Opinion ID: 868140
Heading Depth: 3
Heading Rank: 2

Heading: McGrogan’s Claims Against the VIBIR

Text: As noted above, the only claims against the VIBIR that we are being asked to consider are McGrogan‘s requests for refunds for tax years 2002, 2003, and 2004. The District Court correctly granted the VIBIR‘s motion to dismiss because the statute of limitations barred his claims against the VIBIR. Federal courts lack jurisdiction to entertain refund claims brought outside of the statute of limitations. See 15 Becton Dickinson & Co. v. Wolckenhauer, 215 F.3d 350, 35354 (3d Cir. 2000). The applicable statute of limitations provides that a taxpayer seeking a refund must file a claim for a refund within either three years from the time he filed his income tax return or two years from the time he paid the tax owed, whichever period expires last. See I.R.C. § 6511(a). McGrogan concedes that he filed his refund petition outside of this period, so the District Court did not have jurisdiction to adjudicate McGrogan‘s claims against the VIBIR due to the expiration of the statute of limitations. McGrogan advances three arguments in an attempt to overcome this jurisdictional bar: (1) the mitigation provisions contained in I.R.C. §§ 1311-14 permit his untimely claim; (2) the statute of limitations was equitably tolled; and (3) the doctrine of equitable recoupment permits his untimely claim. Each of these arguments is without merit.
The mitigation provisions in the Internal Revenue Code allow qualifying taxpayers to bring refund claims that would otherwise be barred by the statute of limitations. See I.R.C. § 1311(a); TLI, Inc. v. United States, 100 F.3d 424, 427-28 (5th Cir. 2012). Mitigation applies only if: (1) there has been a final determination under § 1313; (2) there has been a ―circumstance of adjustment‖ under § 1312; and (3) one of the ―conditions necessary for adjustment‖ in § 1311(b) has been met. See Kappel’s Estate v. C.I.R, 615 F.2d 91, 94 (3d Cir. 1980). ―The relief provided by the mitigation statutes is limited to defined circumstances, and does not purport to permit the correction of all errors and inequities.‖ Fruit of the Loom, Inc. v. C.I.R., 72 F.3d 1338, 1341 (7th Cir. 16 1996) (citations and internal quotation marks omitted). The mitigation provisions should be given a liberal interpretation. See Koss v. United States, 69 F.3d 705, 709 (3d Cir. 2005). The taxpayer bears the burden of proving that each of the three mitigation provisions applies. Id. The mitigation provisions do not afford relief to McGrogan because he cannot show that a ―circumstance of adjustment‖ has occurred. McGrogan claims a circumstance of adjustment for the double inclusion of income. However, the Internal Revenue Code permits mitigation for the double inclusion of income only if the taxpayer‘s claim involves ―an item which was erroneously included in the gross income of the taxpayer for another taxable year or in the gross income of a related taxpayer.‖ I.R.C. § 1312(1). Such a double inclusion has not occurred in this case. McGrogan does not allege having erroneously paid taxes in an incorrect tax year nor has he claimed to have erroneously paid taxes for a related taxpayer. Rather, McGrogan‘s overpayment of taxes is a situation not contemplated by the mitigation statute: payment to the wrong taxing entity. Although we should liberally interpret the mitigation statute, we may not rewrite its terms. As a result, the mitigation statute does not apply because the circumstance of adjustment claimed by McGrogan is outside the ambit of I.R.C. § 1312(1). Even though McGrogan‘s claim falls outside the scope of the mitigation statute, he seeks an exception to it because of the special relationship between the United States and the Virgin Islands and the purportedly collusive coordination of tax policy between the IRS and the VIBIR. McGrogan also points to a possibility of double taxation. Again, while we are cognizant of the equitable concerns presented in this case, 17 these policy arguments still do not change the fact that McGrogan‘s claims fall outside of the mitigation scheme established by Congress. We are powerless to create a judicial exception to the mitigation statute to accommodate him. See, e.g., United States v. Dalm, 494 U.S. 596, 602 (1990) (absent a statutory exception, when statute of limitations is expired, ―a suit for refund, regardless of whether the tax is alleged to have been ‗erroneously,‘ ‗illegally,‘ or ‗wrongfully collected,‘ may not be maintained in any court.‖). For these reasons, McGrogan may not use the mitigation statute to avoid the statute of limitations bar.
McGrogan argues that the doctrine of equitable tolling should allow him to proceed with his untimely claim. This argument overlooks the settled rule that I.R.C. § 6511 prohibits equitable tolling in refund cases. See United States v. Brockamp, 519 U.S. 347, 352 (1997) (―Section 6511‘s detail, its technical language, the iteration of the limitations in both procedural and substantive forms, and the explicit listing of exceptions, taken together, indicate to us that Congress did not intend courts to read other unmentioned, open-ended ‗equitable‘ exceptions into the statute that it wrote.‖). Although Congress has amended Section 6511 since Brockamp, none of the exceptions listed in the statute of limitations apply to McGrogan‘s situation. We see no reason to depart from the Supreme Court‘s instructions in Brockamp and therefore reject McGrogan‘s argument that equitable tolling affords him an exception to the statute of limitations. 18
McGrogan‘s assertion of the doctrine of equitable recoupment is also unpersuasive. When applicable, equitable recoupment may allow a taxpayer to receive a credit for a tax overpayment in a subsequent tax year. See In re Pransky, 318 F.3d 536, 544-45 (3d Cir. 2003). However, equitable recoupment is not an independent source of subject matter jurisdiction. See Dalm, 494 U.S. at 608. As noted above, unless an exception like mitigation applies, the federal courts lack jurisdiction to adjudicate refund petitions brought after the expiration of the statute of limitations. See Wolckenhauer, 215 F.3d at 353-54. As a result, because the District Court had no independent source of jurisdiction, the doctrine of equitable recoupment does not affect the outcome of this case.6 6 We continue to be concerned about the possibility of double payment of taxation to the IRS and to the VIBIR in cases such as the ones at issue here. The IRS assured us at oral argument it was willing to participate in the administrative procedure set up by the Tax Implementation Agreement: Ms. RUBIN: At this point I don‘t believe there‘s any sign that there would be double taxation. We‘ve indicated – the IRS has indicated its willingness to participate in competent authority once it is determined how much taxes are owed. Obviously, if a particular taxpayer wins on their challenge, if they prove that they‘re bon[a] fide Virgin Islands residents and they prove that the income in question was Virgin Islands income, there won‘t be any double taxation because there won‘t be any residual U.S. tax liability. But if, 19 instead, there is determined that, yes, there is U.S. tax liability here because these were not Virgin Islands residents, or their income was not Virgin Islands income and, therefore, not subject to the EDP benefits, then we‘ve indicated, as shown in the record cites I gave you for the Cooper notices of deficiency, that we‘re willing to go in a competent authority at that point to determine which tax authorities should be getting the money. The IRS then qualified the above statement: Ms. RUBIN: I‘m not entirely certain what the remedy would be in a situation where someone, unlike the Coopers, failed to do a protective refund claim, failed to take that step to protect their right to go and get money back from the Virgin Islands BIR if, in fact, it is determined that they should have instead paid all of their taxes to [the IRS]. Counsel for the Taxpayers replied to the IRS‘s argument by pointing out that the protective mechanism of a refund claim was set up in 2006, after the time to file a protective income tax return for calendar years 2001 and 2002 had already closed. Therefore, McHenry and McGrogan could not have taken the protective actions advocated by the IRS. In view of the statement by the IRS that negotiation would be initiated to prevent double taxation – in the situation we could envisage if, for instance, McGrogan lost his pending case in the Tax Court – we trust that the IRS will live up to its commitment to prevent double taxation. 20