Facts and Procedural Background
Ms. Jolly sought refunds of income taxes for four years: 2016, 2017, 2018, and 2019.
2016–2019 Tax Years
Ms. Jolly timely filed her 2016 income tax return, and received a refund of USD 2,392. The IRS audited her 2016 tax year, and issued her a notice of deficiency that “result[ed] in a USD 1,965.00 increase to Ms. Jolly’s 2016 tax liability.” The notice stated that the last date for her to petition the US Tax Court to redetermine her 2016 deficiency was July 8, 2019. Ms. Jolly did not pay the deficiency stated on the notice.
Ms. Jolly timely filed her 2017 income tax return, and received a refund of USD 6,863. The court wrote, “according to the government, on 9 July 2018, the IRS assessed a total of USD 6,371.16 in Ms. Jolly’s tax liability.” Critically, the court found that the Government could not locate a notice of deficiency issued to Ms. Jolly in advance of the assessment of her 2017 tax liability.
Ms. Jolly timely filed her 2018 and 2019 income tax returns, on which she claimed refunds (i.e., she claimed she had overpaid her tax due for both years). For both years, the IRS applied Ms. Jolly’s claimed 2018 and 2019 refunds (of USD 1,947 and USD 1,255, respectively) to her 2017 balance. After the application of the 2018 and 2019 refund amounts, Ms. Jolly’s 2017 “additional taxes due . . . . [were] assessed to be USD 2,069.20 as of 5 October 2020 . . . .” Ms. Jolly did not pay that USD 2,069.20 amount.
Proceedings at the Tax Court
On 17 September 2019, Ms. Jolly filed a petition with the Tax Court seeking a redetermination of the tax due for her 2016, 2017, and 2018 tax years. The Tax Court dismissed Ms. Jolly’s petition with respect to her 2016 tax year as untimely. It dismissed her petition with respect to her 2017 and 2018 tax years for lack of jurisdiction because no valid notice of deficiency had been issued for those years.
Proceedings at the Court of Federal Claims
On 6 April 2020, Ms. Jolly filed her complaint with the Court of Federal Claims seeking a refund for her 2016, 2017, 2018, and 2019 tax years. The Government moved to dismiss her refund claims for 2016 and 2017 for lack of subject-matter jurisdiction, and for 2018 and 2019 for failure to state a claim.
The Government argued that the Court lacked jurisdiction as to Ms. Jolly’s 2016 and 2017 tax years because she had not paid “her alleged tax liabilities” before filing a refund suit, thereby violating Flora’s full payment rule. Ms. Jolly contended that she had satisfied the Flora full payment rule because she had paid the tax she determined was due for 2016 and 2017. In the alternative, Ms. Jolly argued that the “IRS violated ‘the Internal Revenue Code’ by failing to provide ‘tax liability deficiency notices’ ‘prior to the assessment of a deficiency.’”
With respect to Ms. Jolly’s 2018 and 2019 tax years, the Government argued that Ms. Jolly had failed to state a claim upon which relief may be granted because she had already received her 2018 and 2019 refund payments as applied to “her alleged 2017 tax debt.” The parties did not dispute that given Ms. Jolly’s 2018 and 2019 refunds had been applied to her 2017 tax liability, any controversy over her 2018 and 2019 tax years would be resolved by a determination of her 2017 liability.
Law and Analysis
In order to maintain a suit for refund in a district court or the Court of Federal Claims, the taxpayer must make “full payment of the assessment” of the tax that is seeks to be refunded. See Flora, 357 U.S. at 75 (resolving whether 28 U.S.C. section 1346(a) demands full payment). This is known as the “full payment” rule, and it is jurisdictional. See Abruzzo v. United States, 24 Cl. Ct. 668, 670 (1991). In general, the party availing itself of the Court’s jurisdiction has the burden of proving jurisdiction. Acevedo v. United States, 824 F.3d 1365, 1368 (Fed. Cir. 2016).
In construing motions to dismiss, the court must accept as true all undisputed facts and draw reasonable inferences in favor of the non-moving party. Id. Though ordinarily the court is confined to the allegations in the pleadings, where a party seeks to dismiss a case for lack of jurisdiction, and a fact underlying jurisdiction is in dispute, the court may “weigh evidence” and “find facts,” all of which must be construed in favor of the non-movant. Knight v. United States, 65 F. App’x 286, 289 (Fed. Cir. 2003). A court will not dismiss a complaint for failure to state a claim where the complaint is plausible—it contains “sufficient factual content that allows the court to draw reasonable inferences that the defendant is liable for the misconduct alleged.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Though a pro se litigant must establish jurisdiction in her pleadings, a court will construe the pleadings with “less stringent standards than the formal pleadings drafted by lawyers.” Hughes v. Rowe, 449 U.S. 5, 9 (1980).
A deficiency is the correct tax minus the tax reported and amounts previously assessed, with certain exceptions not relevant here. See section 6211(a). In general, the IRS may not assess a deficiency until the IRS first mails a notice of deficiency to the taxpayer. Bush v. United States, 655 F.3d 1323, 1328 (Fed. Cir. 2011) (en banc). Judge Holte wrote: “Applying Bush, the Court of Federal Claims has previously ruled, aside from computational adjustments, the IRS is ‘statutorily obligated to serve taxpayers with a notice of deficiency.’ Mandich v. United States, 124 Fed. Cl. 209, 215 (2015).” Judge Holte further wrote: “In Welch v. United States, the Federal Circuit reversed the Court of Federal Claims’ summary judgment decision regarding a 1995 tax assessment and entered judgment in favor of the plaintiff ‘with respect to the refund they seek for the deficiency paid relating to the 1995 tax year,’ because the government failed to meet the burden of proof of mailing a notice of deficiency for that tax year. Welch v. United States, 678 F.3d 1371, 1382–83 (Fed. Cir. 2012).”
In determining the jurisdictional question of whether Ms. Jolly fully paid her tax liabilities for 2016 or 2017, Judge Holte framed the disputed fact as “whether the IRS issued a notice of deficiency before assessing Ms. Jolly’s personal tax for 2016 and 2017 . . . .” Though he did not spell it out in so many words, Judge Holte was looking to whether the 2017 notice of deficiency was ever issued because if it was never issued, then the assessment of the 2017 deficiency was invalid, and therefore was no 2017 deficiency. Without a deficiency for 2017, Ms. Jolly had already satisfied Flora’s full payment rule.
To determine whether the notice of deficiency was issued for 2016 and 2017, the court looked to the Tax Court’s order dismissing Ms. Jolly’s deficiency petition and to the Government’s filings. For 2016, the Tax Court held that a notice of deficiency had been issued, but Ms. Jolly had filed her petition too late. Judge Holte held that the Government had met its burden of showing a 2016 notice of deficiency had been issued. For 2017, the Tax Court found that a notice of deficiency had never been issued. And in its motion to dismiss at the Tax Court, the Government alleged that “no notice of deficiency was issued to petitioner for tax years 2017 or 2018 . . . .” Jolly v. Comm’r, No. 17172-19 (T.C. 11 March 2020). In its reply, the Government alleged that it was “unable to obtain the IRS administrative file for the 2017 tax year. Presumably, however, a similar notice of deficiency was issued with respect to that year.” Judge Holte held that for the purpose of the Government’s motion to dismiss, the IRS may not have issued Ms. Jolly a notice of deficiency for 2017, and therefore also held that “Ms. Jolly may not owe the IRS the levied deficiency for 2017, allegedly USD6,371.76.”
On 17 June 2021, the Government filed a motion for reconsideration. That motion remains pending.
Jolly’s key takeaways derive from the necessity of a valid deficiency assessment.
Flora’s full payment rule can be met where the deficiency assessment was invalid. This application of Flora is novel due to the unique facts of the case, but it follows from the Code. There is no deficiency unless there has been a valid assessment of one. Absent a deficiency, there was nothing more for Ms. Jolly to fully pay for 2017; therefore, she had satisfied Flora’s full payment rule.
Courts may effectively estop the Government from taking conflicting positions in different litigation over the same issue. Judge Holte noted that Ms. Jolly was foreclosed from litigating her 2017 dispute in the Tax Court because there, the IRS successfully argued that the Tax Court lacked jurisdiction over the claim as the IRS had never issued a notice of deficiency for her 2017 tax year. Yet in the Court of Federal Claims, the Government argued that it had issued Ms. Jolly a 2017 notice of deficiency. Such a drastic change in position not only would deprive Ms. Jolly of a venue to litigate her tax controversy but is also unfair to litigants and the judicial system. Judge Holte may have considered the Government’s change in position but was unwilling to sua sponte raise such a powerful defense as collateral estoppel (i.e., issue preclusion) or judicial estoppel.