Opinion ID: 71496
Heading Depth: 1
Heading Rank: 15

Heading: The Duffies' Failure to Timely File a Refund Claim Deprives this Court of Jurisdiction

Text: The United States, as sovereign, is immune from suit save it consents to be sued ... and the terms of its consent to be sued in any court define that court's jurisdiction to entertain the suit. United States v. Sherwood, 312 U.S. 584, 586, 61 S.Ct. 767, 85 L.Ed. 1058 (1941). Under Section 1346(a)(1), district courts have original jurisdiction over: [a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.... 28 U.S.C. § 1346(a)(1). Because tax refund suits are actions in which the sovereign has waived its immunity and consented to be sued, statutory provisions governing such suits are strictly construed. Alexander v. United States, 829 F.Supp. 199, 200-01 (N.D.Tex.1993). One condition to suit against the United States is compliance with the time period within which a claim must be filed. Under 26 U.S.C. § 7422(a): No suit or proceeding 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 the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof. (emphasis added). To overcome sovereign immunity in a tax refund action, a taxpayer must file a refund claim with the IRS within the time limits established by the Internal Revenue Code. United States v. Dalm, 494 U.S. 596, 602, 110 S.Ct. 1361, 108 L.Ed.2d 548 (1990). A taxpayer's failure to file a timely refund claim with the IRS deprives the district court of subject-matter jurisdiction. Gustin v. United States, 876 F.2d 485, 488 (5th Cir.1989). The general limitations periods for filing refund claims with the IRS are prescribed by subchapter B of Chapter 66 of the Internal Revenue Code, set forth at 26 U.S.C. § 6511 et seq. (the regular refund procedures). Under Section 6511(a), a refund claim must be filed within the later of two years from the time the tax was paid or three years from the time the tax return was filed. Under TEFRA, the regular refund procedures and the two or three year statutes of limitations do not apply to credit or refund of an overpayment attributable to a partnership item (or an affected item). 26 U.S.C. § 6230(d)(6). [22] The two types of affected items, computational and substantive, each have different procedural requirements. For computational affected items, the IRS need not issue a statutory notice of deficiency, and the TEFRA time requirements apply. Woody, 95 T.C. at 201-02. Under TEFRA, if the IRS erroneously computes the adjustment, the taxpayer must file a refund claim within six months after the IRS mails a notice of computational adjustment to the partner. 26 U.S.C. § 6230(c)(2)(A). The IRS is required to follow the non-TEFRA deficiency procedures when making an adjustment relating to a non-computational or substantive affected item. 26 U.S.C. § 6230(a)(2)(A)(I); 26 C.F.R. § 301.6231(a)(6)-1T(a); Woody, 95 T.C. at 202; N.C.F. Energy Partners, 89 T.C. at 745. The TEFRA time requirements do not apply to such substantive affected items. Instead, refund claims based on substantive affected items are governed by the limitations period in Section 6511(a). Brookstone Corp. v. United States, 1994 WL 621576 (S.D.Tex. May 23, 1994). The government argues that the enhanced interest assessed against the Duffies under Section 6621(c) is a computational affected item. In support, the government cites Barlow v. Commissioner, 78 T.C.M. (RIA) ¶ 2000-339, 2000 WL 1649506 (T.C.2000), which states that Section 6621(c) interest is an affected item because the determination of a taxpayer's liability for such interest may require findings of fact peculiar to the particular taxpayer, namely the amount of the taxpayer's underpayment that is attributable to a taxmotivated transaction. (emphasis added). According to the government, the fact that Section 6621(c) may require individual partner-level findings does not mean such findings are always required. The Barlow court noted that once it decides that there is a taxmotivated transaction ..., the determination of the additional interest is largely mechanical. Id. at XXXX-XXXX. Because the Tax Court judgment found that the adjustments at the partnership level resulted from transactions lacking in economic substance, the government argues that the determination of the Duffies' additional interest was similarly mechanical. The government asserts that substantive affected items are more accurately described as affected items that depend on `non-computational' partner level factual determinations. Olson v. United States, 37 Fed.Cl. 727, 732 n. 7 (1997). The factual determination at the partner level, according to the government, must be more than just computational or mechanical to be a substantive affected item. There are no non-computational facts, the government maintains, that must be determined at the partner level to determine whether Section 6621(c) interest was properly applied to the Duffies. In response, the Duffies assert that the assessment of Section 6621(c) interest is a substantive affected item, requiring factual determinations at the partner level. The Duffies cite Mellina, 518 F.Supp.2d at 829-30, and Bartimmo, 525 F.Supp.2d at 884. In both Mellina and Bartimmo, the courts stated that Section 6621(c) interest is an affected item that turns on issues specific to the individual partners. However, neither court analyzed or discussed what partner-specific issues had to be determined at the partner level. The Mellina court relied on the Second Circuit's opinion in Field, 328 F.3d at 59, as holding that Section 6621(c) interest is always substantive affected item and not a computational adjustment. The question before the Field court was whether Section 6621(c) is a partnership item, not whether it is a substantive or computational affected item. The statement in Field that Section 6621(c) interest is a substantive affected item comes from a parenthetical in which the court summarized the holding of Barlow, 78 T.C.M. at 2000339. Barlow clarified that the partner-specific issues with respect to Section 6621(c) interest are the amount of the taxpayer's underpayment that is attributable to a taxmotivated transaction. Id. at XXXX-XXXX. In the Texas Farm Venturers case, the Tax Court determined that the adjustments to partnership expenses were attributable to tax-motivated transactions. The only issue in this partner-level refund action is whether the Duffies' tax underpayment resulting from the partnership transactions previously found to be tax-motivated was substantial, $1,000 or greater, clearly a computational rather than a substantive issue. In this case, the IRS's assessment of interest under Section 6621(c) is a computational affected item. Because the interest assessment under Section 6621(c) is a computational affected item in this case, the general limitations period of Section 6511(a) does not apply. Rather, the TEFRA six month statute of limitations applies to the Duffies' refund claim. The Duffies have the burden of showing compliance with the applicable limitations period. See Makarova v. United States, 201 F.3d 110, 113 (2d Cir.2000). The undisputed facts in the record show that the IRS notified the Duffies of the adjustments to their income tax liability on July 19, 2002 and assessed additional tax liability and interest on August 12, 2002. The Duffies paid the full balance of tax and interest on September 9, 2002. It is undisputed that the Duffies filed a refund claim on August 11, 2004. The Duffies failed to timely file their refund claim with the IRS within the applicable six-month limitations period.