If a taxpayer overpays her taxes, she is entitled to sue for a refund after exhausting her administrative remedies. I.R.C. § 7422. She can file suit in district court, which has jurisdiction in cases “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.” 28 U.S.C. § 1346(a)(1).

Taxpayers are entitled to interest on their overpayments. I.R.C. § 6611. So if a taxpayer receives her refund, but not the overpayment interest, can she file suit in district court? That depends on where she lives:

  • In 2005, the Sixth Circuit held that a district court has jurisdiction over an action to collect overpayment interest. See E.W. Scripps Co. v. United States, 420 F.3d 589, 596 (6th Cir. 2005).
  • More recently, the Second Circuit disagreed. Pfizer Inc. & Subsidiaries v. United States, No. 17-2307-cv, 2019 U.S. App. LEXIS 27843, *10-*12 (2d Cir. Sept. 16, 2019).

When Pfizer filed its 2008 tax return on September 11, 2009, it reflected an overpayment of $769,665,651. Pfizer, 2019 U.S. App. LEXIS 27843 at *2. Pfizer asked that $500,000 be refunded and that the balance be applied to its 2009 estimated taxes. The government issued refund checks totaling $499,528,499, but the taxpayer never received them. Id. Ultimately, the IRS made a direct deposit in that amount into one of Pfizer’s bank accounts on March 19, 2010. Id. at *3.

Three years later, Pfizer sought to recoup the overpayment interest by filing an administrative claim, which the IRS rejected. Id. Pfizer then filed an action in district court; initially, the government sought dismissal for lack of subject matter jurisdiction, but the district court denied its motion. Id. The government then made a motion on the basis of the statute of limitations, which the district court granted. Id. at *4.

Initially, the Second Circuit observed that by granting taxpayers the right to interest in section 6611(a) of the Code, Congress waived sovereign immunity. Id. The Court of Appeals then turned to the question of subject matter jurisdiction, which turned on the interpretation of the relevant statute, which provides as follows:

(a) The district courts shall have original jurisdiction, concurrent with the United States Court of Federal Claims, of:
(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, 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.

28 U.S.C. § 1346(a)(1).

The Second Circuit observed that Pfizer’s claim had to fit into one of three categories for the district court to have jurisdiction: “(1) an ‘internal-revenue tax alleged to have been erroneously or illegally assessed or collected,’ (2) a ‘penalty claimed to have been collected without authority,’ or (3) a ‘sum alleged to have been excessive or in any manner wrongfully collected’ under the tax laws.” Id. at *5. The court then considered whether the overpayment interest fit into any of the three categories.

Initially, the Second Circuit concluded that overpayment interest was not a tax, which meant that it could not be characterized as an “internal-revenue tax alleged to have been erroneously or illegally assessed or collected.” Id. at *5-*6. That conclusion is hard to fault; as the Court of Appeals observed, “[s]imply because the government commits to compensating an overpaying party for the time value of that overpayment does not render that interest payment a ‘tax.’” Id. at *6 (footnote omitted).

The Court of Appeals also rejected the idea that the district court had jurisdiction to consider a claim for overpayment interest as a penalty that was improperly collected “because overpayment interest is plainly not a penalty of any kind.” Id. at *7.

That left the third category, a claim to recover a “sum alleged to have been excessive or in any manner wrongfully collected.” This was the rationale adopted by the Sixth Circuit in Scripps, but the Second Circuit rejected it. Specifically, the Sixth Circuit had concluded that the Supreme Court had spoken to the issue in Flora v. United States, 362 U.S. 145 (1960) when it commented that “any sum” could mean any sum that was neither tax nor a penalty, and cited interest as an example. Flora, 362 U.S. at 149; see Scripps, 420 F.3d at 597. As the Second Circuit explained, the Flora Court most likely had deficiency interest (which is assessed on underpayments) in mind. Pfizer, 2019 U.S. App. LEXIS 27843, *9. And Flora had nothing to do with overpayment interest; the issue there was whether full payment of a disputed assessment was required to give a district court jurisdiction.

The Second Circuit also reasoned that “any sum” should be construed in a manner consistent with the other categories established in section 1346(a)(1), a straightforward application of the principle that “a word is known by the company it keeps.” Pfizer, 2019 U.S. App. LEXIS 27843, *10 (footnote omitted). As the Court of Appeals explained:

“[A]ny sum” finds itself in fellowship with terms that plainly refer to amounts the taxpayer has previously paid to the government and which the taxpayer now seeks to recover. Overpayment interest is not such an amount, and so it does not fall with the meaning of “any sum” in this jurisdictional provision.

Id. at *10-*11 (footnote omitted).

For good measure, the Second Circuit observed that overpayment interest could not be excessive or wrongfully collected, as it never was assessed against or collected from the taxpayer. Id. at *11-*12.

There is a concurrence, which does not part company with the majority; instead, it simply addresses the question of the statute of limitations on the merits and concludes that Pfizer waited too long to pursue the overpayment interest in district court. Id. at *12-*18 (Lohier, J., concurring).

This is a very well-reasoned opinion, which frankly makes the Sixth Circuit’s contrary ruling in Scripps look strained.

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