IRS waived specificity requirement for refund claim

By James A. Beavers, CPA, CGMA, J.D., LL.M.

The Ninth Circuit, reversing a district court, found that the IRS had waived the specificity requirement for a taxpayer's refund claim by substantively examining the refund claim, so the district court had incorrectly concluded that it lacked jurisdiction over the taxpayer's refund suit.

Background

Jeffrey Harper was the sole shareholder of Harper Construction Co. (HCC), a design-builder and general contractor specializing in military design-build projects. In 2012, Harper filed amended tax returns on behalf of HCC for tax years 2008 and 2010, claiming that he was entitled to a Sec. 41 research and development (R&D) credit of $437,632 for 2008 and $388,325 for 2010. HCC had not previously sought the R&D credit in its 40-plus-year history, and its sudden pursuit of the credit in 2012 was due to its affiliation with AlliantGroup, a consulting firm that markets the R&D credit to businesses nationwide for a fee based upon a percentage of the credit obtained.

The amended returns for 2008 and 2010 simply stated that the returns were reporting credits for increasing research activity, and Harper did not provide the IRS with any evidence with the returns that HCC was entitled to the credits claimed. However, the IRS conducted a substantive four-year examination of the claims, asking questions of and requesting documents from Harper about them. After receiving multiple answers and over 100,000 pages of supporting documents, the IRS denied the claims on Sept. 12, 2016, informing Harper at that time that his recourse in the matter was to bring a refund suit in district court.

Harper followed the IRS's directions and filed a refund suit in district court to recover the claimed credits. The IRS filed a motion to dismiss the suit, asserting that the claims for refund (i.e., the amended returns) submitted to the IRS failed to adequately set forth the grounds and facts entitling Harper to any credit and, thus, did not meet the specificity requirement in Regs. Sec. 301.6402-2(b)(1), depriving the district court of subject matter jurisdiction over Harper's refund suit. Under the specificity requirement, a claim for refund must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the IRS of the exact basis of the claim.

The district court agreed with the IRS and granted its motion to dismiss, finding that Harper's claim for refund did not meet the requirements of Regs. Sec. 301.6402-2(b)(1). Harper appealed the district court's decision to the Ninth Circuit.

The Ninth Circuit's decision

The Ninth Circuit reversed the decision of the district court. Although Harper continued to argue in the Ninth Circuit that the claims met the specificity requirement in Regs. Sec. 301.6402-2(b)(1) and did not argue that the IRS had waived the requirement, the court nonetheless found that the IRS had waived the requirement as a result of its extensive audit activity regarding the claimed research credits.

Under Sec. 7422, the federal courts' jurisdiction to review a taxpayer's refund claim is conditioned on the taxpayer's filing of the claim for refund or credit with the IRS "according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof," and Regs. Sec. 301.6402-2(b)(1) makes jurisdiction dependent on the satisfaction of the specificity requirement.

The Ninth Circuit explained that the specificity requirement, like Sec. 7422, is an administrative exhaustion provision intended to ensure that the IRS has adequate notice of a taxpayer's claim and its underlying facts so that the IRS can conduct an administrative investigation and determination. However, the Supreme Court held in Angelus Milling Co.325 U.S. 293 (1945), that the IRS can waive satisfaction of its formal or detailed requirements and that an IRS waiver of its requirements can be established by an "unmistakable" showing that the Service has dispensed with the requirements and examined the merits of the taxpayer's claim.

The Ninth Circuit found that the IRS's substantive examination and final denial of Harper's claims on the merits constituted "a textbook case of waiver." The court observed that at no point did the IRS tell Harper that he had not submitted enough information or evidence to satisfy the specificity requirement or for it to determine his eligibility for the tax credit, and the IRS's direction to bring suit if he disagreed with the IRS's denial of the claims was a strong indication that the IRS was making a substantive claim. According to the court, although the IRS is entitled to require taxpayers to provide information in a certain form, it is also entitled to waive its requirements and seek the needed information by investigation. The court determined that the IRS had waived the specificity requirement for Harper's claims by accepting the forms he filed and substantively examining Harper's specific claims.

Besides arguing that Harper had not met the specificity requirement and it had not waived the requirement, the IRS argued that Harper had waived any reliance on the IRS's waiver of the requirement. The Ninth Circuit found that Sec. 7422 conditions the federal courts' jurisdiction on a taxpayer's interaction with the IRS and the IRS's responses to those interactions, and concluded that the evidence regarding Harper's interactions and the IRS's responses showed that Harper had not waived the IRS's waiver of the specificity requirement.

Because the IRS's only objection to the court's jurisdiction was Harper's failure to satisfy the specificity requirement and because the IRS had waived that requirement, the court reversed the lower court's dismissal of the case and remanded it for further proceedings.

Reflections

In a concurring opinion, one member of the Ninth Circuit's panel, while agreeing that the district court had jurisdiction over the case, disagreed with the manner in which the majority came to its conclusion. The concurring judge argued that the majority had blatantly erred in holding that it could exercise its discretion to address the IRS's waiver of its requirements (a point Harper did not address in his arguments to the court) because it is a jurisdictional question. The concurring judge found that while Sec. 7422 addresses the administrative exhaustion of remedies and is jurisdictional, the technical form requirements in Regs. Sec. 301.6402-2(b)(1) are not jurisdictional. As the concurring judge noted, if the specificity requirement were jurisdictional, the IRS could not waive it.

The parties, however, had briefed and argued in the Ninth Circuit the question of whether Harper's claims were valid under the informal-claim doctrine. While acknowledging that under Ninth Circuit precedent the court had discretion in limited circumstances to reach waived issues, the concurring judge determined, quoting the Ninth Circuit's opinion in Norwood v. Vance, 591 F.3d 1062, 1068 (9th Cir. 2010), that "the more prudent course is to resolve the case on the basis of the issues actually briefed and argued by the parties." Therefore, the concurring judge determined that the validity of Harper's claims should be judged under the informal-claim doctrine.

Under the informal-claim doctrine, a formal claim for refund that does not meet all the technical requirements of Regs. Sec. 301.6402-2(b)(1) may be treated as a valid claim for refund. For a claim to be sufficient, three general requirements must be met: (1) There must be a written request for a refund (2) that specifies the tax and the year for which the refund is sought and (3) that provides sufficient notice to allow the government to investigate the claim. The concurring judge found that these requirements had been satisfied by Harper's filing an amended return, which, though flawed as a formal claim for refund, put the IRS on notice of the bases of his refund claims. Further, the IRS had "perfected" Harper's claims through its substantive investigation of them. Thus, the concurring judge found that the district court's decision should be reversed on those grounds and without reaching the waiver issue.

Harper, No. 19-55933 (9th Cir. 2/25/21)

Tax Insider Articles

TECHNOLOGY

2020 tax software survey

COVID-19 upended tax season. Did CPAs’ tax software help them cope? Read the results of our annual tax software survey

TAX RELIEF

Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.