United States Court of Appeals
for the Federal Circuit
______________________
WILTON R. STEPHENS, JR., CAROL M.
STEPHENS,
Plaintiffs-Appellants
v.
UNITED STATES,
Defendant-Appellee
______________________
2016-2720
______________________
Appeal from the United States Court of Federal
Claims in No. 1:15-cv-00153-TCW, Judge Thomas C.
Wheeler.
______________________
Decided: March 9, 2018
______________________
CRAIG S. LAIR, Rose Law Firm, Little Rock, AR, ar-
gued for plaintiffs-appellants. Also represented by BYRON
JANSEN WALKER.
ANTHONY T. SHEEHAN, Tax Division, United States
Department of Justice, Washington, DC, argued for
defendant-appellee. Also represented by DAVID A.
HUBBERT, JONATHAN S. COHEN.
______________________
Before NEWMAN, WALLACH, and CHEN, Circuit Judges.
2 STEPHENS v. UNITED STATES
CHEN, Circuit Judge.
Appellants Wilton R. Stephens, Jr., and Carol M. Ste-
phens (collectively, the “Stephenses”) sued the United
States (Government) in the U.S. Court of Federal Claims
(“Claims Court”), seeking a refund of federal income taxes
and interest. The Government filed a motion to dismiss
for lack of subject matter jurisdiction pursuant to Rule
12(b)(1) of the Rules of the Court of Federal Claims,
arguing that the Stephenses failed to file a timely tax
refund claim with the Internal Revenue Service (IRS).
The Claims Court denied the Government’s motion to
dismiss. See Stephens v. United States, 127 Fed. Cl. 660,
660 (2016). The Government filed a motion for reconsid-
eration, which the Claims Court also denied. App’x 3.1
After the Government requested that the Claims Court
certify the case for interlocutory appeal, the Claims Court
sua sponte “t[ook] another look at the applicable case law
and statutory provisions” and granted the Government’s
motion to dismiss. Stephens, 127 Fed. Cl. at 660–61. We
affirm.
BACKGROUND
The Stephenses filed joint federal income tax returns
for tax years 1995, 1996, and 1997. During these tax
years, Mr. Stephens was a shareholder of SF Holding
Corporation (“SF”), a subchapter S corporation. 2 See
generally I.R.C. §§ 1361 et seq. S corporations generally
do not pay federal income taxes. See I.R.C. § 1363(a).
Instead, they pass their tax items through to their share-
holders, who report those items on individual tax returns.
See I.R.C. § 1366. The Stephenses reported passthrough
income arising out of investments in SF. At least some of
1 “App’x” refers to the appendix filed by Appellants.
2 SF was formerly named “Stephens Group, Inc.”
App’x 10.
STEPHENS v. UNITED STATES 3
this income was classified as “passive activity” income on
the Stephenses’ tax returns. 3 In addition, the Stephenses
reported passive activity losses (which may be deducted
from passive activity income) and passive activity credits
(which may be claimed against taxes allocable to passive
activities). See I.R.C. § 469(d).
The IRS audited SF’s returns and the Stephenses’ in-
dividual returns for 1995 and 1996. Those tax years were
subject to the audit provisions of the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-
248, 96 Stat. 324 (codified in scattered sections of Title 26
of the U.S. Code). Under TEFRA, the IRS had to com-
plete its audit of SF’s returns before it could apply any
corporate-level adjustments to the passthrough items on
the Stephenses’ individual returns and finalize its audit of
the individual returns. Because of amendments to the
Tax Code, the Stephenses’ 1997 return was not subject to
TEFRA and was audited separately from the 1995 and
1996 returns.
In April 2003, the IRS sent a notice proposing to disal-
low certain of the Stephenses’ passive activity loss deduc-
tions and passive activity credits for 1995 and 1996. As
detailed in a subsequent notice of deficiency, the IRS
concluded that Mr. Stephens had materially participated
in some of SF’s activities. This material participation
meant that income arising from such activities would be
considered nonpassive rather than passive, as originally
reported by the Stephenses. The passive activity deduc-
tions and credits could not be used to offset tax liability
arising from nonpassive income. See I.R.C. § 469(d).
3 A “passive activity” is defined in the Tax Code as
any activity that “involves the conduct of any trade or
business” in which “the taxpayer does not materially
participate.” I.R.C. § 469(c)(1).
4 STEPHENS v. UNITED STATES
On December 3, 2007, the corporate audit of SF con-
cluded with a closing agreement that covered only corpo-
rate-level adjustments. Completion of the SF audit
permitted the IRS to finalize its audit of the Stephenses’
1995 and 1996 returns. On March 24, 2008, the IRS
again proposed the disallowance of the Stephenses’ 1995
and 1996 passive activity loss deductions and credits in
the same amounts proposed in April 2003. On January
21, 2009, the IRS sent the Stephenses a notice of deficien-
cy for 1995 and 1996, again in the same amounts pro-
posed in April 2003 and March 2008. The Stephenses did
not contest the notice of deficiency and paid the amount
specified by the IRS on January 6, 2010. The limitations
period for 1995 and 1996 expired two years later on
January 6, 2012. The Stephenses never filed a formal
refund claim for 1995 or 1996.
The Stephenses allege that they believed they could
carry over their now-disallowed passive activity losses
from 1995 and 1996 to 1997 to reduce their income taxes
by an amount approximately equal to the increase in their
1995 and 1996 taxes. On July 25, 2006, the Stephenses
entered into an agreement with the IRS to extend the
deadline for filing a refund claim for 1997 until June 30,
2008. On October 8, 2009, over a year after the June 30,
2008 deadline, the Stephenses mailed an amended tax
return for 1997 to the IRS. The amended return sought to
carry over the 1995 and 1996 passive activity losses to
1997.
In November 2011, the Stephenses sent a letter re-
garding their amended return for 1997 in which they
invoked the mitigation provisions of the Tax Code. See
I.R.C. §§ 1311–1314 (mitigation provisions). These provi-
sions, in specified circumstances, “permit a taxpayer who
has been required to pay inconsistent taxes to seek a
refund of a tax the recovery of which is otherwise barred
by [I.R.C.] §§ 7422(a) and 6511(a).” United States v.
Dalm, 494 U.S. 596, 610 (1990). I.R.C. § 7422(a) states
STEPHENS v. UNITED STATES 5
that no suit for the recovery of any tax alleged to have
been erroneously collected may be brought until a “claim
for refund or credit has been duly filed” with the IRS.
I.R.C. § 6511(a) specifies the limitations period for filing a
refund claim. 4 There is no dispute that the limitations
period in which the Stephenses could have filed a timely
refund claim for 1997 had long expired, on June 30, 2008.
See Open. Br. 14 (“The period for filing a claim for refund
for 1997 expired on June 30, 2008.”).
On March 15, 2012, the IRS sent a notice proposing to
disallow the Stephenses’ refund claim for 1997 because it
was untimely and because the mitigation provisions did
not save the claim. On April 12, 2012, the Stephenses
filed an administrative appeal of the proposed disallow-
ance, in which they invoked, inter alia, equitable recoup-
ment in addition to mitigation in an effort to save their
untimely refund claim. “Equitable recoupment is a judi-
cially created doctrine . . . used as a defense allowing
redress against a timely claim that results in the double
inclusion or double exclusion of items, when the correction
4 Section 6511(a) states:
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. Claim for credit or refund of an
overpayment of any tax imposed by this title
which is required to be paid by means of a stamp
shall be filed by the taxpayer within 3 years from
the time the tax was paid.
6 STEPHENS v. UNITED STATES
of such items would be barred by the statute of limita-
tions.” 2 Mertens Law of Fed. Income Taxation § 14:3
(2018) (hereinafter, “Mertens”) (citing Bull v. United
States, 295 U.S. 247 (1935)). The IRS rejected the Ste-
phenses’ administrative appeal because their refund
claim was untimely and neither mitigation nor equitable
recoupment applied.
The Stephenses filed suit in the Claims Court. In
their complaint, the Stephenses contended that the
amended 1997 return that they filed in October 2009
(which would have been an untimely filing for that year)
was actually an informal refund claim for tax years 1995
and 1996. It is undisputed that the limitations period for
filing a refund claim for 1995 or 1996 did not expire until
after the Stephenses filed their amended 1997 return in
October 2009. The Stephenses asserted two grounds for
relief set out in separate counts in the complaint:
(1) statutory mitigation and (2) equitable recoupment.
The Government moved to dismiss for lack of subject
matter jurisdiction, arguing, inter alia, that the Ste-
phenses had not filed a timely refund claim for 1997 and
had not filed any refund claim for 1995 or 1996 (refuting
the Stephenses’ claim that their amended 1997 return
qualified as an informal claim for the earlier two years).
The Claims Court initially denied the Government’s
motion, treating the timely filing of a refund claim as
merely “an element of the [Stephenses’] cause of action”
rather than a jurisdictional prerequisite. The Govern-
ment filed a motion for reconsideration, which the Claims
Court initially denied. The Government moved to certify
the case for interlocutory appeal. On August 2, 2016, the
Claims Court sua sponte reconsidered its prior rulings
and granted the Government’s motion to dismiss, conclud-
ing that a timely refund claim was indeed a “prerequisite
for a refund suit.” Stephens, 127 Fed. Cl. at 661 (citing
United States v. Clintwood Elkhorn Min. Co., 553 U.S. 1,
5 (2008)).
STEPHENS v. UNITED STATES 7
The Stephenses appeal.
We have jurisdiction pursuant to 28 U.S.C.
§ 1295(a)(3).
STANDARDS OF REVIEW
We review the Claims Court’s legal conclusion that it
lacked subject matter jurisdiction de novo. See Coast
Prof’l, Inc. v. United States, 828 F.3d 1349, 1354 (Fed. Cir.
2016). “In deciding a motion to dismiss for lack of subject
matter jurisdiction, the court accepts as true all uncontro-
verted factual allegations in the complaint, and construes
them in the light most favorable to the plaintiff.” Estes
Exp. Lines v. United States, 739 F.3d 689, 692 (Fed. Cir.
2014). When, as here, a motion challenges the truth of
jurisdictional facts, “[w]e review determinations of the
Court of Federal Claims regarding jurisdictional facts for
clear error.” Ferreiro v. United States, 350 F.3d 1318,
1324 (Fed. Cir. 2003).
DISCUSSION
“The party seeking to invoke [the Claims Court]’s ju-
risdiction must establish that jurisdiction exists by a
preponderance of the evidence.” Hymas v. United States,
810 F.3d 1312, 1317 (Fed. Cir. 2016) (citation omitted).
The United States may only be sued if it expressly con-
sents to suit by waiving sovereign immunity. Dalm, 494
U.S. at 608; see also Starr Int’l Co., Inc. v. United States,
856 F.3d 953, 976 (Fed. Cir. 2017) (citations omitted).
The Tucker Act waives sovereign immunity for lawsuits
seeking tax refunds, but only when the jurisdictional
requirements in the Tax Code for bringing such suits are
met. Clintwood Elkhorn Mining, 553 U.S. at 4–5, 8–9.
One of these requirements is specified in I.R.C. § 7422(a):
No suit or proceeding shall be maintained in any
court for the recovery of any internal revenue tax
alleged to have been erroneously or illegally
assessed or collected . . . until a claim for refund
8 STEPHENS v. UNITED STATES
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.
See Clintwood Elkhorn Mining, 553 U.S. at 4–5. By
regulation, taxpayers are required to “set forth in detail
each ground upon which a credit or refund is claimed and
facts sufficient to apprise the Commissioner of the exact
basis thereof.” Treas. Reg. § 301.6402-2(b)(1) (2016). This
requirement “is designed both to prevent surprise and to
give adequate notice to the [IRS] of the nature of the
claim and the specific facts upon which it is predicated,
thereby permitting an administrative investigation and
determination.” Computervision Corp. v. United States,
445 F.3d 1355, 1363 (Fed. Cir. 2006) (internal quotation
marks omitted).
The only potential refund claim identified by the Ste-
phenses is their October 2009 filing of an amended return
for 1997. See Oral Arg. at 0:30–1:32,
http://oralarguments.cafc.uscourts.gov/default.aspx?fl=20
16-2720.mp3. The Stephenses argue that their amended
1997 return should be understood as a timely informal
refund claim for tax years 1995 and 1996. Id. The Gov-
ernment counters that the amended 1997 return was not
an informal refund claim because it did not adequately
apprise the IRS that the Stephenses sought a refund for
1995 or 1996. We agree with the Government.
The Stephenses did not challenge the amount of their
1995 and 1996 taxes in their October 2009 filing with the
IRS. To the contrary, the Stephenses stated that the
“agreed upon adjustments” for 1995 and 1996 “created”
the carryovers that they sought to apply to their 1997
taxes. App’x 19 (emphasis added). In Computervision, we
explained that an informal refund claim must adequately
apprise the IRS of the particular year or years for which a
refund is sought. 445 F.3d at 1365. Nowhere in the
STEPHENS v. UNITED STATES 9
Stephenses’ amended 1997 return or the cover letter
accompanying it did the Stephenses adequately apprise
the IRS that they were seeking a refund for 1995 or 1996.
Because the Stephenses’ October 2009 filing was not an
informal refund claim for 1995 or 1996, and because this
was the only basis on which the Stephenses argued that
they filed a timely refund claim under § 7422(a), the
Stephenses’ suit is barred by the statute of limitations.
However, the Stephenses argue that, even if their suit
is legally barred by §§ 6511(a) and 7422(a), their mitiga-
tion and equitable recoupment claims remain viable in
view of the “equitable purpose” of mitigation and the need
to apply principles of equity to “avoid a windfall to the
Government.” See Reply Br. 10–13. For the reasons
discussed, infra, we disagree.
I. Mitigation
In general, mitigation allows a taxpayer or the IRS to
“correct errors otherwise barred by the statute of limita-
tions” when all requirements in the mitigation provisions
are met. Mertens § 14:7; see TLI, Inc. v. United States,
100 F.3d 424, 427 (5th Cir. 1996) (“[I]n narrowly defined
circumstances, the strictures established by the statutes
of repose are loosened by the Tax Code’s mitigation provi-
sions.”). “The primary purpose of the mitigation provi-
sions is to prevent the inconsistent treatment of items
that result in a windfall to either the taxpayer or the
Service.” Mertens § 14:7 (citing Costello v. Comm’r of
Internal Revenue, 111 T.C.M. (CCH) 1148 (2016)). How-
ever, “Congress did not intend by [the mitigation provi-
sions] to provide relief for inequities in all situations in
which just claims are precluded by statutes of limita-
tions.” Olin Mathieson Chem. Corp. v. United States, 265
F.2d 293, 296 (7th Cir. 1959). To obtain relief under the
mitigation provisions, taxpayers “must demonstrate that
[they] meet[] the specific requirements” of the provisions.
Id.
10 STEPHENS v. UNITED STATES
The Fourth Circuit summarized the requirements
that must be met for the mitigation provisions to apply:
Mitigation is permitted when three elements are
present: [(1)] there must be “a determination” of
tax liability as defined in [I.R.C.] § 1313(a)(1)–(4);
[(2)] the determination must fall within one of the
circumstances of adjustment described in [I.R.C.]
§ 1312(1)–(7); and [(3)] depending on which
circumstance of adjustment is found, either an
inconsistent position must be maintained by the
party against whom mitigation will operate,
[I.R.C.] § 1311(b)(1), or the correction of the error
must not have been barred at the time the party
for whom mitigation will operate first maintained
its position, [I.R.C.] § 1311(b)(2).
Longiotti v. United States, 819 F.2d 65, 68 (4th Cir.
1987). 5
Regarding the first element, I.R.C. § 1313(a) defines
only four types of “determination[s]” of tax liability that
may trigger application of the mitigation provisions: (1) a
final decision by a court of competent jurisdiction; (2) a
closing agreement under I.R.C. § 7121; (3) a final admin-
istrative ruling on a refund claim (unless suit is timely
instituted on the claim); and (4) a mitigation agreement
5 The Fourth Circuit’s three-part framework is con-
sistent with our prior analysis of the mitigation provi-
sions, see, e.g., Evans Tr. v. United States, 199 Ct. Cl. 98,
101–05 (1972), and with Fifth and Seventh Circuit case
law discussing the mitigation provisions, see TLI, 100
F.3d at 427–29; Fruit of the Loom, Inc. v. Comm’r, 72 F.3d
1338, 1341–42 (7th Cir. 1996). Moreover, both parties
present their arguments under Longiotti’s three-element
framework. We agree that this framework accurately
summarizes the requirements in §§ 1311–1314.
STEPHENS v. UNITED STATES 11
between the IRS and the taxpayers. The Stephenses
allege two determinations that fall under § 1313. First,
the Stephenses argue that the closing agreement entered
into between SF and the IRS at the conclusion of the
IRS’s audit of SF was a determination under § 1313(a)(2).
Second, the Stephenses assert that the IRS’s March 15,
2012 letter denying the Stephenses’ claim related to the
amended 1997 return was a determination under
§ 1313(a)(3). The Government argues that neither of
these qualifies as a determination under the statutes.
We agree with the Government.
As noted by the Government, there has been no clos-
ing agreement for the Stephenses’ individual income
taxes, which are the subject of the instant lawsuit. See
Resp. Br. 46. The closing agreement between SF and the
IRS explicitly stated that the agreement did not deter-
mine whether business activity of SF was or was not
passive activity under I.R.C. § 469 for purposes of any
shareholder’s individual taxes. S. App’x 52 ¶ 5. 6 The SF
closing agreement therefore does not qualify as a “closing
agreement” for the Stephenses’ taxes under § 1313(a)(2).
The IRS’s March 15, 2012 letter denying the Ste-
phenses’ claim related to their amended 1997 return is
likewise not a “final determination” because such a de-
termination could only come at the end of the instant
litigation, which was initiated to challenge the IRS’s
decision. Section 1313(a)(3)(B) excepts from its coverage
any claim for refund that was denied where “suit is insti-
tuted” on that claim, and the claim could only become a
determination under § 1313(a)(1) at the conclusion of the
instant litigation. See Treas. Reg. § 1.1313(a)-1 (“A de-
termination may take the form of a decision by the Tax
Court of the United States or a judgment, decree, or other
6 “S. App’x” refers to the appendix filed by the Gov-
ernment.
12 STEPHENS v. UNITED STATES
order by any court of competent jurisdiction, which has
become final.” (emphasis added)). The Stephenses’ miti-
gation claim fails because they have not identified any
determination of tax liability that falls under § 1313(a).
Additionally, the mitigation claim fails because the
Stephenses have not shown applicability of any of the
seven “circumstances of adjustment described in [I.R.C.]
§ 1312(1)–(7)” under Longiotti’s second requirement. 819
F.2d at 68. The Stephenses contend that circumstance
four (codified as § 1312(4)) applies in this case, because
the complaint alleges that “passive loss deductions were
denied for tax years 1995 and 1996, and the carryforward
of these losses were again denied for 1997.” Open. Br. 17.
Section 1312(4) authorizes an adjustment where “[t]he
determination disallows a deduction or credit which
should have been allowed to, but was not allowed to, the
taxpayer for another taxable year.” I.R.C. § 1312(4).
However, § 1312(4) is subject to an important exception
set out in § 1311(b)(2)(B):
In the case of a determination described in
[§] 1312(4) (relating to disallowance of certain
deductions and credits), adjustment shall be made
under this part only if credit or refund of the
overpayment attributable to the deduction or
credit . . . was not barred, by any law or rule of
law, at the time the taxpayer first maintained
before the Secretary or before the Tax Court, in
writing, that he was entitled to such deduction or
credit for the taxable year to which the
determination relates.
Section 1311(b)(2)(B) excludes the Stephenses’ refund
claim from coverage by the mitigation provisions, regard-
less of whether their claim is for 1997 or for 1995 and
1996. First, as explained, supra, the Stephenses’ amend-
ed 1997 return was untimely filed—and, therefore, barred
by the statute of limitations—for tax year 1997. Second,
STEPHENS v. UNITED STATES 13
the Stephenses’ argument that their amended 1997
return was an informal claim for 1995 and 1996—
presented for the first time in their complaint filed in
2015—was untimely “maintained” under § 1311(b)(2)(B).
The IRS defined what it means to “maintain” a claim for a
deduction or credit under this subsection of the statute in
Treas. Reg. § 1.1311(b)-2(b):
The taxpayer will be considered to have first
maintained in writing before the Commissioner or
the Tax Court that he was entitled to such
deduction or credit when he first formally asserts
his right to such deduction or credit as, for
example, in a return, in a claim for refund, or in a
petition (or an amended petition) before the Tax
Court.
The Stephenses first claimed a refund under their current
theory—that their 1997 amended return was an informal
claim for 1995 and 1996—when they filed their complaint
in this suit in 2015, well after the limitations period for
1995 and 1996 expired in 2012. Even assuming that the
Stephenses’ complaint qualifies as a valid way to “main-
tain” entitlement to deductions or credits under this rule,
an issue we need not decide, the Stephenses’ complaint
was filed more than three years after they were first
“barred” from asserting any claim for refund for 1995 or
1996 under the statute of limitations. Prior to filing their
complaint in 2015, the Stephenses never challenged the
changes to their 1995 or 1996 tax liability imposed by the
IRS. Therefore, the Stephenses’ mitigation claim fails for
the additional reason that § 1312(4) does not apply as a
circumstance of adjustment under Longiotti’s second
requirement.
II. Equitable Recoupment
Finally, the Stephenses argue that they have pleaded
sufficient facts to support a claim for equitable recoup-
ment. Under the doctrine of equitable recoupment, “a
14 STEPHENS v. UNITED STATES
party litigating a tax claim in a timely proceeding may, in
that proceeding, seek recoupment of a related, and incon-
sistent, but now time-barred tax claim relating to the
same transaction.” Dalm, 494 U.S. at 608. In Dalm, the
Supreme Court stated that, “[t]o date, we have not al-
lowed equitable recoupment to be the sole basis for juris-
diction.” Id. Instead, the Supreme Court explained that
the doctrine has been applied only where “there was no
question but that the courts in which the refund actions
were brought had jurisdiction.” Id. Taxpayers may assert
equitable recoupment only “in a timely proceeding.” As
already discussed, supra, the Stephenses’ claims are
untimely.
To allow the Stephenses’ equitable recoupment to
survive the Government’s motion to dismiss would be to
overlook the Supreme Court’s instruction that the Gov-
ernment “is immune from suit, save as it consents to be
sued” and that “the terms of its consent to be sued in any
court define that court’s jurisdiction to entertain the suit.”
Id. (internal quotation marks omitted). “A statute of
limitations requiring that a suit against the Government
be brought within a certain time period is one of those
terms.” Id. When a plaintiff’s refund claim is barred by
the statute of limitations and does not qualify under the
mitigation provisions, allowing the plaintiff to “maintain
a suit for refund on the basis of equitable recoup-
ment . . . would be doing little more than overriding
Congress’ judgment as to when equity requires that there
be an exception to the limitations bar.” Id. at 610. In
view of Dalm and the principle that “waivers of sovereign
immunity by Congress ‘cannot be implied but must be
unequivocally expressed,’” the Stephenses’ equitable
recoupment claim cannot serve as an independent basis
for jurisdiction in this case. Id. at 608 (quoting United
States v. King, 395 U.S. 1, 4 (1969)).
STEPHENS v. UNITED STATES 15
CONCLUSION
We have considered the Stephenses’ remaining argu-
ments and find them unpersuasive. 7 Accordingly, the
Claims Court’s order granting the Government’s motion
to dismiss for lack of subject matter jurisdiction is
AFFIRMED
7 At oral argument, counsel for the Stephenses ar-
gued that they had “no notice that they were impacted” by
the 1995 and 1996 adjustments resulting from the SF
audit until January 2009. Oral Arg. at 28:03–28:11. As
noted, supra, the IRS proposed disallowances in April
2003 and again in March 2008 in the exact amounts that
were eventually assessed and paid by the Stephenses.
The Stephenses were given enough notice to file a timely
general refund claim for 1997 before the limitations
period expired in June 2008. See generally Computervi-
sion, 445 F.3d at 1368–69 (describing general refund
claim doctrine). The Stephenses could have later perfect-
ed the general refund claim once the IRS sent an official
notice of deficiency specifying the precise amount owed.
The Stephenses did none of the above.