Jeffrey Harper v. United States ( 2021 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS FEB 25 2021
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
JEFFREY A. HARPER; KATHERINE M. No. 19-55933
HARPER,
D.C. No.
Plaintiffs-Appellants, 3:18-cv-02110-DMS-LL
v.
MEMORANDUM*
UNITED STATES OF AMERICA,
Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of California
Dana M. Sabraw, District Judge, Presiding
Argued and Submitted November 20, 2020
Pasadena, California
Before: LINN,** RAWLINSON, and HUNSAKER, Circuit Judges.
Concurrence by Judge HUNSAKER
Appellants Jeffrey and Katherine Harper (collectively, “Taxpayer”) appeal the
dismissal of their Complaint for failure to exhaust their administrative claim for
research tax credits under 26 U.S.C. § 7422. Because the IRS’s substantive four-
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
The Honorable Richard Linn, United States Circuit Judge for the U.S.
Court of Appeals for the Federal Circuit, sitting by designation.
year audit specifically directed to determining Taxpayer’s eligibility for an increased
research activities credit constituted waiver of the IRS’s enforcement of the
specificity requirement in 26 C.F.R. § 301.6402-2(b)(1) with respect to Taxpayer’s
formal claim for increased research tax credit, we reverse.
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.” 26 U.S.C. § 7422; Boyd v. United
States, 762 F.3d 1369, 1371 (9th Cir. 1985) (noting that satisfaction of § 7422 is a
jurisdictional prerequisite). Jurisdiction depends upon substantive satisfaction of 26
C.F.R. § 301.6402-2(b)(1) (the “specificity requirement”). The specificity
requirement, like the statute it regulates, is an administrative exhaustion provision,
intended to “ensure that the IRS is given adequate notice of each claim and its
underlying facts, so that the IRS may conduct an administrative investigation and
determination.” Quarty v. United States, 170 F.3d 961, 972 (9th Cir. 1999). The
specificity requirement is intended “to prevent surprise, and to give the IRS adequate
notice of the claim and its underlying facts so that it can make an administrative
investigation and determination regarding the claim.” Boyd, 762 F.2d at 1371.
The IRS can waive satisfaction of the specificity requirement despite the
jurisdictional nature of § 7422. Angelus Milling Co. v. Comm’r of Internal Revenue,
2
325 U.S. 293, 297 (1945) (holding that the Commissioner may choose “not to stand
on his own formal or detailed requirements” by substantively considering
Taxpayer’s claims); Martinez v. United States, 595 F.2d 1147, 1148 (9th Cir. 1979);
Gov’t Br. at 37. Waiver may be established upon an “unmistakable” showing “that
the Commissioner has in fact [seen] fit to dispense with his formal requirements and
to examine the merits of the claim.” Angelus Milling, 325 U.S. at 297.
The IRS’s substantive examination and final denial on the merits constitutes
a textbook case of waiver here. Over the course of the four-year audit, the IRS
targeted its questioning and document requests specifically on determining
Taxpayer’s eligibility for the increased research credit, including, inter alia,
Taxpayer’s project accounting practices, the means used to translate that accounting
to capture Qualified Research Expenses, the breakdown of its business components,
the satisfaction of the “substantially all” rule of 26 U.S.C. § 41(d)(1)(C) and the
breakdown of eligible employee salaries. Upon receiving Taxpayer’s multiple
answers and over a hundred thousand pages of documentary support, the IRS
substantively determined that “You have not shown you are entitled to the claimed
refund” and informing Taxpayer of the availability of recourse by filing suit in the
district court to challenge the IRS’s determination. The direction to bring suit in
case of disagreement is a strong indication of the IRS’s understanding that it was
making a substantive determination. At no point, up to and including its final
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determination, did the IRS tell Taxpayer that it had not submitted enough
information or evidence to satisfy the specificity requirement or for it to determine
Taxpayer’s eligibility for the tax credit.
Although the IRS is entitled to “insist that the form [in which the
commissioner requests information] be observed so as to advise him expeditiously
and accurately of the true nature of the claim,” Angelus Milling, 325 U.S. at 299, the
IRS is equally entitled to seek the information it needs through investigation and
waive the specificity requirement, id. at 297. It did so here by accepting Taxpayer’s
properly filed Forms 6765 and substantively examining Taxpayer’s specific claims.
The IRS’s targeted investigation and final determination unmistakably demonstrates
that it understood Taxpayer’s claims and “the exact basis thereof,” 26 C.F.R.
§ 301.6402-2(b)(1), that it had “adequate notice of the claim and its underlying facts
so that it [could and did] make an administrative investigation and determination
regarding the claim,” Boyd, 762 F.2d at 1371, that the Commissioner’s attention was
focused on the merits of the particular claim and that it chose “not to stand on [its]
own formal or detailed requirements,” see Angelus Milling, 325 U.S. at 297.
The government’s argument that Taxpayer waived IRS’s waiver of the
specificity requirement is belied by the fact that Taxpayer repeatedly relied on the
IRS’s audit and decision in its argument in opposition to the government’s Motion
to Dismiss and in its reconsideration motion. Indeed, when asked by the district
4
court whether Taxpayer agreed that “the IRS didn’t waive their jurisdictional
requirements” Taxpayer’s attorney answered “No.” Section 7422 conditions the
federal courts’ jurisdiction on a Taxpayer’s interaction with the IRS and the IRS’s
response thereto, see 26 U.S.C. § 7422, not on whether a party makes an explicit
argument to the district court. Moreover, the question of whether the IRS waived its
specificity requirement is dispositive of this court’s and the district court’s
jurisdiction and at least to that extent is well within our discretion to consider. See
Swan v. Peterson, 6 F.3d 1373, 1383 (9th Cir. 1993).
Because the government’s only objection to jurisdiction under § 7422 is the
failure to satisfy the specificity requirement and because the IRS has waived that
requirement here, we reverse the district court’s dismissal and remand for
proceedings consistent with this disposition. 1
REVERSED and REMANDED.
1
Because our holding is case-dispositive, we need not and do not consider
whether the Taxpayer’s filing of Form 6765 itself satisfied the formal claim
requirements, whether Taxpayer perfected its claim by its submissions during the
IRS’s investigation, or whether the district court abused its discretion by not
ordering jurisdictional discovery.
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FILED
Harper v. United States, No. 19-55933 FEB 25 2021
HUNSAKER, Circuit Judge, concurring in the judgment. MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
I agree with the majority that the district court erred in concluding that it lacks
jurisdiction over this case because Taxpayer failed to exhaust administrative
remedies and, therefore, the case must be reversed and remanded. I write separately,
however, to explain why I think this case should be resolved on the informal claim
doctrine, not waiver.
I. Waiver
“It is well-established that a party can waive waiver implicitly by failing to
assert it.” Norwood v. Vance, 591 F.3d 1062, 1068 (9th Cir. 2010) (internal quotation
marks and citation omitted). Moreover, arguments not raised in a party’s opening
brief on appeal are deemed waived. Friends of Yosemite Valley v. Kempthorne, 520
F.3d 1024, 1033 (9th Cir. 2008).
Here, Taxpayer did not argue to the district court that the IRS waived the
specificity requirement in 26 C.F.R. § 301.6402-2(b)(1). Instead, Taxpayer argued
that it satisfied the specificity requirement. Further, on appeal Taxpayer did not
assert waiver by the government in its briefing or during oral argument. Nonetheless,
the majority concludes that Taxpayer did not forfeit waiver because it “repeatedly
relied on the IRS’s audit and decision in its argument in opposition to the
government’s Motion to Dismiss and in its reconsideration motion.” This is an
inaccurate reading of the record.
1
In opposing the government’s motion to dismiss, Taxpayer referenced the
audit only in relation to its argument that it met the specificity requirement.
Likewise, in its motion for reconsideration, Taxpayer briefly mentioned “waiver”
but only related to its argument that it had met the informal claim doctrine. Indeed,
despite the district court specifically asking Taxpayer’s counsel about the
government’s waiver during the hearing on the motion for reconsideration, Taxpayer
still failed to assert waiver, focusing instead on how it had satisfied the specificity
requirement. Taxpayer was represented by experienced and able counsel throughout
the proceedings, and with the benefit of its counsel’s advice, Taxpayer chose the
litigation strategy it deemed best. The court should not substitute its judgment for
that of the parties in shaping their case. See United States v. Sineneng-Smith, 140 S.
Ct. 1575, 1579 (2020) (“[O]ur system is designed around the premise that [parties
represented by competent counsel] know what is best for them, and are responsible
for advancing the facts and argument entitling them to relief.” (second alteration in
original) (internal quotation marks and citation omitted)). On this record, Taxpayer
forfeited any reliance on the government’s waiver of the specificity requirement, and
the case should not be resolved on that ground.
Additionally, it is Taxpayer’s burden to show that the government waived
compliance with the regulations. See Quarty v. United States, 170 F.3d 961, 973 (9th
Cir. 1999); see also Angelus Milling Co. v. Comm’r, 325 U.S. 293, 298 (1945)
2
(imposing burden on the taxpayer to show that the government waived compliance
with the specificity requirements of the regulations). Taxpayer did not meet this
burden because it never asserted waiver or attempted to make a showing of waiver.
The majority concludes that the court can exercise its discretion to address the
government’s waiver because it is a jurisdictional question. However, the specificity
requirement (or the government’s waiver thereof) is itself not jurisdictional—
otherwise, the requirement could not be waived. See Dunn & Black, P.S. v. United
States, 492 F.3d 1084, 1091 (9th Cir. 2007). While the government “may waive the
regulatory specificity requirement in limited circumstances, the [government] has no
power to waive the statutorily-imposed exhaustion requirement, which is an
inseverable condition on Congress’s waiver of sovereign immunity under
§ 1346(a)(1).” Id. (footnote omitted). The Supreme Court has held that while the
government may not waive the congressionally-mandated filing requirement, the
Treasury can waive its formality requirements. Angelus Milling, 325 U.S. at 296–97
(“Insofar as Congress has made explicit statutory requirements, they must be
observed and are beyond the dispensing power of Treasury officials,” but the
Commissioner may “choose[] not to stand on his own formal or detailed
requirements.”) Therefore, precedent draws a clear line between the jurisdictional
question surrounding the exhaustion of administrative remedies and waiver of a
form-of-presentation regulation, such as the specificity requirement.
3
While I recognize the court has discretion to reach waived issues in limited
circumstances, see In re Mercury Interactive Corp. Sec. Litig., 618 F.3d 988, 992
(9th Cir. 2010), “the more prudent course is to resolve the case on the basis of the
issues actually briefed and argued by the parties,” Norwood, 591 F.3d at 1068.
Therefore, in my view, this case is better resolved on the informal claim doctrine—
a theory that was briefed and argued by both parties.
II. Informal Claim Doctrine
The informal claim doctrine “is concerned with claims that are deficient
merely in one or two of the technical requirements imposed by the Treasury
regulation [26 C.F.R. § 301.6402–2(b)(1)].” Comm’r v. Ewing, 439 F.3d 1009, 1015
(9th Cir. 2006) (alteration in original) (internal quotation marks omitted). We have
not adopted a formalized test for the informal claim doctrine, but other jurisdictions
have articulated various tests. See, e.g., PALA, Inc. Emps. Profit Sharing Plan & Tr.
Agreement v. United States, 234 F.3d 873, 877 (5th Cir. 2000); New England Elec.
Sys. v. United States, 32 Fed. Cl. 636, 641 (Ct. Cl. 1995) (adopting a three-part test
for the informal claim doctrine). Though articulated with different words, the tests
contain the same general requirements: (1) 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. See, e.g., PALA,
Inc. Emps. Profit Sharing Plan & Tr. Agreement, 234 F.3d at 877; New England
4
Elec. Sys., 32 Fed. Cl. at 641; see also Palomares v. Comm’r, 691 F. App’x 858, 859
(9th Cir. 2017).
Under any of the articulations of the informal claim doctrine, Taxpayer has
satisfied it. Taxpayer filed Form 6765 and amended returns that put the government
on notice that Taxpayer was requesting a refund for the 2008 and 2010 tax years and
that the basis for the claimed refund was 26 U.S.C. § 41, for increased research
activities. While there may have been defects in Taxpayer’s filing for purposes of
the formal claim requirements, the government had sufficient information to be on
notice of Taxpayer’s basis for the requested refund.
Further, Taxpayer “perfected” its claim during the IRS’s investigative
process. See United States v. Kales, 314 U.S. 186, 194 (1941) (explaining an
insufficient refund request may still be “treated as a claim where formal defects and
lack of specificity have been remedied by amendment filed after the lapse of the
statutory period” (emphasis added)). For example, the extensive correspondence
between the government and Taxpayer, and the over 112,000 pages of
documentation produced by Taxpayer, demonstrated Taxpayer’s methodology for
how it calculated the refund it claimed. While the information Taxpayer provided
might not merit a refund under 26 U.S.C. § 41, it was sufficient to perfect Taxpayer’s
claim.
5
For these reasons, I would conclude that Taxpayer waived any reliance on the
government’s waiver of the specificity requirement but exhausted its administrative
remedies under 26 U.S.C. § 7422 based on the informal claim doctrine. I respectfully
concur only in the judgment.
6