Life can be unfair, and the tax law even more so.  In the case of Koopman, et al v. United States[1] the taxpayers found the law left them no recourse when they never received amounts on which they had previously paid Medicare taxes due to the bankruptcy of United Airlines.

The case involves a United Airlines nonqualified deferred compensation arrangement Mr. Koopman was a participant in.  As the Court describes the facts of the case:

The underlying facts of this case are undisputed. In 2001, Mr. Koopmann retired from United Airlines, and was covered by United Airlines’ non-qualified deferred compensation plan. Def. Mot. Ex. A at 3-4. Pursuant to the special timing rule, Mr. Koopmann paid the present value of his FICA taxes the year in which he retired. Def. Mot. Ex. A at 3-4. Mr. Koopmann received benefits under United Airlines’ non-qualified deferred compensation plan from 2001 through 2006. Def. Mot. Ex. A at 3. The hospital insurance tax was 1.45% of an individual’s “wages” received with respect to employment. Def. Mot. Ex. A at 4.

On December 9, 2002, two years after Plaintiff’s retirement, United Airlines filed a Chapter 11 bankruptcy petition. Def. Ans. ⁋ 13. In 2006, the Seventh Circuit Court of Appeals approved United Airlines’ reorganization plan. Def. Ans. ⁋ 13; see also In re UAL Corp., 468 F.3d 444 (7th Cir. 2006). As a result of these proceedings, United Airlines’ obligation to pay Plaintiff’s deferred compensation was discharged, with a portion of Mr. Koopmann’s benefits never having been paid. See Def. Ex. A at 3; Pl. Resp. at 4, 5-6. Specifically, Mr. Koopmann paid tax on $415,025.91 worth of non-qualified deferred compensation, of which he received only $248,293. Def. Ex. A at 3. He paid $6,017.88 of FICA tax on these benefits, which reflects the 1.45% HI tax rate applied to the $415,025.91 present value of the benefits. Def. Mot. Ex. A at 3.

As partial compensation for the bankruptcy discharge of Mr. Koopman’s retirement benefits, United issued common stock to Mr. Koopmann, with the last issuance taking place on April 24, 2007. Pl. Resp. at 4. Sometime thereafter, Mr. Koopmann filed an administrative claim for refund, on IRS Form 843, which he signed on August 5, 2007. See Def. Mot. Ex. A at 2; Pl. Resp. at 4. Mr. Koopmann’s refund claim purported to relate to the tax period from “1/1/06 to 12/31/06.” Def. Mot. Ex. A at 2. However, attachments to the refund claim indicate that Koopmann was seeking a refund of “withheld Medicare taxes on the entire amount in the [non-qualified deferred compensation] plan in 2001.” Def. Mot. Ex. A at 3.[2]

The IRS denied Mr. Koopman’s claim for refund.  One key problem was that he had filed the claim more than three years after the tax had been withheld, and thus any refund, whether or not otherwise allowable, would be barred by IRC §6511(a)—the standard three year statute of limitations on claims for refund.

Statute of Limitations for Filing a Claim for Refund

The Court of Federal Claims agreed with the IRS, finding that the time had long ago past for Mr. Koopman to have filed a claim for a refund of Medicare taxes withheld in 2001.  The Court found:

• The three-year statute under IRC §6511(a) applies to any tax imposed by the IRC, which includes the Medicare tax Mr. Koopman was looking to recover;

• The statute of limitations is not subject to equitable tolling—so the mere fact this may appear unfair isn’t relevant; and

• The statute has no “discovery” rule that delays the running of the statute until the taxpayer learns a tax has been paid in error.[3]

The opinion notes that this is not the first time this issue has come before the courts:

In fact, at least two other courts have rejected Mr. Koopmann’s statute of limitations arguments. In Jackson v. Internal Revenue Service, No. 7:07-CV-168-H(2), 2008 WL 755916 (E.D.N.C. 2008), the district court held that a refund claim was untimely in circumstances virtually identical to those here. There, a retired United pilot sought a refund of FICA taxes withheld on “the present value of his entire non-qualified pension plan” under the special timing rule in § 3121(v)(2). Id. at *1. When that pilot retired, United paid FICA taxes totaling $8,239.05, based on the present value of his entire non-qualified pension plan of $568,210.04. When United filed for bankruptcy, that plaintiff’s pension plan was terminated, with plaintiff only receiving payments totaling $137,611.60. Id. at *1. The pilot in that case filed a refund claim with the IRS on August 3, 2006, seeking a refund for the 2002 tax year of FICA tax paid on August 9, 2002. Id. The court held that Mr. Jackson had not filed a timely administrative claim under § 6511 and dismissed his suit as a result. Id.

Likewise, in United States v. Bates, No. 8:12-cv-833-T, 2015 WL 7444285 (M.D. Fla. 2015), the district court entered a judgment in the Government’s favor in a suit under § 7405 to recover an erroneous refund of tax. Mr. Bates, who was also a plaintiff in both Koopmann and Sofman, had filed an administrative refund claim on January 8, 2008, seeking a refund of FICA taxes that United had paid in 2004. Id. at *1-2. An IRS Appeals Officer issued an erroneous refund which the United States sued to recover. Id. at *2. The district court held that “the Office of Appeals exceeded its authority when it authorized the refund . . . to the Bates because the request for refund was filed outside the statutory limitations period provided by 26 U.S.C. § 6511.” Id. at *5. In reaching its holding, the district court rejected the argument that “there was no basis to request a refund until the bankruptcy court definitively ruled that Mr. Bates would no longer be receiving any payments from United under the Plan,” because “the limitations period under section 6511 is not subject to equitable tolling.” Id. at *4.[4]

The Court notes that Mr. Koopman could have challenged the special timing rule that triggers the FICA taxation of deferred compensation by default when the right to the funds vest, rather than when the deferred compensation is paid, before the running of the statute:

Mr. Koopmann could have filed a claim for refund protesting the application of the special timing rule. In this respect, § 6511(a) did not entirely deprive Mr. Koopmann of an opportunity to file a refund. Further, there may have been good reason for Mr. Koopmann and other similarly situated plaintiffs not to challenge the legality of the special timing rule. While it is true that taxation of the compensation at its present value can sometimes work to an employee’s disadvantage such as in the case of an employer going bankrupt, the special timing rule can also work to an employee’s advantage. Indeed, Mr. Koopmann may have potentially benefitted from the application of the special timing rule in this case. Mr. Koopmann paid only a 1.45% Medicare tax on the present value of his compensation in the 2001 tax year, for a total tax of $6,017.88. See Def. Mot. Ex. A at 3. Had Mr. Koopmann paid FICA tax on the deferred compensation as he received it in 2001 through 2006, and had his income fallen under the Social Security wage cap, he would have paid both a 1.45% Medicare tax and a 6.2% Social Security tax on the compensation he later received. See I.R.C. § 3101(a) (imposing “tax equal to 6.2 percent of the wages”).[5]

The Taxpayer’s Claim Would Have Failed Even if Not Time Barred

The Court notes that while the taxpayer’s claim had been filed too late to be heard by the Court, the taxpayer’s underlying claim was doomed even if he had filed in time.  The Court of Federal Claims had already rejected a challenge to the special timing rule:

Finally, even if Mr. Koopmann’s claims are not time-barred, his arguments would nevertheless fail, as the Federal Circuit has already rejected Mr. Koopmann’s arguments related to the Treasury Department’s application of the special timing rule in the identical situation. Balestra, 803 F.3d at 1369-1373 (ruling that Treasury regulation concerning special timing rule was not invalid or inapplicable where United Airlines was in bankruptcy proceedings when the present value of the deferred compensation was calculated). In Balestra, a retired United Airlines pilot brought a suit seeking a FICA tax refund. Like the present case, Mr. Balestra paid FICA taxes on retirement benefits he never received due to United Airlines’ bankruptcy. Mr. Balestra challenged the Treasury Department’s application of the special timing rule, which taxed plaintiff’s deferred compensation at the “present value” as of the date of plaintiff’s retirement but also “prohibited consideration of an employer’s financial condition (e.g., bankruptcy) in calculating the amount deferred.” Balestra, 803 F.3d at 1365 (citing 26 C.F.R. § 31.3121(v)(2)-1(c)(2)(ii)).

The Federal Circuit rejected Mr. Balestra’s arguments that these regulations were invalid stating, “[i]t may seem unfair in a specific instance such as this, but in balancing the desire for simplicity against the ideal of ultimate comprehensiveness, the agency must be allowed a reasonable degree of discretion.” Balestra, 803 F.3d at 1374 (holding that Treasury Department’s regulation was due deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)). Regardless of this Court’s views on Chevron deference, it is axiomatic that this Court is bound by the Supreme Court’s decision and the Federal Circuit’s analysis and holding in Balestra, 803 F.3d at 1365, and Mr. Koopmann has not provided a persuasive reason why his case should be treated differently.[6]

[1] Koopman, et al. v. United States, US Court of Federal Claims, Case No. 1:09-cv-00333, September 30, 2020, https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2009cv0333-363-0 (retrieved October 6, 2020

[2] Koopman, et al. v. United States, pp. 4-5

[3] Koopman, et al. v. United States, pp.8-10

[4] Koopman, et al. v. United States, pp. 10-11

[5] Koopman, et al. v. United States, p. 12

[6] Koopman, et al. v. United States, p. 14