El Paso Corporation v. United States, 2014 U.S. App. LEXIS 5090

Background

El Paso claimed investment tax credits on its 1986 return, carried excess credits to 1987–1990, and later was audited; some 1986 credits were disallowed, increasing liabilities for 1986 and later years.
El Paso made an advance payment (~$51M) in 2000 to cover audit-related deficiencies for 1986–1990.
In March 2002 El Paso executed Form 870-AD agreeing to assessment of a 1986 deficiency but reserved the right to file a refund claim; in December 2002 El Paso filed an $18,047,020 refund claim for 1986.
In July 2005 the parties executed a Closing Agreement (Form 870-AD and Form 866-C) fixing overpayments/deficiencies for 1986–1990; IRS paid part of the 1986 refund in Sept 2005, withheld the remainder to offset deficiencies for 1987–1990, and paid an additional amount in Nov 2005 for interest adjustment.
El Paso later argued (Aug 2006) that the IRS failed to assess the 1987–1990 deficiencies within the mitigation period (one year after the Closing Agreement) and thus could not set them off; IRS denied the informal claim; El Paso sued for refund in 2010.
District court granted summary judgment to IRS; Fifth Circuit considered jurisdiction (variance doctrine and refund-claim requirements) and whether IRS complied with I.R.C. §1314(b)/§6402 offset authority when implementing the Closing Agreement.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether federal court has jurisdiction over El Paso's refund suit given variance doctrine and §7422(a) claim requirements	El Paso: variance doctrine should not bar suit because IRS actions after the 2002 claim created the new issue; suit enforces the Closing Agreement	IRS: refund suit barred by variance doctrine and §7422(a) because the 2002 claim could not anticipate the 2005 set-off and the claim was extinguished by the Closing Agreement	Court: Jurisdiction exists; variance doctrine does not bar suit where Government conduct after the refund claim created the substantial variance and suit enforces Closing Agreement
Whether IRS could offset 1987–1990 deficiencies against 1986 overpayment without prior year-by-year assessments under mitigation rules (I.R.C. §§1311–1314 and §6402)	El Paso: IRS had to assess and collect each year’s deficiencies within one year of the Closing Agreement; failing that, IRS lost authority to collect or set off those amounts	IRS: §1314(b) allows the IRS to implement the Closing Agreement by refunding or crediting a net overpayment (or assessing/collecting a net deficiency) across the covered years; no separate assessments required when a net overpayment exists and taxpayer funds are held	Court: Held for IRS — §1314(b) permits treating the Closing Agreement as a package: determine amounts year-by-year, then refund/credit the net overpayment within one year; IRS complied here
Whether the mitigation provisions require separate assessments even when Closing Agreement yields net overpayment	El Paso: statute’s plain language and norm of treating tax years separately require separate year-by-year assessments for deficiencies	IRS: plain language permits a single adjustment covering multiple years after computing each year’s amount; assessment ties to collection power and is unnecessary where IRS already holds taxpayer funds to cover deficiencies	Court: The statute allows a single net adjustment after year-by-year computation; connection between assessment and collection supports IRS approach when taxpayer funds are available
Whether the Closing Agreement should be treated as a package deal preventing El Paso from accepting refund benefits while rejecting liabilities	El Paso: seeks full refund because procedural defects in assessments nullify the set-off	IRS: parties agreed to a Closing Agreement allocating overpayments/deficiencies; El Paso cannot accept benefits without the agreed offsets	Court: Treats Closing Agreement as a package; El Paso cannot take refund without burdens imposed by the agreement

Key Cases Cited

Mallette Bros. Const. Co., Inc. v. United States, 695 F.2d 145 (5th Cir. 1983) (variance doctrine bars raising new refund grounds not presented to IRS)
Alabama By-Products Corp. v. Patterson, 258 F.2d 892 (5th Cir. 1958) (all grounds relied on must be stated in original refund claim)
Philadelphia & Reading Corp. v. United States, 944 F.2d 1063 (3d Cir. 1991) (general rule: IRS may not net across years absent agreement; parties may contract to net)
Brown v. United States, 427 F.2d 57 (9th Cir. 1970) (taxpayers may respond to new issues created by government after initial claim)
Shore v. United States, 26 Cl. Ct. 826 (Ct. Cl. 1992) (variance doctrine inapplicable where government’s unilateral action created the variance)
Kornman & Associates, Inc. v. United States, 527 F.3d 443 (5th Cir. 2008) (standard of review for summary judgment in tax refund suits)
Wagner v. United States, 545 F.3d 298 (5th Cir. 2008) (subject-matter jurisdiction in tax refund suits reviewed de novo)
Carder v. Continental Airlines, Inc., 636 F.3d 172 (5th Cir. 2011) (statutory interpretation begins with plain language)