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Appellate Court Rules That Refunds Moot Exemption Claim

By Bruce R. Hopkins, Editor December 22, 2011

(Originally published in the January 2012 issue of Bruce R. Hopkins Nonprofit Counsel, available electronically to subscribers on publication.)


The US Court of Appeals for the Eleventh Circuit, on November 15, held that an organization’s effort to be recognized by the IRS as a tax-exempt entity (other than one described in IRC § 501(c)(3)) is mooted when the IRS refunds the taxes the organization has paid, the payment of which accorded the district court original jurisdiction (
Christian Coalition of Florida, Inc. v. United States). The appellate court affirmed the district court’s holding (summarized in the October 2010 issue). This litigation has persisted because the IRS refuses to provide any explanation for the refunds.

Facts

The Coalition, according to its complaint, “advocates and teaches concern for the sanctity of life, traditional family values, an economic system which fosters individual self-reliance, and faith in God.” The organization engages in a substantial amount of lobbying, distributes a newsletter, and publishes voter guides during elections. It conducts leadership schools to train and involve citizens in the political process, organizes chapters, and publishes the voting records of elected officials.

The Coalition applied for recognition of tax exemption as a social welfare (IRC § 501(c)(4)) entity. This effort proved to be unsuccessful, with the IRS denying the recognition on the ground that the primary activity of the organization is intervention in political campaigns. The IRS directed the organization to file income tax returns for the years involved—1991, 1994–2000, 2005, and 2006. The Coalition filed the returns, paid the taxes, along with interest and penalties, then filed claims for refund for each of these years, premising its claims on the assertion that it was exempt as a social welfare organization.

About two months later, the IRS refunded the taxes, interest, and penalties for 2005 and 2006, without specifying in its refund letters the basis for the grant of the refunds. The Coalition sued on its remaining claims (as reported in the June 2009 issue). Shortly after that, the IRS sent refund checks for the other years, again without explaining why. Trying to keep its litigation alive, the Coalition refused to accept tender of the checks; it persisted in its quest for declaratory and injunctive relief in order to obtain a favorable determination of its tax-exempt status. The government asserted that the issuance of the checks mooted the case and thus deprived the court of subject-matter jurisdiction.

Law and Analysis

The Eleventh Circuit (in words that may prove prophetic in connection with the preceding article) opened its opinion with this: “Filing a claim for a tax refund suit is not simply a procedural hurdle that, once leapt over, allows a party to seek other forward-looking relief against the IRS after the refund has been granted. Without a live refund claim, there is no way to distinguish this case from the kind of pre-enforcement suits that Congress, through the Anti-Injunction Act and the federal tax exemption to the Declaratory Judgment Act, has expressly forbidden taxpayers from bringing.”

Following a survey of the law, the court wrote that “judicial review of IRS determinations is largely circumscribed to entertaining suits for the refund of already-paid taxes.” It observed that the Supreme Court held that “filing these forward-looking suits, as opposed to paying the taxes arising from the dispute, then claiming a refund, was contrary to the clear terms of the AIA preventing courts from entertaining any suit for the purpose of restraining the assessment or collection of any tax” (Bob Jones University v. Simon (1974)).

The court wrote that, while the Coalition “wanted to obtain its refund on the most favorable grounds possible, a refund is a refund, and the IRS returned all of the disputed taxes shortly after this litigation began.” It added that, “absent any live refund component, the district [court] correctly concluded that it was without jurisdiction to entertain a suit containing solely forward-looking claims seeking declaratory and injunctive relief from the IRS.” Indeed, the court concluded, “[i]f we were to adopt the rule urged by [the Coalition], then all adverse IRS determinations regarding an organization’s claim to tax-exempt status would be susceptible to challenge in federal district court.” [26.5(a)]


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