erved a debtor may not by assignment or otherwise dispose of the funds in th e hands of the garnishee.”)); Chase Commercial Corp. v. Donald Benson Accessories , Inc. , 69 B.R. 32, 34 (N.D.Tex. 1986) (“[T]he issuance and service of a writ o f ga rnishment

serves to trap funds in the hands of the garnishee which are due to a judgment creditor.”). Moreover, onc e a writ of garnishment has been issued, the funds

are held by the garnishee as an officer of the court. Intercontinental Terminals , 63 0 S.W.2d at 863. Thus, the writ of garnishment in effect transferred the funds from the taxpayer to the court. 5

Finally, nothing in the record suggests t hat taxpayer sought to induce issuance of the writ so as to avoid tax liability. Rather, quite obviously, the transfer directl y resultedfrom the exigencies of litigation and, hence, cannot be characterized as a tax avoidance scheme. We therefore conclude that the writ of garnishment issued by the Texas court in 1982 constitutes a transfer within the meaning of section 461(f)(2).

B. The Di strict Court Properly Held That Taxpayer’s Deduction Under Sectio n 461( f) Is Otherwise Allowable as a Trade or Business Loss Under Sectio n 165(c)(1).

In a nd of itself, section 461(f) does not authorize a deduction. Rather, sectio n 461(f) affects the ti ming of a deduction that is otherwise allowable under the tax code. See 26 U.S.C. 461(f)(4) (“[B]ut for the fact that the asserted liability is contested, a-11-

deduction would be allowed for the taxable year of the transfer . . . .”). In this case, the district court held that taxpayer’s transfer of funds to contest the liability entitled him to a deduction for a business loss under 26 U.S.C. § 165(c)(1). The United State s contests this ruling, claiming instead that taxpayer’s transfer only entitles him to a deduction for a loss incurred in a transaction entered into for profit, though no t

conn ected with a trade or business under 26 U.S.C. § 165(c)(2). The distinction i s importa nt because in calculating a net operating loss to be carried back to previou s years, a taxpayer may take in full all of the deduction attributable to trade or business losse s, whereas deductions not attributable to trade or business losses are onl y allowable to the extent the gross income is not derived from a trade or business. See 26 U.S.C. § 17 2(c) and (d)(4). In this case, taxpayer’s claim for refund includes a net operating loss carryback from 1982 to the tax y ear 1979. See infra Section II.C. Thus, if the allowable deduction here is not for a business loss, taxpayer does not qualify for the claimed net operating loss carryback.

The United States first directs our attention to the language of section 461(f)(2), whic h requires that “the taxpayer transfers money or other property to provide for the satisfaction of the asserted liability.” According to the United States, the plain language of this section requires that the nature of the allowable deduction must be determined by examinin g the asserted liability. Thus, where funds are transferred to contest a n
as serted liability that concerns a business expense, a deduction for a business loss i s allowable; conversely, where funds are transferred to contest an asserted liability that concerns a non-business loss, only a deduction for a non-business loss is allowable. It is well established that repayment of embezzled f unds only gives rise to a deduction for a non-business loss. See , e.g. , Kraft v. United States , 991 F.2d 292, 298 (6th Cir. 1993) (holding that r

epayment of embezzled funds is an expense deductible under 26 U.S.C. § 165(c)(2)); Stephens v. Commissioner , 905 F.2d 667, 670 (2d Cir . 1990) (same). The Unit ed States thus asserts that here the funds were transferred to contest an asserte d liability that involved a non-business expense, namely-12-

embezzlement. And, therefore, the deduction a llowable must be viewed as a deduction for a non-business loss under section 165(c)(2).

We are unpersuaded by the government’s argument. First, contrary to th e position of the United States, there is no language in the statute to suggest tha t determining the nature of the deduc tion is limited to analysis of the underlying liability, i.e. , the e mbezzlement liability. Section 461(f) simply states that in the year of th e transfer a deduction must have been otherwise allowable. See 26 U.S.C. § 461(f)(4). We are unwilling to read into the statute the government’s novel corollary that the form of the deduction allowable in the year of transfer must be determined by the nature of the asserted liability.

Instead, in accord w ith settled principles of tax law, a transaction must be given effect based on what actually happen ed, not what might have occurred. See Donald E. Williams Co. v. Commissioner , 429 U.S. 569, 579 (1977) (quoting, Commissioner v. National Alfalfa Dehydrating , 417 U.S. 134, 148-49 (1974) (“[A] transaction is to be given its tax effect in accord with what actually occurred and not in accord with what might have occurred.”). Congress even en dorsed this principle when it enacted section 461(f), stating that “[t]he objective of the reporting of items of income and deduction under th e internal revenue laws generally is to realistically and practically matc h receip ts and disbursements attributable to specific tax years.” S.Rep.No. 830 (1964), reprinted in 1964 U.S.C.C.A.N. 1673, 1773.

The rati onale underpinning this tax principle is especially evident in this case

. For, if one were to look only to the year of transfer, i.e. , 1982, the outstanding litigation underway at that time makes it impossible to determine if the funds transferred wer e embezzled funds or funds actually due taxpayer. Thus, it is not readily apparent if one looks solely to the year of the transfer whether the allowable deduction should be for

a business los s or a non-business loss. But, when all events that impinged upon th e transaction are considered, the form of the deduction that is most soundly grounded in-13-

reality is easily discerned. Specifically, taxpayer was conclusiv ely adjudged not to have embezzled the disputed funds by a jury b efore he filed the Form 1040X refund claim at issue here. In view of all events that actually occurred, it is th erefore clear that taxpayer transferred funds owed to him as compensation, not embezzl ed funds. Accordingly, the distr ict court properly construed taxpayer’s transfer of funds to contest the asserte d liability as a deduction for a business loss under section 165(c)(1).
Finally , the United States maintains this holding sets up a framework fo r administering section 461(f) that is unworkable. In particular, the United States claims this result potentially requires taxpayers and the IRS to hold tax years open until th e contest over the asserted liability is resolved. This is not the case. In those instances where the ultimate determination as to the contested liability has yet to be made when taxpayer files his or her refund claim with the IRS, the nature of the deduction still must be determined upon careful review of all events consequent to the transaction. If th e IRS determines th at the current framework dictated by the statute is unwieldy, then its forum for redress is with Congress, not the judiciary.

C. Taxpayer’s Claim for a Net Operating Loss Carryback to 1 979 Is Jurisdictionally Deficient.

Befo re the district court, taxpayer claimed that the deduction allowable unde r section 461(f) for the year 1982 results in a $23,784 loss. As dis cussed above, taxpayer clai med a refund for 1982 under section 165(c)(1), as a business expense. Therefore, taxpayer also included a s part of his refund calculation a claim for net operating losses in 1982, which he

carried back to 1979. This portion of the refund amounts to $9,206 pl us interest by taxpayer’s calculation. Without opinion, the district court grante d taxpayer his refund request in its entirety, including the amount for the net operating loss carryback to 1979.-14-

Onappeal, the United States maintains for the first time that the district court erred when it accepted taxpayer’s claim for a net operating loss carryback to 1979. The United States argues taxpayer failed to make a refund claim with the IRS for carryback loss es, and, hence, the district court lacked jurisdiction to rule on this aspect o f taxpayer’s refund suit. Taxpayer counters that his refund claim for 198 2 made clear that his tax liability for 1979 also was affected. Thus, taxpayer asserts that because hi s Form 1040X refund claim for 1982 included an informal claim for refund of taxes paid in 1979 , he placed the IRS on notice and, as such, is entitled to a refund for th e carryback losses and the interes t accruing thereon. Moreover, taxpayer claims that the United State s waived this argument when it failed to bring it to the attention of th e district court.
Although the United States did not raise this jurisdictional argument before the district court, it is well settled t hat “the question of a court’s jurisdiction over an action is non-waivable and may be raised at any point in the litigation.” Berger Levee Dist., Fra nklin County, Missouri v. United States , 128 F.3d 679, 680 (8th Cir. 1997) (citing Buefor d v. Resolution Trust Corp. , 991 F.2d 481, 485 (8th Cir. 1995); Fed.R.Civ.P

. 12(h)(3)). As a result, we must consider the United States’ argument that the district court l acked subject-matter jurisdiction to issue a refund for the net-operating losse s carried back from 1982 to 1979.

It is fundamental that the United States, as a sovereign, cannot be sued without its consent. See United States v. Mitchell , 463 U.S. 206, 212 (1983); Manypenny v

. United States , 948 F.2d 1057, 1063 (8th Cir. 1991). Here, taxpayer filed his complaint withthe district court, asserting jurisdiction under 28 U.S.C. § 1346(a). This section permits civil suits against the government for recover y of taxes “erroneously or illegally assessed or collected .” As stated by th e Supreme Court in United States v. Dalm , 494 U.S . 599 (1990), however, section 1346(a)(1) “must be read in conformity with other statutory provisions which qualify a taxpayer’s right to bring a refund suit uponAs support fo r its jurisdictional argument, the United States only briefly raises 6 the tim eliness issue and then only in its reply brief. Instead, the United State s princi pally relies upon its assertion that taxpayer never actually filed a claim for ne t operating losses. Although as a general rule, we will not address arguments raised for the first time in a reply brief, see , e.g. , Planet Prods., Inc. v. Shank , 119 F.3d 729, 732 (8th Cir. 1997), in this case we entertain the timeliness argument due to it s jurisdictional nature.

-15- compliance with certain

conditions.” 494 U.S. at 601. Most importantly, 26 U.S.C. § 7422(a) proscribes a taxpayer’s ability to maintain a refund suit as follows:

No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously o r il legally assessed or collected, or any penalty claimed to have bee n colle cted without authority, or of any sum alleged to have bee n excessive or in any manner wrongfully collected, until a claim fo r refund o r credit has been duly filed with the Secretary, according t o the provisions of law in that regard, and the regulations of th e Secretary established in pursuance thereof. 26 U.S.C. § 7422(a). Accordingly, it is plain that the filing of a timely r efund claim with the IRS in accord with section 7422(a) is a prerequ isite to maintaining a tax refund suit. Indeed, t he Supreme Court has squarely held this is a jurisdictional requirement tha t

canno t be waived. Dalm , 494 U.S. at 602; United States v. Kales , 314 U.S. 186, 193 (1941). See also Fairley v. United States , 901 F.2d 691, 693 (8th Cir. 1990); Bruno v. United States , 547 F.2d 71, 7 4 (8th Cir. 1976); Essex v. Vinal , 499 F.2d 226, 231 (8th Cir. 1974).

Taxpay er here failed to comply in a timely manner with the statutory filin g requirements for its claimed refund of net operating losses in 1982 carried back t o 1979. The statute governing the timeliness of taxpayer’s claim for a refund is found 6 in 26 U.S.C. § 6511(d)(2)(A). This section of the tax code mandates a “special periodAlthough never addressed by taxpayer, we can only surmise that he considered 7 the timely filing of his refund claim for 1982 taxes under the two-year alternative time limit o f section 6511(a) sufficient to qualify him for net operating loss carrybac k refunds. However, both the Sixth Circuit and the Fourth Circuit have squarely held that the two-year limitation in section 6511(a) is inapplicable for purposes of considering the t imeliness of refund claims for net operating losses. See Sachs v. United States , 941 F.2d 464, 466 (6th

Cir. 1991); Longiotti v. United States , 81 9 F.2d 65, 67 (4th Cir. 1987). “The reference to subsection (a) that is contained in § 6511(d)(2)(A) cannot be read to expand the only limitation period contained in the [special net operating los s provision] – the three-year period measured from the date of [a] return was required to be fi led.” Sachs , 941 F.2d at 466. We agree. The structure of the tax code make s
-16- of limitation” for refund claims arising out of net operating lo ss carrybacks. In pertinent part, this special provision states:

If the claim for credit or refund relates to an overpayment attributable to a net operating loss carryback . . ., in lieu of the 3-year period o f limitation prescribed in subsection (a), the period shall be that period whic h ends 3 years after the time prescribed by law for filing th e return (including extensions thereof) for the taxable year of the ne t operating loss . . . .

26 U.S.C. § 6511(d)(2)(A). The taxable year in which taxpayer claims net operatin g losses is 1982. The prescribed deadline for filing 1982 individual tax returns was April 15, 1983; with extensions, the deadline for filing the return was October 15, 1983. See 26 U.S. C. §§ 6151(a) and 6161(a)(1); Treas. Regs. 20-6151-1(a) and 20-6161-1(a ) (1982). From the record before the court, it appears taxpayer requested an extension and file d his tax return for 1982 in October 1983. Pursuant to the terms of sectio n 6511(d) (2)(A), at the very latest then, taxpayer was required to make his claim fo r refund based on the net operating losses at issue here by October 15, 1986. Therefore,

even acc epting taxpayer’s argument that the Form 1040X refund claim for 1982 taxes filed in 1991 constituted an informal claim for net operating losses carried back to 1979, we still would lack jurisdiction to grant taxpayer’s refund request. The claim 7clear that the explicit three-year limitation in section 6511(d)(2)(A) is not meant to be expanded; the alternative two-year limitation listed in section 6511(a) applies to refund claims in general and should not be viewed as an alternative l imitation for net operating loss claims.

-17- for carryback losses, informal or otherwise, should have been filed by October 1986, not August 1991. See Koss v. United States , 6 9 F.3d 705, 708 (3rd Cir. 1995) (finding that taxpayer failed to comply with the requirements of section 6511( d)(2)(A) in seeking

arefund for a net operating loss carryback from the tax year 1977 when refund claim was not brought until 1991, ten year s after 1981 deadline); Sachs v. United States , 941 F.2d at 466 (noting tha

t taxpayer failed to comply with section 6511(d)(2)(A) by filing refund claim for a net operating loss c arryback for 1981 in 1987, outside the three-year statutory window); Malonek v. United States , 923 F. Supp. 14 62, 1465 (D. Wyo. 1996) (holding that because the special three-year limitation applies, for losses incurred i n 1987 taxpayer had to file claim for net operating loss carryback refund by April 1991); Whitney v. United States , 920 F. Supp. 41, 44 (W.D.N.Y. 1995) (finding taxpayer’ s claim for a refund based on operating loss es in 1989 untimely because it was filed after April 1993, the statutorily prescribed deadline for carryback refund s). Therefore, by the plain terms of sections 6511(d)(2)(A) and 7422(a), the district court lacked jurisdiction to grant taxpayer’s refund request for net operating losses in 1982 carried back to 1979. Accordingly , we reverse and remand to the district court with instructions to calculate the proper refund due taxpayer ( i.e

. , the refund for 1982 taxes paid exclusive of the net operating loss carryback to 1979 and the interest accruing thereon).

D. The District Court Properly Denied Taxpayer’s Claim for a Refund under section 1341.
On cross appeal, taxpayer arg ues that he is entitled to an even greater refund for 198 2 taxes under 26 U.S.C. § 1341, and that the district court erred in not granting a refund under this section of the tax code. Briefly stated, C ongress enacted section 1341-18-

in response to deficiencies associated with the so-called “claim of right” doctrine. In general, the

claim of right doctrine requires a taxpayer to report as income money that he controls, yet to which competing claims may be made.

Mr. Justice Brandeis, speaking for a unanimous Court in North American Oil Consolidated v. Burnet, 286 U.S. 417, 424 (1932), gave [the claim of right doctrine] its classic formulation. ‘If a taxpaye r receives earnings under a claim of right and without restriction as t o its disposition, he h as received income which he is required to return, even though it

may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent.’ Should it later appear that the taxpayer was not entitled to ke ep the money, Mr. Justice Brandeis explained, he would b e entitled to a deduction in the year of repayment; the taxes due for the year of receipt would not be affected.
United States v. Skelly Oil Co. , 394 U.S. 678, 681-82 (1 969). Of course, the inequities that result from this doctrine ar e apparent. For example, under this doctrine a taxpayer wh o later claims a deduction would be entitled to a lesser tax benefit if tax rates were to increase in the intervening years or if taxpayer’s positio n in the tax brackets elevated. Yet, prior to 1954, the potential hardships “were accepted as an unavoidabl e consequence of the annual accounting system.” Id. at 682.

To l essen the taxpayer’s burden, Congress enacted section 1341 in 1954. Se e H.R.Rep.No. 1337, at 86-87 (1954), reprinted in 1954 U.S.C.C.A.N. 4017, 4436-37. Section 1341 provides, in pertinent part, as follows:

Computationof tax where taxpayer restores substantial amount held under claim of right.
(a) General rule. – If –-19- (1) an item was included in gross income for a prior taxable year (or years) be cause it appeared that the taxpayer had an unrestricted right to such item;
(2 ) a deduction is allowable for the taxable year because it wa s established after the close of such prior taxab le year (or years) that the taxpayer did not have an unrestricted right to such item or to a portion of such item; and (3) the amount of such deduction exceeds $3,000, . . . .

Internal Revenue Code of 1954, Pub. L. No. 83-591, § 1341, 68A Stat. 3 (1954), 2 6 U.S.C. § 1341. If the taxpayer meets these three requirements, then he is entitled t o either t he equivalent of a refund for income tax paid in the earlier year, or a deduction frominc ome in the year of repayment, whichever is more beneficial to the taxpayer

. See 26 U.S.C. § 1341(a)(4)-(5).
Taxpayer maintains he qualifies for a deduction under section 1341. All parties agree that taxpayer satisfies the first and third requirements. The contest turns o n whether taxp ayer meets the second criteria. Of particular import, taxpayer insists that throug h the actions of the Texas court in 1982, he lost his “unrestricted right” to th e disp uted funds. Taxpayer then argues that the explicit language of section 1341(a)(2) requires only that “the taxpayer did not have an unrestricted right” to t he disputed funds. Taxpayer maintains he there fore qualifies based on the plain language of section 1341. Th e district court rejected taxpayer’s argument. According to taxpayer, however, the district court impermissibly read into the statute an additional requirement – a taxpayer only loses an unre stricted right to funds for purposes of section 1341(a)(2) when he or she repays or restores the disputed funds.
We disagree with the taxpayer. It is true that our start ing place for analysis is the language of the statute itself. See , e.g. , Connecticut Nat’l. Bank v. Germain , 503 U.S. 249, 253-54 (1992); United States v. Ron Pair Enters., Inc. , 489 U.S. 235, 241-20-

(1989). And, when the language of the statute is clear and unambiguous, our analysis also should end here. See , e.g. , Davis v. Michigan Dep’t. of the Treasury , 489 U.S

. 803, 808, n.3 (1989); Northern States Power Co. v. United States , 73 F.3d 764, 76 6 (8th Cir.), cert. denied , 117 S.Ct. 168 (1996). Yet, contrary t o taxpayer’s argument, the rel evant statutory language here is not clear. Specifically, the language of sectio n 1341(a)(2) makes no mention of how a taxpayer or the IRS is supposed to establish that the t axpayer does not have an unrestricted right to income. That is, from the statute’s terms it is entirely ambiguous as to how a taxpayer might lose his or her unrestricte d right to disputed funds.
Therefore, for purpose s of section 1341(a)(2), it is appropriate to examine other legis lative sources to ascertain the criteria Congress would have us use to determin e whether or not a taxpayer has lost his unrestricted right to funds. In doing so, we first note that the legislative history is replete with references to repayment, restoration, and restitution. H.R. Rep. No. 1337 (1954), reprinted in 1954 U.S.C.C.A.N. 4017, 4113 (“T he committee’s bill provides that if the amount restored exceeds $3,000, th e taxpayer may recompute the tax for the prior year, excluding from income the amount repaid ,” and “[E]xcludin g the amount repaidfrom the earlier year’s income is likely to have lit tle, if any, tax advantage over taking a deduction in the year of restitution .” ) (emphasis added); S.Rep.No. 1622 (1954), reprinted in 19 54 U.S.C.C.A.N. 4621, 4751 (adopting the same language contained in the House report). In additi on, it is instructive to turn to the tit

le of the statute to aid in resolving textual ambiguity. See INS v. Nat’l Ctr. for Im

migrants’ Rights , 502 U.S. 183, 189 (1991) (citations omitted) (stating that “the title of a statute or section can aid in resolving an ambiguity in t he legislative text.”) Here, the title to section 1341 reads, “Computation of Tax Where Taxpayer Restores Substantial Amount Held Under Claim of Rig ht.” 26 U.S.C. § 1341 (emphasis added). As w ith the legislative history, the title of the statute plainly indicates that a taxpaye r must restore funds to establish that he or she has lost the unrestricted right to thos e funds.-21-

Similarly, the regulations promulgated by the IRS to administer the s tatute require th attaxpayer must actually repay funds to qualify for section 1341treatment. Fo r instance, Treasury regulatio n § 1.1341-1(a)(1) provides that “restoration to another” is a prerequisite for eligibility under section 1341. And, Treasury r egulation § 1.1341-1(e) explicitly states that “[t]he provisions of section 1341 and this section shall b e appli cable in the case of a taxpayer on the cash receipts and disbursements method of accounting only to the taxable year in which t he item of income included in a prior year (or y ears) under a claim of right is actually repaid .” (Emphasis added). We fin d reference to the regulations instructive because an agency’s interpretation, whe n reasonable, is entitled to deference, especially where the statute is ambigu ous. See , e.g. , Rowan Cos., Inc. v. United States , 452 U.S. 247, 252 (1981); Commissioner v . Portland Cement Co. of Utah , 450 U.S. 156, 169 (1981). Moreover, in the few instances where this issue has been discussed, the courts have also found that section 1341 require s actual repayment, restoration, or restitution. See Kappel v. United States , 437 F.2 d 1222, 1226 (3rd Cir. 1971) (“The requirement that a legal obligation exist to restor e funds before a d eduction is allowable under the claim of right doctrine is derived from § 1 341(a)(2) of the Code.”); Smith v. Commissioner , 110 T.C. No. 2, 1998 WL 6147 (Jan. 12, 1998) (“Section

1341 provides relief to taxpayers who are forced to repay an it em previously reported as income under a claim of right.”) (emphasis added). W e therefor e conclude that under section 1341(a)(2), funds must actually be repaid t o establish that the unrestricted right to those funds has been lost.
Finally, taxpayer claims that even assuming section 1341 requires actua l repay ment

of disputed funds, the facts here establish that he qualifies for treatmen t under this section of the tax code. Specifically, taxpayer argues that the TROs and the writ of ga rnishment issued by the Texas court in 1982 operated as repayment o r restoration sufficient to qualify for section 1341 treatment. We find no merit i n taxpayer’s argument. It is true that the TROs and the writ of garnishment changed the preexist ing legal rights taxpayer had with respect to the disputed funds. When th e TROs were issued, taxpayer temporarily lost his unfettered control over the funds.-22-

And, w hen the writ of garnishment issued, the disputed funds were legally transferred out of ta xpayer’s hands and into the hands of the garnishees, the Texas banks. Se e supra Section II.A. Yet, neither the TROs nor the writ of garnishment operated to repay or restore funds. Webster’s Dictionary defines “repay” as “ to pay back (a person)” and defines “restore” as “to give back (. . .); make restitution of.” W EBSTER ’ S N EW W ORLD D ICTIO NARY1137, 1145 (3d ed. 1988). Black’s Law Dictionary in turn define s “restitution” to mean the “[a] ct or making good or giving an equivalent for or restoring

so mething to the rightful owner.” B LACK ’ S LAW D ICTIONARY 1313 (6th ed. 1990)

. Taxpayer concedes L PP never received any funds by way of the TROs and the writ of garnish ment. We therefore conclude taxpayer does not qualify for section 134 1 treatment because he never repaid funds to LPP.

III.

We therefore affirm the district court’s opinion in part and reverse and remand in part. Because we conclude this court lacks jurisdiction to consider taxpayer’s claim for a refund for net operating losses carried back from 1982 to 1979, we remand to the district court to recalculate the appropriate tax refund due taxpayer for the year 1982.

A true copy.

ATTEST:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.