Argument Preview: Hinck v. US on 4/23

The following argument preview was written by Howard Jacobson, a partner in Akin Gump’s DC office.

Later today, the Supreme Court will hear argument in No. 06-376, Hinck v. United States. The issue presented in this case is whether the Tax Court has exclusive jurisdiction under 26 U.S.C. 6404(h) to review determinations by the Internal Revenue Service not to grant a taxpayer’s request for interest abatement under 26 U.S.C. 6404(e)(1) (relating to interest accruing due to the IRS’s own ministerial delay) or whether district courts and the Court of Federal Claims also have jurisdiction to review such determinations. This case will resolve a split between the Fifth and Federal Circuits on this issue, which treated taxpayers involved in substantially the same underlying transaction differently. Thomas Redding of Redding & Assoc. in Houston, will argue for John and Pamela Hinck, while Assistant to the Solicitor General Jonathan Marcus will argue on behalf of the United States.

Background on Jurisdiction over Tax Cases

This case is best understood by understanding the various trial courts with jurisdiction over federal tax cases. On the one hand, if the taxpayer is seeking a refund of taxes paid in excess of those due, it may sue for a refund in either the Court of Federal Claims or the federal district court in which the taxpayer resides. The Court of Federal Claims is granted jurisdiction under the Tucker Act over “any claim against the United States founded either upon the Constitution, or any act of Congress or any regulation of an executive department,” including tax refunds authorized by 26 U.S.C. § 7422(a). Federal district courts are granted concurrent jurisdiction with the Court of Federal Claims under 28 U.S.C. § 1346(a)(1) 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.” Prior to filing a tax refund, the taxpayer must first have filed an administrative refund claim which either has been denied or not acted upon within a specified period.

On the other hand, Congress established the Tax Court as a tribunal which has jurisdiction over certain deficiency cases, generally providing for judicial review of determinations made by the IRS that a taxpayer has underpaid its tax without requiring the taxpayer to pay the taxes prior to obtaining judicial review. The taxpayer has a specified period following the mailing of a notice that the taxpayer owes a deficiency to file a petition for review in the Tax Court.

Under 26 U.S.C. § 6601(e), interest is paid, assessed, and collected in the same manner as tax, and any reference to tax also includes interest, provided that interest is excepted from the definition of a “deficiency” and the Tax Court’s deficiency jurisdiction. Accordingly, the Tax Court’s jurisdiction is generally limited to deficiencies and not to the determination of interest. In contrast, the Court of Federal Claims and district court have jurisdiction over refund claims for tax and interest.

History of Statutory Provision at Issue

Prior to 1986, the IRS claimed to have no authority to abate interest that had accrued on taxpayer underpayments of tax, even if such accruals were due to its own errors and delays. But in 1986, Congress enacted 26 U.S.C. § 6404(e) [“Section 6404(e)”], authorizing the IRS to abate all or any part of the interest assessed on any deficiency if the assessed interest is attributable, in whole or in part, to errors or delays in performing ministerial acts by IRS officers or employees acting in their individual capacity. The early cases interpreting Section 6404(e) held that although the claims fell within the existing refund claim jurisdiction of the district courts and Court of Federal Claims, they were not justiciable because Section 6404(e) was too general and lacked a standard for judicial review. Later courts cited these cases for the more general proposition that district courts lack subject matter jurisdiction over Section 6404(e) cases. The Tax Court had determined that it lacked subject matter jurisdiction over Section 6404(e) claims because it has limited jurisdiction and had not been granted jurisdiction over such claims by Congress. Accordingly, the IRS had total discretion with respect to Section 6404(e) abatement requests.

In 1996, as part of the Taxpayer Bill of Rights II legislation, Congress amended Section 6404 to add present subsection (h), granting jurisdiction to the Tax Court over any action brought by certain taxpayers to determine whether the failure to abate interest under this section was an abuse of discretion. Any such action in the Tax Court must be brought within 180 days after the date of the mailing of the Secretary’s final determination not to abate such interest. The taxpayers permitted to bring such an action are limited to those whose net worth does not exceed specified amounts.

Facts and Procedural Posture of the Case

In this case, John Hinck invested in a California limited partnership (“Agri-Cal”) and reported his share of tax losses for the 1986 tax year. Raymond Beall was a limited partner in two other limited partnerships with a common general partner (the “Amcor partnerships”). The IRS examined and proposed adjustments to items reported on the tax returns for Agri-Cal and the other Amcor partnerships. While partnership level cases were pending, many of the partners – including the Bealls and the Hincks – ultimately settled their tax disputes with the government on these items in 1997 and 1999 respectively. In 1996, the Hincks had made an advance remittance to the IRS toward any deficiency. When the case was settled, the IRS assessed the agreed-upon taxes and also calculated and retained interest thereon, refunding the balance of the remittance to the taxpayers. In 2000, the Hincks timely filed a with the IRS a claim for refund, asserting that interest assessed against them should be abated pursuant to 26 U.S.C. 6404(e)(1) for a four-year period due to IRS delays and errors in the consolidated IRS examination of the AMCOR partnerships. The IRS denied the claim in 2001, and the Hincks filed suit in the Court of Federal Claims in 2003 seeking review of this denial.

The Bealls also unsuccessfully filed refund claims with the IRS to abate the interest on similar grounds. They then filed their refund suit to review their claim with the U.S. District Court for the Eastern District of Texas. The two cases were chosen as lead cases on this issue for the AMCOR partners.

The district court granted the government’s Rule 12(b)(1) motion to dismiss the Beall case for lack of subject matter jurisdiction in July 2001, but the Fifth Circuit reversed. It held that the Section 6404(e) claims for refund fit within 28 U.S.C. § 1346(a)(1), and it rejected the government’s argument that the grant of Tax Court jurisdiction had repealed or limited the grants of refund jurisdiction of the district court, concluding instead that it had merely been additive to the Tax Court’s jurisdiction. Neither the statute nor the legislative history had explicitly indicated any intent for this jurisdiction to be exclusive in the Tax Court and subject to the limitations of Section 64604(h). The Fifth Circuit further held that the 1996 amendment adding Section 6404(h) clarified that the abatement claims are justiciable and not wholly within the IRS’s discretion. Thus, it looked to the fact that Congress had created a standard for review in the Tax Court and concluded that the abatement decision was no longer committed solely to agency discretion.

Following three district court opinions issued after the 1996 legislation, the Court of Federal Claims granted the government’s Rule 12(b)(1) motion in 2005 to dismiss the Beall case for lack of subject matter jurisdiction. It held that the claim was not for an “illegal extraction” because the IRS had discretion and the standard enacted in Section 6404(h) applied only to cases filed in the Tax Court; the review standard did not apply to the Court of Federal Claims. On appeal, the Federal Circuit affirmed on a different theory, holding that the 1996 amendments granting jurisdiction to the Tax Court was exclusive and withdrew existing Court of Federal Claims jurisdiction. It based its decision on the facts that Section 6404(h) provided a specific procedure for reviewing IRS determinations of interest abatement, specified a forum for such cases (the Tax Court), and granted the Tax Court the power to issue an abatement. It rested its decision on the Supreme Court’s statement in Whitney Nat’l Bank in Jefferson Parish v. Bank of New Orleans & Trust Co. that when “Congress has provided statutory review procedures designed to permit agency expertise to be brought to bear on particular problems, those procedures are presumed to be exclusive.”

As further evidence of Congressional intent, the Federal Circuit relied on the 1996 House Report, which stated that under present law, “[f]ederal courts generally do not have jurisdiction to review the IRS’s failure to abate interest.” It gave less deference to the portion of that report providing that no inference should be drawn as to whether other courts had jurisdiction over such claims. It further cited the reports to legislation proposed (and not enacted) in 2000, which stated that the 1996 legislation “specifically granted jurisdiction to the Tax Court to review for abuse of discretion” interest abatement claims. The Federal Circuit noted that that report further stated, “The courts have held that judicial review of the IRS’ failure to use its discretion to abate interest is generally not available, unless jurisdiction is specifically granted by statute or a standard has been established.”

The Federal Circuit rejected the Fifth Circuit’s opinion in Beall. In its view, the Fifth Circuit was wrong in concluding that Congress did not grant exclusive jurisdiction in the Tax Court for such claims; it rejected the Fifth Circuit’s interpretation of the legislative history and the supposed anomalies of (i) limiting relief to taxpayers below a specified net worth level because it had done so in the Equal Access to Justice Act for recovery of legal fees, and (ii) the efficiencies of not separating interest abatement claims from a refund claim. Thus, the Supreme Court granted cert to resolve the conflict between the two circuits on this narrow issue.

Subsequent to the filing of the petition, the district court in Beall dismissed the case under Rule 12(b)(6) for failure to state a claim because the taxpayer had not demonstrated that the acts at the heart of the claim were “ministerial” claims. This decision was later affirmed by the Fifth Circuit.

Arguments by the Parties

The basic argument presented by the taxpayer is that district courts and the Court of Federal Claims have concurrent jurisdiction over Section 6404(e) refund claims under 28 U.S.C. § 1346. In addition, the Court of Federal Claims has jurisdiction under the Tucker Act. It contends that Section 6404(h) was added to address the lack of subject matter jurisdiction in the Tax Court to resolve interest abatement claims and to provide a standard for such claims, but that Congress did not amend other provisions of the statute. The enactment of standards for the Tax Court, according to the taxpayer, established that Congress did not intend to leave such decisions up to the sole discretion of the IRS.

The taxpayer maintained that the Federal Circuit’s analysis was erroneous because it based its decision solely on the amendments and legislative history and did not consider the historic distinctions between the Tax Court’s limited prepayment jurisdiction and the broader refund jurisdiction of the district courts and Court of Federal Claims. Moreover, the taxpayer maintains that the plain language of the statute did not express any intent to make the Tax Court remedy exclusive or to reduce the jurisdiction of the district court or Court of Federal Claims. It based this argument, in part, on the principle that implied repeal of existing federal court jurisdiction is disfavored. Finally, the taxpayer asserted that the Federal Circuit’s decision deprived taxpayers expressly excepted from the Tax Court’s jurisdiction for Section 6404(h) review of their due process rights.

The government’s argument may be reduced to “the text, structure, and history of Section 6404(h) reveal that Congress intended to establish a limited remedy for adverse interest abatement determinations in the Tax Court only.” Since Congress was aware that no taxpayer had been permitted by any court to have a denial of an abatement request reviewed because it had been committed to agency discretion, the implied repeal doctrine could not apply because no right had been restricted when and if Section 6404(h) was applied as an exclusive remedy in the Tax Court.

The government also responded that no damage was done to the prepayment-refund dichotomy among the courts because an interest abatement claim does not ripen until after the Tax Court determined that deficiency exists; the claim is a freestanding claim and Congress was free to limit its application to taxpayers with the net worth limitations. The government further argued that the taxpayer has the ability to prevent the accrual of such interest, since it may pay it when the IRS first asserts such amounts are due. Neither of these arguments is very convincing, as evidenced by the instant case. First, the taxpayer had deposited funds with the IRS and received a refund net of interest that may have been inflated due to ministerial delays by the IRS. Moreover, such a case might never be decided by the Tax Court if the underlying claim were to be settled and a payment made.

Ultimately, a close reading of both the statute and the legislative history of Section 6404(h) provides little guidance on how this case should be resolved. The statute provides no guidance as to whether it was intended to provide exclusive jurisdiction in the Tax Court, on the one hand, or, if permitting concurrent jurisdiction, whether the review standard was intended to apply to the district court of Court of Federal Claims. The legislative history is equally vague and can be read to support either position, but is conclusive as to neither. Congress clearly intended that the IRS decisions whether to abate interest be subject to review, but it did not indicate whether the remedy it provided was exclusive. Either interpretation could be justified under general principles of statutory interpretation. Ultimately, the decision will likely consist of picking between two alternatives and resolving the split in the circuits without having a lasting effect on other areas of the law. If the Court were to affirm the Federal Circuit’s decision, it will have the effect of limiting taxpayers’ access to court to contest abuses of discretion by the IRS. On the one hand, this would appear to be contrary to the intent of the Taxpayer Bill of Rights provisions holding the IRS more accountable. On the other, it may be consistent with Congress’s intent to provide relief only in very limited cases.