WILTON R. STEPHENS, JR., CAROL M. STEPHENS, Plaintiffs-Appellants
UNITED STATES, Defendant-Appellee
from the United States Court of Federal Claims in No.
1:15-cv-00153-TCW, Judge Thomas C. Wheeler.
S. Lair, Rose Law Firm, Little Rock, AR, argued for
plaintiffs-appellants. Also represented by Byron Jansen
Anthony T. Sheehan, Tax Division, United States Department of
Justice, Washington, DC, argued for defendant-appellee. Also
represented by David A. Hubbert, Jonathan S. Cohen.
Newman, Wallach, and Chen, Circuit Judges.
Wilton R. Stephens, Jr., and Carol M. Stephens (collectively,
the "Stephenses") sued the United States
(Government) in the U.S. Court of Federal Claims
("Claims Court"), seeking a refund of federal
income taxes and interest. The Government filed a motion to
dismiss for lack of subject matter jurisdiction pursuant to
Rule 12(b)(1) of the Rules of the Court of Federal Claims,
arguing that the Stephenses failed to file a timely tax
refund claim with the Internal Revenue Service (IRS). The
Claims Court denied the Government's motion to dismiss.
See Stephens v. United States, 127 Fed.Cl. 660, 660
(2016). The Government filed a motion for reconsideration,
which the Claims Court also denied. App'x
3.After the Government requested that the
Claims Court certify the case for interlocutory appeal, the
Claims Court sua sponte "t[ook] another look at
the applicable case law and statutory provisions" and
granted the Government's motion to dismiss.
Stephens, 127 Fed.Cl. at 660-61. We affirm.
Stephenses filed joint federal income tax returns for tax
years 1995, 1996, and 1997. During these tax years, Mr.
Stephens was a shareholder of SF Holding Corporation
("SF"), a subchapter S corporation. See
generally I.R.C. §§ 1361 et seq. S
corporations generally do not pay federal income taxes.
See I.R.C. § 1363(a). Instead, they pass their
tax items through to their shareholders, who report those
items on individual tax returns. See I.R.C. §
1366. The Stephenses reported passthrough income arising out
of investments in SF. At least some of this income was
classified as "passive activity" income on the
Stephenses' tax returns. In addition, the Stephenses
reported passive activity losses (which may be deducted from
passive activity income) and passive activity credits (which
may be claimed against taxes allocable to passive
activities). See I.R.C. § 469(d).
audited SF's returns and the Stephenses' individual
returns for 1995 and 1996. Those tax years were subject to
the audit provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, 96
Stat. 324 (codified in scattered sections of Title 26 of the
U.S. Code). Under TEFRA, the IRS had to complete its audit of
SF's returns before it could apply any corporate-level
adjustments to the pass through items on the Stephenses'
individual returns and finalize its audit of the individual
returns. Because of amendments to the Tax Code, the
Stephenses' 1997 return was not subject to TEFRA and was
audited separately from the 1995 and 1996 returns.
April 2003, the IRS sent a notice proposing to disallow
certain of the Stephenses' passive activity loss
deductions and passive activity credits for 1995 and 1996. As
detailed in a subsequent notice of deficiency, the IRS
concluded that Mr. Stephens had materially participated in
some of SF's activities. This material participation
meant that income arising from such activities would be
considered nonpassive rather than passive, as originally
reported by the Stephenses. The passive activity
deductions and credits could not be used to offset tax
liability arising from nonpassive income.
See I.R.C. § 469(d).
December 3, 2007, the corporate audit of SF concluded with a
closing agreement that covered only corporate-level
adjustments. Completion of the SF audit permitted the IRS to
finalize its audit of the Stephenses' 1995 and 1996
returns. On March 24, 2008, the IRS again proposed the
disallowance of the Stephenses' 1995 and 1996 passive
activity loss deductions and credits in the same amounts
proposed in April 2003. On January 21, 2009, the IRS sent the
Stephenses a notice of deficiency for 1995 and 1996, again in
the same amounts proposed in April 2003 and March 2008. The
Stephenses did not contest the notice of deficiency and paid
the amount specified by the IRS on January 6, 2010. The
limitations period for 1995 and 1996 expired two years later
on January 6, 2012. The Stephenses never filed a formal
refund claim for 1995 or 1996.
Stephenses allege that they believed they could carry over
their now-disallowed passive activity losses from 1995 and
1996 to 1997 to reduce their income taxes by an amount
approximately equal to the increase in their 1995 and 1996
taxes. On July 25, 2006, the Stephenses entered into an
agreement with the IRS to extend the deadline for filing a
refund claim for 1997 until June 30, 2008. On October 8,
2009, over a year after the June 30, 2008 deadline, the
Stephenses mailed an amended tax return for 1997 to the IRS.
The amended return sought to carry over the 1995 and 1996
passive activity losses to 1997.
November 2011, the Stephenses sent a letter regarding their
amended return for 1997 in which they invoked the mitigation
provisions of the Tax Code. See I.R.C. §§
1311-1314 (mitigation provisions). These provisions, in
specified circumstances, "permit a taxpayer who has been
required to pay inconsistent taxes to seek a refund of a tax
the recovery of which is otherwise barred by [I.R.C.]
§§ 7422(a) and 6511(a)." United States v.
Dalm, 494 U.S. 596, 610 (1990). I.R.C. § 7422(a)
states that no suit for the recovery of any tax alleged to
have been erroneously collected may be brought until a
"claim for refund or credit has been duly filed"
with the IRS. I.R.C. § 6511(a) specifies the limitations
period for filing a refund claim. There is no dispute that the
limitations period in which the Stephenses could have filed a
timely refund claim for 1997 had long expired, on June 30,
2008. See Open. Br. 14 ("The period for filing
a claim for refund for 1997 expired on June 30, 2008.").
March 15, 2012, the IRS sent a notice proposing to disallow
the Stephenses' refund claim for 1997 because it was
untimely and because the mitigation provisions did not save
the claim. On April 12, 2012, the Stephenses filed an
administrative appeal of the proposed disallowance, in which
they invoked, inter alia, equitable recoupment in
addition to mitigation in an effort to save their untimely
refund claim. "Equitable recoupment is a judicially
created doctrine . . . used as a defense allowing redress
against a timely claim that results in the double inclusion
or double exclusion of items, when the correction of such
items would be barred by the statute of limitations." 2
Mertens Law of Fed. Income Taxation § 14:3 (2018)
(hereinafter, "Mertens") (citing Bull v. United
States, 295 U.S. 247 (1935)). The IRS rejected the
Stephenses' administrative appeal because their refund
claim was untimely and neither mitigation nor equitable
Stephenses filed suit in the Claims Court. In their
complaint, the Stephenses contended that the amended 1997
return that they filed in October 2009 (which would have been
an untimely filing for that year) was actually an informal
refund claim for tax years 1995 and 1996. It is undisputed
that the limitations period for filing a refund claim for
1995 or 1996 did not expire until after the Stephenses filed
their amended 1997 return in October 2009. The Stephenses
asserted two grounds for relief set out in separate counts in
the complaint: (1) statutory mitigation and (2) equitable
Government moved to dismiss for lack of subject matter
jurisdiction, arguing, inter alia, that the
Stephenses had not filed a timely refund claim for 1997 and
had not filed any refund claim for 1995 or 1996
(refuting the Stephenses' claim that their amended 1997
return qualified as an informal claim for the earlier two
years). The Claims Court initially denied the
Government's motion, treating the timely filing of a
refund claim as merely "an element of the
[Stephenses'] cause of action" rather than a
jurisdictional prerequisite. The Government filed a motion
for reconsideration, which the Claims Court initially denied.
The Government moved to certify the case for interlocutory
appeal. On August 2, 2016, the Claims Court sua
sponte reconsidered its prior rulings and granted the
Government's motion to ...