Circuits Split on Jurisdiction Over Claims for Overpayment Interest

(Parker Tax Publishing May 2021)

The Eleventh Circuit affirmed a district court's dismissal of a taxpayer's standalone action for overpayment interest under 28 U.S.C. Section 1346(a)(1) due to lack of jurisdiction and held, as a matter of first impression, that the Court of Federal Claims has exclusive jurisdiction over such standalone claims exceeding $10,000. The Eleventh Circuit concluded that overpayment interest does not constitute "any sum alleged to have been excessive" as used in Section 1346(a)(1), and noted that its conclusion is at odds with the Sixth Circuit's decision in E.W. Scripps Company and Subsidiaries v. U.S., 420 F.3d 589 (6th Cir. 2005), in which the court found that overpayment interest did fall within Section 1346(a)(1). Paresky v. U.S., 2021 PTC 126 (11th Cir. 2021).

Background

David and Linda Paresky are victims of Bernie Madoff's Ponzi scheme and, as a result, paid millions of dollars in taxes on income that they later learned was fictitious. In an attempt to partially recoup their losses, the Pareskys filed multiple claims with the IRS in late 2009 to recover taxes that were overpaid for years 2003 through 2007. Specifically, they filed amended returns for years 2005 through 2007 seeking refunds of taxes they overpaid for those years. They also filed a Form 1045, Application for Tentative Refund, seeking separate refunds arising from a carryback of the Madoff theft losses from 2008 to be applied to years 2003 through 2007.

In 2010, the Pareskys received tentative refunds of approximately $10 million for tax years 2003 through 2007. The Pareskys, however, asserted that they were also entitled to interest on the tax overpayments, claiming that the IRS had exceeded the statutory 45-day limitations period in Code Sec. 6611(e)(2) to issue the tentative refunds. But the IRS determined that they were not entitled to any additional interest. The Pareskys filed a formal claim against the IRS which the IRS denied in 2015. The denial letter stated that the couple could file suit within two years after the mailing of the denial letter.

Almost two years later, the Pareskys filed a complaint in the Court of Federal Claims, asserting that the government owed them overpayment interest for the years at issue. The government moved to dismiss the complaint for lack of subject matter jurisdiction. The government argued that the Pareskys' claim was governed by the Tucker Act, and that the Pareskys had failed to file their complaint within the six-year limitations period for claims under the Tucker Act, as they waited approximately seven years and four months to file their complaint. The Pareskys opposed the motion to dismiss and, alternatively, moved to transfer the case. The Court of Federal Claims denied the government's motion to dismiss as moot after finding that it lacked jurisdiction over the Pareskys' claim because it was untimely under the Tucker Act. The Court of Federal Claims, however, transferred the case to the Southern District of Florida because it was not evident how the Southern District of Florida or the Eleventh Circuit would address jurisdiction over a standalone claim for overpayment interest.

Following the transfer of the case, the Pareskys filed an amended complaint seeking $535,595 in overpayment interest from the government, alleging that the district court had jurisdiction over their overpayment interest claim pursuant to 28 U.S.C. Sections 1346 and 1491. The government moved to dismiss, arguing that the district court lacked jurisdiction over standalone overpayment interest claims of more than $10,000, or, alternatively, that even if the district court had jurisdiction, the Pareskys had failed to timely file administrative claims for all the years at issue except for 2007. The Pareskys asserted that the district court had jurisdiction over standalone overpayment interest claims under Section 1346(a)(1), that the government was equitably estopped from challenging the timeliness of their administrative claims, and that their claims were timely.

The district court referred the government's motion to dismiss to a magistrate judge, who recommended that the government's motion be granted in part. The magistrate judge concluded that the district court had jurisdiction over a claim for overpayment interest under Section 1346(a)(1), principally relying on the Sixth Circuit's decision in E.W. Scripps Co. & Subsidiaries v. United States, 420 F.3d 589, 593 (6th Cir. 2015), which determined that the statutory language of Section 1346(a)(1) encompassed such standalone overpayment interest claims. Because the Pareskys had not timely filed administrative claims with the IRS for the tax years 2003 through 2006, however, the magistrate judge recommended the overpayment interest claim as to those tax years be dismissed for lack of subject matter jurisdiction.

The district court declined to adopt the magistrate judge's recommendation and dismissed the amended complaint for lack of subject matter jurisdiction. In its order, the district court explained that, during the objections period, the Second Circuit issued its decision in Pfizer Inc. v. U.S., 2019 PTC 354 (2d Cir. 2019), which disagreed with the Sixth Circuit's analysis in Scripps, and concluded that Section 1346(a)(1) did not confer jurisdiction to district courts over standalone overpayment interest claims. In Scripps, the Sixth Circuit interpreted the Supreme Court's decision in Flora v. U.S., 362 U.S. 145 (1960), which referenced "interest" when discussing Section 1346(a)(1). The district court found the analysis in Pfizer to be more reasoned and persuasive, as Scripps relied on "an arguably strained reading" of Section 1346(a)(1) and an "overbroad reading of dicta in Flora to permit a taxpayer to recover a sum that it never paid to the government." The Pareskys appealed to the Eleventh Circuit.

Under 28 U.S.C. Section 1346(a)(1), the district courts have jurisdiction, concurrent with the Court of Federal Claims, over (1) any civil action against the United States for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, (2) any penalty claimed to have been collected without authority, or (3) "any sum alleged to have been excessive or in any manner wrongfully collected under the internal revenue laws." If an overpayment interest claim does not fall into one of these three categories, then 28 U.S.C. Section 1491(a)(1) provides that the Court of Federal Claims has exclusive jurisdiction over the claim.

On appeal, the Pareskys did not dispute that a claim for overpayment interest does not fall within the first two categories of Section 1346(a)(1). They contended, however, that overpayment interest qualifies under the third category as a "sum alleged to have been excessive" and urged the Eleventh Circuit to adopt the reasoning of the Sixth Circuit in Scripps. In response, the government asserted that the district court correctly relied on the Second Circuit's analysis in Pfizer, which was subsequently adopted by the Federal Circuit in Bank of America Corp. v. U.S., 2020 PTC 188 (Fed. Cir. 2020).

Analysis

The Eleventh Circuit agreed with the reasoning of the Second and Federal Circuits in Pfizer and Bank of America, respectively, and held that Section 1346(a)(1)'s "any sum" category does not encompass standalone claims for overpayment interest. The court therefore concluded that the Court of Federal Claims has exclusive jurisdiction over standalone overpayment interest claims exceeding $10,000. The court noted that the issue was a matter of first impression in the Eleventh Circuit.

The Eleventh Circuit found that the use of the term "excessive" in the statute assumes that there exists an amount that does not exceed the usual, proper, or normal amount and that therefore cannot be recovered from the government. The court reasoned that in the context of overpayment interest, however, there is no amount of overpayment interest that would be proper for the government to hold once the taxpayer is entitled to that interest under Code Sec. 6611, which provides that interest shall be allowed and paid on any overpayment in respect of any internal revenue tax. In the court's view, reading the "any sum" category of Section 1346(a)(1) to encompass standalone overpayment interest claims would change the ordinary meaning of the phrase "any sum alleged to have been excessive" to mean "any sum alleged to have been wrongfully held." The court also found that the word "sum," when read in the context of the terms "tax" and "penalty" used in the other two categories of Section 1346(a)(1), refers to an amount of money assessed, collected, or retained by the government. Further, the court reasoned that the verb tense used in the phrase "alleged to have been excessive" indicates that the third category of Section 1346(a)(1) refers to amounts previously paid by a taxpayer, and overpayment interest is not such an amount.

The court rejected the Pareskys' argument that the Eleventh Circuit should follow the Sixth Circuit's holding in Scripps. The court found the Sixth Circuit's analysis in Scripps unpersuasive and agreed with the Second and Federal Circuits that the Supreme Court's decision in Flora was inapplicable to the issue here. In the court's view, when the Supreme Court mentioned interest in the context of Section 1346(a)(1) in Flora, it plainly had additional tax assessments of deficiency interest - not overpayment interest - in mind as a "sum" under Section 1346(a)(1).

For a discussion on interest on overpayments of tax, see Parker Tax ¶261,510.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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