Dillon Trust Company LLC v. United States

No. 17-1898T, 17-2022T, 17-2023T
(Decided: February 9, 2023)
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DILLON TRUST COMPANY LLC, et al., Keywords: I.R.C. § 6603;
Revenue Procedure 2005-
Plaintiffs,
18; RCFC 54(b); Motion
for reconsideration;
v.
Illegal exaction; Abuse of
THE UNITED STATES, discretion
Defendant.
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Lawrence M. Hill, Steptoe & Johnson LLP, Washington, DC, with
whom were Richard A. Nessler, Steven R. Dixon, Caitlin R. Tharp, for
plaintiffs.
Joseph A. Sergi, Attorney of Record, United States Department of
Justice, Tax Division, Court of Federal Claims Section, Washington, DC,
with whom were David A. Hubbert, Deputy Assistant Attorney General,
David I. Pincus, Chief, Court of Federal Claims Section, G. Robson Stewart,
Assistant Chief, Court of Federal Claims Section, Dara B. Oliphant,
Assistant Chief, Civil Trial Section – Central, Margaret E. Sheer, Trial
Attorney, Jeffrey N. Nuñez, Trial Attorney, Ryan O. McMonagle, Trial
Attorney, Emily K. Miller, Trial Attorney, for defendant.
OPINION
BRUGGINK, Judge.
The undisputed facts are as follows. 1 In late 2014, the Internal
Revenue Service (“IRS”) notified nine original Dillon family trusts
1
The facts set out here are a streamlined version of the statement of facts in
our previous order (ECF No. 118), which we had taken as alleged in the
1
(“Original Trusts”) that they might be held liable as transferees under I.R.C.
§ 6901 (2018) for Humboldt Shelby Holding Corporation’s deficiency for
the tax year that ended on November 30, 2003. After receiving the notices
addressed to each Original Trust, plaintiffs informed the IRS that six Original
Trusts terminated between 2007 and 2012 and distributed their assets to a
number of successor trusts (“Successor Trusts”); plaintiffs also informed the
IRS that another Original Trust distributed its assets to its Successor Trusts
even though it did not terminate. 2 Every one of these trusts had a different
Employer Identification Numbers (“EIN”), which is the number the IRS
assigns business entities for taxpayer identification.
In May 2015, plaintiffs sent the IRS a single check for $71.7 million
and requested that the sum be allocated as thirty separate deposits for two
Original and twenty-eight Successor Trusts. Plaintiffs made the deposits in
anticipation of possible future assessments—no liabilities had yet been
assessed. In October 2016, the IRS issued notices of liability to each of the
nine Original Trusts. As for the Successor Trusts, the IRS issued only pre-
assessment letters in October 2016; it was not until October 2018 that the
IRS issued notices of liability to the Successor Trusts.
In January 2017, plaintiffs requested in writing that the IRS use $20.2
million of prior deposits to pay the respective liabilities assessed against
Trust 8545 ($19.7 million), Trust 709204 ($248,655), and Trust 709210
($248,655). Specifically, plaintiffs directed the IRS to pay those amounts by
following: (1) plaintiffs’ complaints in the pending refund suits; (2) the
complaint filed in Dillon Tr. Co. LLC v. Koskinen, No. 1:17-CV-01571 (D.
Colo. June 27, 2017); (3) the parties’ stipulation of facts; (4) plaintiffs’
pretrial memorandum of fact and law; (5) the appendix to plaintiffs’
opposition to defendant’s partial motion to dismiss for lack of subject matter
jurisdiction or partial summary judgment. As stated in the order, defendant
asserted that any dispute was “over the characterization of the facts or their
materiality, rather than the facts in themselves.” Order at 10. Many of the
facts set out here are now included in the parties’ updated stipulation of facts.
See ECF No. 126, 143.
2
Dillon Trust Company has brought these consolidated refund suits as trustee
for Trust 709204, Trust 709210, and Trust 8545, which are three Original
Trusts that have not terminated. For ease of reading, we refer to “plaintiffs”
when plaintiffs’ counsel was acting on behalf of all Dillon family trusts, not
just plaintiffs. The parties agree that the liabilities of the terminated Original
Trusts and their Successor Trusts will be determined as if they were also
parties to these refund suits.
2
using the deposits that they had previously asked the IRS to allocate to Trust
709204, Trust 709210, and four Successor Trusts. The same letter to the IRS
also stated that “[t]he remaining amount of the Dillon deposit, $52,168,388
should remain as a deposit.”
IRS Agent Timothy Stern informed plaintiffs on March 6, 2017,
however, that the Successor Trusts would need to submit a written request to
the IRS and ask for the return of the deposits in order to make a tax payment
for the Original Trusts. In doing so, Agent Stern relied on an IRS advice
memorandum, which states that Revenue Procedure 2005-18 “does not
authorize a person to direct the Service to apply a deposit to pay another
person’s liability.” I.R.S. Off. of Chief Couns. Mem. 20171801F at 1
(decided Feb. 27, 2017, released May 5, 2017) (“CCM”). Although the IRS
refused to use the Successor Trusts’ deposits for payment of the Original
Trusts’ liabilities, it used the deposits that plaintiffs had asked to be allocated
to Trust 709204 and Trust 709210—both Original Trusts—to pay for those
same trusts’ liabilities on May 29, 2017.
Per Agent Stern’s instructions, plaintiffs wrote a letter to the IRS on
March 16, 2017, requesting the return of the deposits that they had previously
asked the IRS to allocate to four Successor Trusts. The request was followed
by a mandamus action filed on June 27, 2017, which was voluntarily
dismissed on July 31, 2017. Plaintiffs received those deposits as requested,
with interest, 3 in August 2017. Plaintiffs then requested the return of the
remaining $51.5 million in deposits and received them with interest in
October 2017. Once the IRS returned the deposits, plaintiffs paid the Original
Trusts’ liabilities in full, including underpayment interest accrued during the
period when the IRS held plaintiffs’ deposits. (In the case of terminated
Original Trusts, a Successor Trust made the tax payment on behalf of an
Original Trust.)
In the pending refund suits, plaintiffs have made a separate claim
regarding interest payment: namely, that they did not owe underpayment
interest during the period when the IRS held their deposits. 4 In October 2022,
defendant moved to dismiss that claim for lack of subject matter jurisdiction,
3
The rate of interest for a returned deposit is lower than the rate of interest
for an underpayment. See I.R.C. §§ 6603(d)(4), 6621.
4
This amount of interest is a part of the refund sought in plaintiffs’ other
claim in these suits: namely, that they are entitled to a refund of all taxes,
penalties, and interest paid because they are not liable as transferees under
§6901.
3
or in the alternative, for partial summary judgment. Defendant argued that
I.R.C. § 6603 mandates underpayment interest suspension only when the IRS
uses a deposit for a payment of tax and that interest cannot be suspended for
plaintiffs without retroactive treatment of their deposits as having been used
for tax payments—a power that defendant argued this court lacks because
sovereign immunity has not been waived in that respect.
We denied defendant’s motion for partial dismissal, holding that
plaintiffs have made a non-frivolous allegation of an illegal exaction claim,
which is a type of claim over which this court has subject matter jurisdiction
under the Tucker Act. We granted defendant’s motion for partial summary
judgment, however, because “under the undisputed material facts, the IRS’s
collection of interest for the period at issue did not violate the law.” Order at
15. Plaintiffs then moved for reconsideration of our order granting partial
summary judgment. Specifically, plaintiffs argue that reconsideration is
appropriate because the court “(1) appears to have misunderstood that
Plaintiffs were arguing that the IRS exceeded its discretion and then (2) made
an erroneous decision beyond the scope of the parties’ briefing by holding
that the IRS has unfettered, unreviewable discretion to refuse to use a deposit
to pay a tax.” Pls.’ Mot. for Recons. at 3. 5
A motion for reconsideration is “not an invitation for litigants to treat
interlocutory decisions as mere first drafts, subject to revision and
reconsideration at a litigant’s pleasure.” E&I Glob. Energy Servs., Inc. v.
United States, 152 Fed. Cl. 524, 533 (2021); see also L-3 Commc’n
Integrated Sys., L.P. v. United States, 98 Fed. Cl. 45, 49 (2011) (“A motion
5
For reference, plaintiffs advanced three arguments in their opposition to
defendant’s motion for partial summary judgment (“Pls.’ Opp’n to Def.’s
Mot.”). First, they argued that they did not owe underpayment interest
because they “did not have underpayments for the period the IRS held the
cash deposits.” Pls.’ Opp’n to Def.’s Mot. at 15. Second, they argued that a
“parade of IRS mistakes” (identified as Mistake #1 through 4 in the statement
of facts) allowed the IRS to reap a $10 million windfall, and that whatever
discretion the IRS may have under § 6603 “surely cannot be so broad as to
allow the IRS to reap a windfall from its own bureaucratic incompetence or
intransigence or both.” Id. at 17. Finally, they argued that “there is no legal
ground for the IRS’s refusal to convert the cash deposits to tax payments,”
challenging the CCM the IRS relied on as “not entitled to any deference” and
containing “specious reasoning by IRS counsel.” Id. at 17-18. We understood
then and still understand now that plaintiffs’ second and third arguments
challenge the IRS’s exercise of discretion under § 6603.
4
for reconsideration is not intended . . . to give an unhappy litigant an
additional chance to sway the court.”) (internal citation and quotation marks
omitted). Reconsideration of an interlocutory order under RCFC 54(b) is
available as “justice requires,” a determination left to the “wide discretion”
of the court. E&I Glob. Energy Servs., 152 Fed. Cl. at 533 (contrasting the
standard under RCFC 54(b) against the “heightened standards” of RCFC
59(a)). Where legal conclusions are concerned, justice does not require a
different outcome if the “issues are well-settled and the decisions well-
reasoned.” See id. at 536 (holding that there were “no compelling reasons”
to revisit the court’s legal conclusions).
Justice does not require a different outcome in this instance. In our
previous order, we construed plaintiffs’ assertion to be that interest collection
was illegal because the IRS should have used the deposits that plaintiffs had
allocated to the Successor Trusts to pay the Original Trusts’ liabilities, in
which case interest would have been suspended under § 6603 as of May
2015. To the extent the IRS’s refusal to do so arose from a series of
“mistakes,” we held that this court does not have subject matter jurisdiction
to review a claim for the abatement of interest attributable to unreasonable
errors and delays by the IRS. See Order at 13; Hinck v. United States, 550
U.S. 501, 503 (2007) (holding that the Tax Court provides the exclusive
forum for judicial review of a failure to abate interest under § 6404(e)(1)).
Otherwise, we held that the necessary predicate for plaintiffs’ illegal exaction
claim was not met because the IRS’s refusal to use the Successor Trusts’
deposits did not violate relevant provisions of law.
As we have explained, the plain language of § 6603 makes clear that:
(1) a deposit is not a tax payment until and unless the IRS uses the deposit to
pay a tax; 6 (2) a taxpayer has no statutory entitlement to interest suspension
if the IRS does not actually use a deposit for a payment of tax; (3) the decision
to use a deposit for a payment of tax is subject to IRS discretion. 7 Even if the
6
Not only is the distinction between deposits and payments clear on the face
of § 6603, but legislative history also confirms that “[a] deposit is not a
payment of tax prior to the time the deposited amount is used to pay a tax.”
H.R. Rep. No. 108-548, pt. 1, at 312. As such, the Tax Court’s holding with
regard to the designation of payments in Dixon v. Comm’r does not apply to
this case. See 141 T.C. 173, 195 (2013) (holding that the IRS’s failure to
honor a corporation’s designation of delinquent tax payments as payments
for its employees’ income tax liabilities was an abuse of discretion).
7
Contrary to plaintiffs’ assertion, our previous order did not hold that the
absence of statutory constraints on the IRS’s discretion made its actions
5
“undisputed purpose of § 6603 is to enable taxpayers to avoid interest
liability,” Pls.’ Mot. for Recons. at 8, Congress pointedly left room for the
IRS to not to use a deposit as a payment of tax by using the word “may”
instead of “shall.” See § 6603(a) (“A taxpayer may make a cash deposit with
the Secretary which may be used by the Secretary to pay any tax . . . .”)
(emphasis added). Whereas § 6603(c) provides that “the Secretary shall
return to the taxpayer any amount of the deposit . . . which the taxpayer
requests in writing,” there is no comparable requirement mandating the use
of a deposit, either generally or in cases where the taxpayer makes such a
request in writing. It is thus beyond doubt that the IRS’s use of a deposit for
tax payment is discretionary, not mandatory, under § 6603.
How the IRS has chosen to exercise that discretion is reflected in Rev.
Proc. 2005-18, which provides in part that
Upon completion of an examination . . . the Service will mail a notice
of deficiency and the taxpayer will have a right to petition the Tax
Court. The portion of the deposit that is not greater than the
determined deficiency plus any interest . . . will be posted to the
taxpayer’s account as a payment of tax upon the expiration of the 90
or 150-day period during which assessment is stayed, unless the
taxpayer files a petition with the Tax Court and requests in writing . .
. that the deposit continue to be treated as a deposit during the
applicable Tax Court proceeding. § 4.02(2).
The procedure, in short, does not contemplate a taxpayer’s request as
triggering the IRS’s duty to use a deposit as a tax payment in the first place.
A taxpayer’s request is effective only for preventing the IRS’s use of a
deposit or for directing the IRS to apply excess deposits to another tax
liability. See §4.02(3). The IRS’s application of a deposit toward payment of
unreviewable. We expressly noted that plaintiffs do not bring their claim
under the APA; nevertheless, we examined the case law under the APA
because it was “instructive for showing the kind of statutory language
necessary to limit agency discretion,” and pointed out the absence of
comparable language in § 6603. See Order at 13. The absence of statutory
factors guiding the IRS’s exercise of discretion (factors that also guide any
review of the agency’s actions) was relevant because an illegal exaction
claim requires a showing that “the valued sued for was improperly paid,
exacted or taken from the claimant in contravention of the Constitution, a
statute, or a regulation.” See id. at 8 (quoting Eastport S.S. Corp. v. United
States, 372 F.2d 1002, 1007 (Ct. Cl. 1967). As it was, we found no provision
of law that the IRS’s exercise of discretion contravened.
6
an assessed liability is otherwise automatic—provided that the taxpayer that
made the deposit is the same taxpayer that has been assessed the liability.
Although Rev. Proc. 2005-18 does not explicitly say so, the CCM on which
Agent Stern relied states that the procedure “does not authorize a person to
direct the Service to apply a deposit to pay another person’s liability.” CCM
at 1.
In the light of this statutory and regulatory framework, we held that
“no provision of law allows for a finding of illegality necessary to support
plaintiffs’ illegal exaction claim,” so that defendant was entitled to judgment
as a matter of law. See Order at 14-15. There is, simply put, no provision of
law that required the IRS to use the Successor Trusts’ deposits to pay for the
liabilities of the Original Trusts—whether because plaintiffs requested it or
because the deposits should have been automatically applied. Had the IRS
issued notices of liability to the Successor Trusts, not the Original Trusts, in
October 2016, the result would have been different. Rev. Proc. 2005-18
would then have required the IRS to apply the Successor Trusts’ deposits
toward payment of the Successor Trusts’ liabilities at the end of the period
during which assessment had been stayed, unless those Trusts requested
otherwise. But those are not the facts here. 8
Nor was it an abuse of discretion for the IRS to refuse to use the
Successor Trusts’ deposits for payment of the Original Trusts’ liabilities. See
Onan Corp. v. United States, 19 Cl. Ct. 678, 681 (1990) (holding that the
plaintiff stated no claim for an abuse of discretion because the announced
procedure that the IRS failed to observe was “not adopted to further any
existing right of taxpayers”). Rather, the agency’s decision was based on a
reasonable interpretation of Rev. Proc. 2005-18, as offered in the CCM. See
Am. Exp. Co. v. United States, 47 Fed. Cl. 127, 136 (2000) (holding that the
Commissioner’s decision was not an abuse of discretion because there is “no
evidence that the Commissioner ignored the Revenue Procedure, . . . [or] that
he made an unreasonable determination”). Much as plaintiffs may disagree
with the reasoning or the result, the CCM supports its position with an
8
As for the IRS’s failure to issue the notices of liability to the Successor
Trusts in the first place, we held that such a failure did not violate the law
because the Field Service Advisory that plaintiffs rely on specifically states
that it is “not to be cited as precedent.” See Order at 12. At best, it was a
“mistake” as plaintiffs had described, for which a claim for the abatement of
interest attributable to unreasonable errors and delays by the IRS may be
available—but which this court lacks subject matter jurisdiction to review.
See id. at 13.
7
examination of the structure, purpose, and language of Rev. Proc. 2005-18. 9
Specifically, it points to § 4.02(3) and § 6.01 as presupposing that any deposit
to be applied as a payment must have been made by the same taxpayer that
has been assessed the liability. See CCM at 4. In the administration of taxes,
including the use of deposits for tax payments, the question of which
taxpayer has actually been assessed the liability at issue is not an
unreasonable factor for the IRS to consider.
The significance of assessments in the context of deposits is
underscored by plaintiffs’ own explanation of the purpose and structure of
§6603: “[I]f no tax is assessed against the taxpayer, there is no tax against
which the IRS can apply the deposit.” Pls.’ Mot. for Recons. at 14.
Nevertheless, plaintiffs view the identity of the assessed taxpayer as
irrelevant, citing United States v. Williams, 514 U.S. 527, 535 (1995)
(holding that I.R.C. § 1346(1) authorizes a refund suit by a party who was
not assessed a tax but paid it under protest to remove a federal tax lien on her
property). Specifically, they argue that the Successor Trusts were “plainly
‘subject to’ the tax that they sought to pay with the deposit, since they
ultimately had to pay that tax (with interest) as alleged transferees.” Pls.’
Mot. for Recons. at 21. Being “subject to” the tax owed by the Original
Trusts, plaintiffs assert that the Successor Trusts should have had the ability
to make deposits to pay the Original Trusts’ liabilities.
Plaintiffs’ reliance on Williams in this regard is misplaced. In finding
standing for the respondent’s refund suit, the Court did not render the
identities of assessed parties irrelevant in the general administration of taxes.
Rather, the Court rejected the government’s argument that only the assessed
9
Although plaintiffs previously argued that the CCM was not entitled to any
deference, citing AMP Inc. & Consol. Subsidiaries v. United States, 185 F.3d
1333, 1339 (Fed. Cir. 1999), the case is distinguishable. In AMP Inc. &
Consol. Subsidiaries the court held that the revenue ruling was not entitled
to deference because it was “self-serving” in light of the plaintiffs’ refund
claims that were pending when the ruling was issued and “inconsistent” with
other regulations and pronouncements by the IRS. Id. Here, the CCM was
not “self-serving” since there was no litigating position for the IRS to prepare
vis-à-vis a pending claim: when issuing the CCM in February 2017, the IRS
did not know that plaintiffs would file refund suits in December 2017 that
included a separate claim for interest based on § 6603. The IRS also offered
a position that was consistent with its pronouncements to date in relation to
§ 6603. See CCM at 5 (“More concerning is that the guidance issued to date
to administer [§ 6603] does not authorize one depositor designating its
deposit to be applied to another taxpayer’s liability.”).
8
party may exhaust administrative remedies—a prerequisite for refund suits
set forth in I.R.C § 7422—on narrower grounds. See 514 U.S. at 534-35.
First, the Court reasoned that “[t]o read the term ‘taxpayer’ as implicitly
limiting administrative relief to the party assessed is inconsistent with other
provisions of the refund scheme, which expressly contemplate refunds to
parties other than the one assessed.” See id. at 534 (pointing out statutory
language such as “the person who made the overpayment” and “the person
who paid the tax”). Second, the Court reasoned that the respondent was a
“taxpayer” qualified for administrative remedies, because “[i]n placing a lien
on her home and then accepting her tax payment under protest, the
Government surely subjected Williams to a tax, even though she was not the
assessed party.” Id. at 535 (citing the I.R.C. § 7701(a)(14) definition of a
“taxpayer” as “any person subject to any internal revenue tax”).
The Court’s reasoning in Williams does not apply to this case to make
the IRS’s refusal to use the Successor Trusts’ deposits either unlawful or an
abuse of discretion. Most importantly, both legal and factual circumstances
that underpinned the Court’s analysis in Williams are missing. The statutory
scheme for deposits does not expressly contemplate the IRS’s use of deposits
when the deposit was made by someone other than the assessed party, and
plaintiffs have not alleged that the IRS “subjected” the Successor Trusts to
the Original Trusts’ tax liabilities by placing a lien on the Successor Trusts’
property. 10 And as the Court took care to stress, the holding of Williams is
narrow. See id. at 540 (“We do not decide the circumstances, if any, under
which a party who volunteers to pay a tax assessed against someone else may
seek a refund under § 1346(a).”). Williams certainly does not stand for the
proposition that the IRS may never take into account which taxpayer was
actually assessed when exercising discretion authorized by a statute.
We do not find a compelling reason to revise our holding that under
the undisputed material facts, the IRS’s collection of interest for the period
at issue did not violate the law. Nor do we find that the IRS abused its
discretion by refusing to use the Successor Trusts’ deposits for payment of
the Original Trusts’ liabilities.
Because justice does not require a different outcome, plaintiffs’
motion for reconsideration is DENIED.
10
Although plaintiffs have alleged the “threat of collection actions” as
necessitating their mandamus action, see Order at 5, they have not alleged
that the IRS filed any liens on the Successor Trusts’ property.
9
s/Eric G. Bruggink
Eric G. Bruggink
Senior Judge
10