The United States Court of Federal Claims held that the “one-claim rule” in 26 U.S.C. §§ 6427 and 34 barred Western Company of North America’s (Western) first claim for tax credits. The trial court also dismissed Western’s second claim for refund of a wrongfully imposed tax penalty because Western failed to file a formal administrative claim.
Western Co. of N. Am. v. United States,
I.
Section 4091 of the Internal Revenue Code, 26 U.S.C. § 4091 (2000), requires producers and importers of diesel fuel to pay a tax on any sale of that fuel. Producers pass these taxes on to the consumer in the price of the fuel. Some uses of diesel fuel, such as for farming, are exempt from taxation. These tax exempt uses qualify the purchaser of diesel fuel to recover those fuel taxes in the form of a refund under 26 U.S.C. § 6427(i) or in the form of a tax credit under 26 U.S.C. § 34(a).
For the taxable years 1993 and 1994, Western claimed credits for diesel fuel taxes under §§ 6427 and 34 — $45,637 for 1993 and $84,392 for 1994. Later, Western discovered additional diesel fuel purchases that qualified under § 6427 as “nontaxable uses” and filed amendments to its original tax returns. These first amendments claimed an additional credit of $224,918 for 1993 and $189,817 for 1994. The IRS allowed these amendments and paid the refund. The Government now argues that it allowed these claims by mistake, but concedes the statute of limitations bars their recovery.
Later Western discovered still more tax exempt purchases and sought to amend its returns a second time. Thus, in September 1997, Western sought an additional $304,719 for tax year 1993 and an additional $377,018 for tax year 1994. In February 1999, the IRS denied these last two amended claims. The IRS based its denial of Western’s claims on a purported violation of the “one-claim rule” in § 6427(i):
(i) Time for Filing Claims; Period Covered.
(1) General Rule. — Except as provided in paragraphs (2), (3), and (4), not more than one claim may be filed under subsection (a), (b), (c), (d), (g), (h), (l), or (q) by any person with respect to fuel used ... during his taxable year, and no claim shall' be allowed under this paragraph with respect to fuel used ... during any taxable year unless filed by the purchaser not later than the time prescribed by law for filing a claim for credit or refund of overpayment of income tax for such taxable year.
26 U.S.C. § 6427(0(1) (1988 & Supp. IV 1992). 1
In its second amended tax return for 1993, Western also reported a change in taxable income on its Form 1120X in the amount of $310,938. During the processing of this amended return, the IRS mis-coded this amount as a failure-to-file re *1028 turn (FTF) penalty under 26 U.S.C. § 6651(f). Consequently, on January 14, 1998, Western received a final notice of intent to levy on its assets to recover unpaid taxes. This notice did not explain the basis for the levy. Moreover, Western had not received any prior notice of assessment for the alleged unpaid tax. Shortly thereafter, Mark Cox contacted the IRS for Western and requested an explanation of the basis for the levy amount. The IRS told Mr. Cox that the amount was a fraud penalty. The IRS record of this inquiry further noted that Western “requests more info on fraud penalty 240 — 310,-938.00.” The IRS promised to send the requested explanation of the mistaken fraud allegation.
Thereafter, the IRS sent Western a 197-page record of accounts, which included two pages containing four numbers that, when added together, totaled the amount sought by the IRS as a fraud penalty. That total amount, including interest accrued, was $408,173.82. Meanwhile, the IRS owed Western $400,721.02 as a highway use tax refund. In a letter dated April 13, 1998, the IRS notified Western that it would withhold that refund to offset Western’s alleged tax liabilities. That letter did not refer to the fraud penalty, but only to the amount of offset. In September 1998, Mr. Cox and other Western representatives met with the IRS’s William Cappleman to discuss the disallowed claims for diesel fuel taxes. According to Mr. Cox’s affidavit, he informed Mr. Cappleman about the alleged fraud penalty, and Mr. Cappleman stated he would look into the matter. Mr. Cappleman, on the other hand, has no recollection of any discussion of a fraud penalty in that meeting.
Mr. Cox continued to request information from the IRS about the fraud penalty and the IRS’s withholding of Western’s tax refund as an offset. Finally, the IRS responded that Western would receive a copy of the original notice of assessment by April 30, 2001. Western still has not received that notice or any other documented information to this date. Western first learned that the alleged penalty was an FTF penalty resulting from the mistaken coding of Western’s amended 1993 tax return at a status conference in this case in the trial court. The IRS, as a result of its own research, acknowledged it had made an error and that the FTF penalty was erroneous. However, the IRS refused to refund the $400,721.02 withheld to offset the erroneous penalty because the limitations period for Western to file a formal administrative claim for a refund had already expired.
Western brought this action to recover the diesel fuel tax credits it claimed in its second amended tax returns for the tax years 1993 and 1994, totaling $304,719 and $377,018. Western also seeks refund of the $400,721.02 withheld in satisfaction of the admittedly erroneous FTF penalty. The Government filed a motion to dismiss Western’s first claim under Ct. Fed. Cl. R. 12(b)(4), because the one-claim rule found in § 6427(i) barred Western’s claims for diesel fuel tax credits. The Government also sought to dismiss Western’s second claim for recovery of the erroneous FTF penalty under Ct. Fed. Cl. R. 12(b)(1) as barred by the substantial variance doctrine of 26 U.S.C. § 7422(a).
The Court of Federal Claims, departing from its previous holding in
Schlumberger Technology Corp. & Subsidiaries v. United States,
II.
This court reviews “de novo whether the Court of Federal Claims possessed jurisdiction and whether the Court of Federal Claims properly dismissed for failure to state a claim upon which relief can be granted, as both are questions of law.”
First Hartford Corp. Pension Plan & Trust v. United States,
“One Claim”Rule
“[T]he starting point for interpreting a statute is the language of the statute itself. Absent a clearly expressed legislative intention to the contrary, that language must ordinarily be regarded as conclusive.”
Consumer Prod. Safety Comm’n v. GTE Sylvania, Inc.,
In
Schlumberger,
the Court of Federal Claims held that the one-claim limitation found in § 6427(i) did not apply to claims for tax credits under § 34(a), because the substantive grant of authority to issue tax credits for the overpayment of diesel fuel taxes is not found in § 6427, but rather in § 34.
Schlumberger,
In this case, the Court of Federal Claims came to the opposite conclusion. In essence, the court found that the substantive grant of authority to issue tax credits for overpaid diesel fuel taxes is found in § 6427(i), which, as in effect in 1994, states:
(i) Nontaxable Uses of Diesel Fuel and Aviation Fuel Taxed Under Section 4091.—
(1) In general. — Except as provided in subsection (k) and in paragraphs (3) and (4) of this subsection, if any fuel on which tax has been imposed by section 4091 is used by any person in a nontaxable use, the Secretary shall pay (without interest) to the ultimate purchaser of such fuel an amount equal to the aggregate amount of tax imposed on such fuel under section 4091.
26 U.S.C. § 6427(0(1) (1988 & Supp. V 1993). That section refers to § 6427(k):
(k) Income Tax Credit in Lieu of Payment.—
(1) Persons not subject to income tax. — Payment shall be made under this section only to—
(A) the United States or an agency or instrumentality thereof, a State, a political subdivision of a State, or any agency or instrumentality of one or more States or political subdivisions, or
*1030 (B) an organization exempt from tax under section 501(a) (other than an organization required to make a return of the tax imposed under subtitle A for its taxable year).
(2) Exception.—Paragraph (1) shall not apply to a payment of a claim filed under paragraph (2), (3), or (4) of subsection (i).
(3) Allowance of credit against income tax.—For allowances of credit against the income tax imposed by subtitle A for fuel used or resold by the purchaser, see section 34.
26 U.S.C. § 6427(k)(3) (1988). Finally,
§ 34, referred to in § 6427(k) above, provides:
(a) General Rule.—There shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the sum of the amounts payable to the taxpayer—
(3) under section 6427—
(A) with respect to fuels used for nontaxable purposes ...
during the taxable year (determined without regard to section 6427(k)).
(b) Exception.—Credit shall not be allowed under subsection (a) for any amount payable under section 6421 or 6427, if a claim for such amount is timely filed and, under section 6421(j) or 6427(k), is payable under such section.
26 U.S.C. § 34 (1988).
Based on the language of these statutes, the Court of Federal Claims in this case correctly concluded that the one-claim limitation in § 6427(i) applies to credits under § 34. Subsection (i) clearly applies to § 6427(i), which refers to § 6427(k), which refers to § 34 dealing with credits. Section 34, in turn, incorporates § 6427 to determine the amount “payable to the taxpayer” under that section. Section 34 expressly excludes subsection (k) of § 6427 from that analysis. Significantly, subsection (k) is the only portion of § 6427 excluded by § 34. Thus, § 34 incorporates § 6427(i) with its “one claim” limitation. Section 34 could have excluded § 6427(i) as it does § 6427(k) if it meant to exclude the one claim rule from tax refunds under § 34. As noted, § 34 does not exclude the one claim rule, but incorporates it into application of its tax credit rules. Thus, to restate, § 34 states that the credit must equal an amount “payable to the taxpayer” under § 6427, including all relevant provisions except subsection (k). When the “one claim rule” of § 6427(i) operates, then the amount payable under § 6427 is zero. Consequently, any credit sought under § 34(a) in such a case would also be zero.
With respect to incorporation of the one-claim limitation into § 34, the trial court’s analysis is persuasive and well-reasoned. Therefore, this court affirms the holding of the Court of Federal Claims that the one-claim rule in § 6427(i) applies to credits claimed under § 34(a).
See generally Western,
However, that holding does not dispose of Western’s claim for a credit in this case. The Court of Federal Claims’ opinion obviously assumed that Western’s amended tax returns are barred as “new claims,” because its opinion contains no further analysis or finding regarding the operation of the one-claim rule. This court finds that assumption to be in error. The trial court correctly stated that the legislative history in this area is “unhelpful and inconclusive in discerning whether Congress intended to apply the one-claim rule to tax credits under [§ 34].” Id. at 62 n. 16. Likewise, the trial court regarded a General Counsel memorandum and revenue rulings as providing “little or no value” in *1031 determining whether the one-claim rule applied to credits under § 34. Id. at 62 n. 17. While this may be true, the legislative history, General Counsel memorandum, and revenue rulings provide insight on the purpose of the one-claim rule and, specifically, whether timely amendments to annual claims are barred as “new claims.”
Western argues that the one claim limitation in § 6427(i) does not bar timely amendments to a properly filed annual claim. Nothing in the statutory language or history suggests that § 6427(i) changes the standard procedure allowing a taxpayer to amend a properly filed claim. In other words, § 6427(f) does not expressly limit the taxpayer to the filing of a single non-amendable claim each year. To the contrary, a reasonable analysis of the history of the one-claim rule reveals its purpose as preventing a party from filing multiple claims for refunds of relatively small amounts, thus multiplying the administrative burdens of supplying credits. Stated differently, the purpose of the one-claim limitation is to require a claim for refund to encompass all transactions for an entire year, rather than piece-meal claims for short time periods and small amounts. The one-claim rule found in § 6427(i) first appeared in 1956 in § 6420, dealing with gasoline used on farms, and § 6421, dealing with gasoline used for non-highway or local transit systems. See Act of April 2, 1956, Pub.L. No. 466, c. 160, § 1, 70 Stat. 87; Highway Revenue Act of 1956, Pub.L. No. 627, c. 462, § 208, 70 Stat. 374, 387, 394. In 1958, the Revenue Code introduced quarterly claims as an exception to the one-claim rule for refunds due under § 6421. See Pub.L. No. 85-859, s 164, 72 Stat. 1275 (1958). The Senate Report addressing this exception states:
Where the tax ultimately does not have to be paid because of the use for non-highway purposes (or in local transit systems) it seems unfair to permit a credit or refund only on an annual basis. Although this may be justified on administrative grounds where the amount of the claim is relatively small, it is believed that this is not the case where the amount involved in a quarter is $1,000 or more.
S.Rep. No.2090 (85th Cong.),
reprinted in
1958 U.S.C.C.A.N. at 4471 (1958-
In a 1962 General Counsel memorandum, the IRS chief counsel expressly stated the prevailing opinion regarding the operation of the one-claim rule found in § 6420, which deals with gasoline used on farms:
Section 6420(b) provides that, “not more than one claim may be filed” for the one-year period ending June 30. The most obvious result of such provision, and probably the prime reason for it, is the predisposition of what might have become quite an administrative problem. Absent the prohibition against filing more than one claim, a farmer would legally have a valid refund claim for overpayment of excise taxes each time he makes a purchase within the meaning of section 6420. This would mean that the fanner would be able to flood the District Director with many refund claims involving relatively small amounts. Congress eliminated such possibility by requiring a lump sum refund at the end of the year.
*1032 It is not believed that the prohibition against filing more than one refund claim necessarily precludes the filing of an amended claim, if the original refund claim was timely filed. This is because an amended claim, if timely filed, merely perfects the original claim and thus falls without the reason for the prohibition against filing more than one claim per year.
I.R.S. Gen. Couns. Mem. 32,254 (April 13, 1962). This position was affirmed to the public in Revenue Ruling 62-174, 1962-
These general counsel memoranda and revenue rulings merely represent the position of the United States and do not bind this court.
Vons Companies, Inc. v. United States,
Finally, and most importantly, absent express statutory language or legislative history to the contrary, this court will interpret the Internal Revenue Code to operate fairly and reasonably. A 1964 Private Letter Ruling relating to refunds for gasoline tax under § 6421 indicates the IRS also seeks fairness and equity in the application of the tax code:
A conception of fairness, directly pertinent to this problem, calls for treating all cases that are still open for corrective assessments while undergoing audits as likewise open for supplemental allowances as a result of such audit.
Priv. Ltr. Rul. 6407248550A (July 24, 1964). In other words, if the IRS may reassess and change a portion of a taxpayer’s tax return form, the taxpayer may likewise amend that return form.
The Government agrees that the code permits amendment of a claim for diesel fuel credits without violating the one-claim rule if that claim is still “pending.” However, according to the Government, the revenue rulings cited above also state that a claim is no longer “pending” after payment or disallowance.
See
Revenue Ruling 62-174, 1962-
This court recognizes that no statutory provision expressly authorizes the filing of amended tax returns, and that the treatment of such amendments is within the discretion of the Commissioner.
See Hillsboro Nat’l. Bank v. Comm’r,
Because the court below did not make specific findings regarding the timeliness and propriety of Western’s second amended tax returns, other than in the context of the one-claim rule, this court remands to permit the trial court to determine whether Western’s second amended claims for the years 1993 and 1994 were otherwise proper. The trial court shall recognize that the one-claim rule only operates to prevent a taxpayer from claiming refund or credit of diesel fuel taxes paid in a time period less than the entire tax year, but does not bar a timely and otherwise proper amendment to an annual claim, even if that initial claim has been paid or disallowed by the IRS.
FTP Penalty
The IRS acknowledges its erroneous assessment of a penalty against Western. Nonetheless the IRS withheld $400,721.02 from Western in satisfaction of that illegal penalty. The Government defends this action as a proper application of the rule requiring a timely administrative claim under § 7422(a):
SEC. 7422. CIVIL ACTIONS FOR REFUND.
(A) No Suit Prior to Filing Claim for Refund. — No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax al *1034 leged to have been erroneously or illegally assessed or collected, or of any penalty claims to have been collected wrongly without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.
26 U.S.C. § 7422(a) (1994).
Based on this jurisdictional prerequisite for a refund claim, this court derived the “substantial variance” doctrine. Under that doctrine, a taxpayer may not substantially vary either the factual or the legal basis of any claim for refund in court from those presented in its administrative claim before the IRS.
See Lockheed Martin Corp. v. United States,
In this case, however, if Western may be faulted for not satisfying the technical requirement of a formal administrative claim, that failure arose because the IRS withheld information about the very source and substance of the claim. Western, however, did file a formal claim for refund of its fuel tax credits that was inextricably tied to the IRS’s mistaken FTF penalty. Therefore, in the unique circumstances of this case, Western satisfied the prior administrative claim requirement on the false FTF claim by timely filing its fuel tax credit claim. Moreover, this holding fully satisfies the policies behind § 7422(a).
The purpose of the substantial variance rule is to “prevent surprise and to give adequate notice to the [IRS] of the nature of the claim.”
Union Pacific R.R. Co. v. United States,
The trial court stated that the substantial variance doctrine requires an administrative claim that must “(a) put the IRS on notice that the Plaintiff is asserting a right to a refund for a specified tax year, (b) contain sufficient information for the IRS to examine the merits of the refund claim, and (c) ... contain a written component.”
Western,
To the contrary, in this case, where the IRS made an internal error in the processing of a proper claim that caused assessment of an erroneous penalty against a taxpayer, “[a]ll that is required of [the taxpayer], as a predicate for suit in this court is that they put the Commissioner of Internal Revenue on notice” of the error.
Nat’l Forge & Ordnance Co. v. United States,
CONCLUSION
In summary, this court affirms the holding of the Court of Federal Claims that the one-claim rule found in § 6427(i) applies to claims for credit filed under § 34(a). However, because this court finds that the one-claim rule does not bar timely amendments to an annual claim, the decision of the Court of Federal Claims granting the Government’s motion to dismiss for failure to state a claim is reversed. Finally, the decision of the Court of Federal Claims granting the Government’s motion to dismiss for lack of jurisdiction is reversed. This court remands for further proceedings consistent with this opinion.
COSTS
Each party shall bear its own costs.
AFFIRMED-IN-PART, REVERSED-IN-PART, AND REMANDED.
Notes
. The sections of the Internal Revenue Code cited herein are cited as written and in effect during the relevant time period and may not contain recent amendments and changes.
. 26 C.F.R. § 301.6402-3 (2003).
(a) In the case of a claim for credit or refund ...
(1) In general, in the case of an overpayment of income taxes, a claim for credit or refund of such overpayment shall be made on the appropriate income tax return.
(3) In the case of an overpayment of income taxes for a taxable year of a corporation for which a Form 1120 has been filed, a claim for refund shall be made on Form 1120X ("Amended U.S. Corporation Income Tax Return”).
. 26 U.S.C. § 6511 (2003). Limitations on credit or refund.
(a) Period of limitation on filing claim. Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid.