Third Circuit Court of Appeals Reverses Tax Court in Sunoco Inc. v. Commissioner of Internal Revenue

Nov 08, 2011   

Last month, the Third Circuit reversed the judgment of the Tax Court which held that the Tax Court had jurisdiction over Sunoco’s claim that it was entitled to interest on tax overpayments. In reversing the decision of the Tax Court, the Third Circuit held that either the U.S. District Courts or the Court of Federal Claims have jurisdiction over claims that the United States owes interest on overpayments.

The relevant facts are as follows:  On July 1, 1997, the IRS issued a notice of deficiency to Sunoco for the tax years 1979, 1981, and 1983. The IRS claimed deficiencies of income tax in the amounts of $10,563,157.00, $5,163,449.00, and $35,916,359.00 respectively, for a total amount of $51,642.965.00. Sunoco responded to the notice of deficiency by filing a timely petition in the Tax Court in which it contested the IRS determination of deficiencies for 1979, 1981, and 1983. It also asserted that it had made income tax overpayments for those years totaling $46,100,857.00. Sunoco sought a refund of the overpayment together with interest.

Thereafter, in November of 1997, Sunoco amended its petition to add, inter alia, allegations relating to certain errors that Sunoco claimed the IRS had made in computing underpayment and overpayment interest. Sunoco alleged that for each of the disputed years, the interest the IRS had charged on underpayments pursuant to I.R.C. § 6601 was too high, and the interest the IRS had paid to Sunoco on overpayments pursuant to I.R.C. § 6611 was too low.

In March of 2000, the IRS moved to dismiss Sunoco’s amended petition to the extent that it asked the Tax Court to order the IRS to pay additional overpayment interest under I.R.C. § 6611. The IRS contended that Sunoco’s claims for overpayment interest for the taxable years 1979, 1981, and 1983 must be dismissed for lack of jurisdiction [because] the Tax Court does not have jurisdiction to determine the amount of interest due on overpayments allowed prior to the commencement of the case.

In an opinion dated February 4, 2004, the Tax Court denied the IRS motion to dismiss, holding that it had jurisdiction to determine interest with respect to overpayments where the overpayments and interest on overpayments had been refunded to the taxpayer or otherwise credited to the taxpayer’s account before the case arrived in the Tax Court. Sunoco, Inc. and Subsidiaries v. Commr of the IRS, 122 T.C. 88 (2004). A full copy of the Tax Court decision can be found here.

In overturning the decision of the Tax Court, the Third Circuit discussed the two types of interest, interest on tax underpayment and interest on overpayments.  Interest on tax underpayments is known as deficiency interest.  See I.R.C. section 6601.  Interest on overpayments is known as overpayment interest.  See I.R.C. section 6611.  The Tax Court has jurisdiction to determine interest on underpayments (deficiency interest).  See I.R.C. section 6512(b).  However, a claim for overpayment interest is a general monetary claim against the United States, which (like all such claims) must be brought in the federal district courts or the Court of Federal Claims within the six-year limitations period set forth in 28 U.S.C. §§ 2401 (district court) and 2501 (Court of Federal Claims). Consequently, the Third Circuit reversed the Tax Court’s decision that it had the requisite decision to hear Sunoco’s claim that it was entitled to interest on tax overpayments.

The significance of this decision is that a taxpayer must properly ascertain what time of interest deficiency vs. overpayment is involved in a particular dispute.  Failure to properly bring an action in the appropriate court could lead to a case being dismissed for lack of jurisdiction.  Moreover, if a case is brought in the wrong court, by the time a decision is rendered it may be too late to refile with the appropriate court.

A full copy of the Third Circuit’s decision can be found here

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the government in the Tax Court, the District Courts, the Court of Claims, and the Circuit Courts.  You can contact at contact@fidjlaw.com.