The US District Court for Middle District of Tennessee dismissed the suit in the case of Jarrett et al v. United States[1] as moot as the United States had granted the requested refund.

For those who may not remember this case, it involved an attempt by the taxpayers in question to get a federal court to rule that staking rewards do not generate taxable income. While the IRS initially denied the taxpayers’ claim for a refund, after the case was filed the IRS authorized the refund plus interest.

Of course, the goal of this case was not simply to get a refund for the Jarretts for taxes imposed on staking rewards for a single year, but to obtain a court decision other taxpayers could point to holding that such rewards aren’t taxable income. As the decision explains:

On January 28, 2022, a refund check was issued to Plaintiffs in the amount $4,001.83, consisting of $3,793.00 for the refund of federal income taxes and $208.83 interest. (Doc. No. 41-1). The check was delivered to Plaintiffs’ counsel on February 14, 2022. (Id.). Plaintiffs have not accepted the refund. (Jarrett Decl., Doc. No. Doc. No. 51-1 ¶ 6).

Thereafter, the United States moved to dismiss the Complaint for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1) on grounds that that refund claim is moot because the United States has fully refunded the federal income taxes and statutory interest demanded in the Complaint.1 (Doc. No. 41). The Jarretts, who have not accepted the refund check, argue the case is not moot because they rejected what they characterize as the United States’ offer of settlement. (Doc. No. 51).

Now before the Court is the United States’ Motion to Dismiss Complaint (Doc. No. 41), which is fully briefed. (Doc. Nos. 42, 51, 53).[2]

The Court outlined the dispute as follows:

Plaintiffs filed this case ostensibly seeking recovery of overpayment of taxes — an overpayment the United States has now refunded in full. The United States argues there is no longer a live "case or controversy" for this Court to adjudicate. Plaintiffs disagree. They insist they are entitled to judicial ruling in this case even though the United States has fully refunded the claimed overpayment.[3]

Unfortunately for the Jarretts and those funding the case, the Court found that the government was correct that there was no longer a case for the court to rule upon.

The Court begins its analysis by citing a number of authorities that indicate that the Court must now dismiss this case:

The weight of authority appears to favor the Government’s position. Indeed, a number of Courts to have considered the issue have concluded that the Government’s tender of full payment of a refund moots the refund claim. See Drs. Hill & Thomas Co. v. United States, 392 F.2d 204, 205 (6th Cir. 1968) (affirming dismissal for mootness because suit for refund only has the objective of recovery of money, and the United States had tendered more than appellant sought); Christian Coalition, Inc. v. United States, 662 F.3d 1182, 1192 (11th Cir. 2011) (refund claim moot where “IRS returned all of the disputed taxes shortly after this litigation began.”); Hudak v. United States, No. MJG-11-1271, 2011 WL 6739019, at *1 (D. Md. Dec. 21, 2011) (claim for refund of income tax overpayments denied a moot); Cath. Answers, Inc. v. United States, No. 09-CV-670-IEG (AJB), 2009 WL 3320498, at *8 (S.D. Cal. Oct. 14, 2009) (abatement and refund of taxes rendered refund suit moot), aff’d, 438 F. App’x 640, 641 (9th Cir. 2011); Est. of O’Neal v. United States, No. CV-93-H-0139-S, 1993 WL 766477, at *3 (N.D. Ala. June 2, 1993) (“Checks in the amount of the refund requested have been issued and delivered to plaintiffs. Thus, the refund issue is moot and there is no need for any adjudication as to this claim.”); Miklautsch v. Gibbs, No. A89-291 Civ., 1990 WL 236045, at *5 (D. Alaska Nov. 6, 1990) (“[A]ll the plaintiffs could hope to gain in a refund action under 26 U.S.C. § 7422 has in fact been credited to their 1975 tax liability. Accordingly, those claims are moot.”); but see Church of Scientology of Hawaii v. United States, 485 F.2d 313 (9th Cir. 1973) (finding exception to mootness applied).[4]

The taxpayers argue that, despite the cited authority, they have a right to decline the refund and force a hearing on the underlying tax status of staking rewards:

Plaintiffs contend the tender of a refund has no effect because they have a "right to reject a proffered tax refund and obtain a judicial determination." (Doc. No. 51 at 1). Plaintiffs rely on the Supreme Court’s decision in Campbell-Ewald v. Gomez, 577 U.S. 153, 165 (2016), to support their notion that failure to cash the refund check, saves this case from the bowels of non-justiciability.[5]

The opinion first analyzes the facts of the case that the taxpayers were relying upon:

In Campbell-Ewald, the plaintiff brought a putative class action alleging claims for violation of the Telephone Consumer Protection Act, 47 U.S.C. § 227(b)(1)(A)(iii), and seeking treble statutory damages and a permanent injunction. Id. at 157. Before the plaintiff moved for class certification, the defendant proposed to settle the plaintiff’s individual claim and filed an offer of judgment pursuant to Federal Rule of Civil Procedure 68. Id. at 158. The plaintiff did not accept the offer of judgment and allowed the Rule 68 submission to lapse. Id. The Supreme Court reasoned that once the offer of judgment lapsed, it had no continued efficacy. Id. at 163 (applying principles of contract law). Therefore, the parties remained adverse, and the case was not moot. Id.[6]

But the Court finds that this case is distinguishable from the Campbell-Ewald case:

Plaintiffs’ reliance on Campbell-Ewald is misplaced. Here, the United States has not made an offer of judgment under Rule 68 or any other kind of offer. The Internal Revenue Service (“IRS”) issued a refund check, not an offer. The Plaintiffs are certainly entitled to decide for themselves whether to deposit the check tendered by the IRS, but their failure to do has no bearing on whether there remains a live case or controversy for the Court to adjudicate. The United States explains, “[r]efunds are simply what happens when payments exceed liability on a taxpayer’s IRS account.” (Doc. No. 53 at 3). The United States does not “ask” taxpayers if they will accept a refund. The refund is simply issued upon determination of an overpayment. See 26 U.S.C. § 6402(a) (“In the case of an overpayment, the Secretary . . . shall refund any balance to [the person who made the overpayment].”).[7]

The taxpayers next argue that even if the claim for refund is moot, they can obtain prospective relief under the refund statute, and thus they still have a live claim for the Court to rule upon. But the opinion finds otherwise:

Two statutes appear to foreclose forward-looking relief. The Declaratory Judgment Act, 28 U.S.C. § 2201(a), which allows federal courts to declare the rights of parties in cases of actual controversy, specifically excepts declaratory relief with respect to federal taxes (except under circumstances not appliable here). See 28 U.S.C. § 2201(a) (permitting federal courts to declare the rights of the parties “except with respect to Federal taxes”). Further, the Anti-Injunction Act bars suits “for the purpose of restraining the assessment or collection” of taxes. 26 U.S.C. § 7421(a); see Christian Coalition, Inc. v. United States, 662 F.3d 1182, 1192 (11th Cir. 2011) (“[T]he district [court] correctly concluded it was without jurisdiction to entertain a suit containing solely forward-looking claims seeking declaratory and injunctive relief from the IRS. These type of suits are expressly proscribed by the [Declaratory Judgment Act] and the [Anti-Injunction Act].”). Moreover, the claim Plaintiffs bring here, a civil action for a refund under 26 U.S.C. § 7422, is necessarily backward-looking. By its terms, claims under this Section are “for the recovery of any internal revenue tax alleged to have been erroneously assessed or collected, or of any penalty claims to have been collected without authority, of any sum alleged to have been excessive or in any manner wrongfully collected.” Even if prospective relief were available in the context of a refund suit, there is nothing to suggest that Plaintiffs could proceed with an action involving only prospective tax relief.

Plaintiffs argue that in Bob Jones University v. Simon the Supreme Court “previewed” that prospective relief sought in a refund suit would not violate the Anti-Injunction Act. (Doc. No. 51 at 19-20 (citing Bob Jones University v. Simon, 416 U.S. 725, 748 n.22 (1974))). This is an inaccurate representation of that opinion. In Bob Jones, which was not brought as a refund suit, the Court held that Bob Jones University could not enjoin the IRS from revoking its tax-exempt status because such action was barred by the Anti-Injunction Act and the university could litigate the issue in a refund suit. Bob Jones, 416 U.S. at 746. The Court explained, that if the university had taxable income after the withdrawal of its tax-exempt status, its judicial remedy was to either petition the Tax Court to review the assessment, or pay the taxes and then bring suit for a refund. Id. The Court recognized that these avenues offered a “delayed” opportunity to litigate the revocation of its tax status and noted the practical problems with the approach. Id. at 747. The Court concluded, however, that “the problems presented do not rise to the level of constitutional infirmities, in light of the powerful governmental interests in protecting the administration of the tax system from premature judicial interference . . . and of the opportunities for review that are available.” Id. (internal citations omitted). The Court specifically declined to address whether injunctive relief is possible in a refund suit. Id. at 747, n.22.[8]

Finally, the taxpayers argue that, regardless of the above, they meet an exception to mootness:

Plaintiffs argue that even if the issuance of a refund moots their claim, the Court nevertheless retains jurisdiction because the claim falls within the exceptions to mootness. (Doc. No. 51 at 12). There are two exceptions to the mootness doctrine. First, voluntary cessation of the challenged conduct does not moot a case unless it is “clear that the allegedly wrongful behavior could not reasonably be expected to recur.” United States v. Concentrated Phosphate Exp. Ass’n, 393 U.S. 199, 203 (1968). Second, a case will not become moot if the injury is “capable of repetition yet evading review.” Plaintiffs add that the Sixth Circuit has also suggested that a claim will not be moot if it is “capable of repetition and one of public importance.” (Doc. No. 51 at 12 (citing Drs. Hill & Thomas Co. v. United States, 392 F.2d 204 (6th Cir. 1968)).[9]

But the Court rejects this theory as well:

This exception is inapplicable for a simple reason, the United States’ refund of the claimed overpayment of income tax is not “voluntary cessation of conduct.” The United States has not changed the tax rules or regulations and does not claim to have changed its position. It has merely refunded Plaintiffs the overpayment requested. Even if the “wrongful conduct” is defined as failing to refund tax overpayment for the 2019 tax year, there is no reasonable expectation that the conduct will recur. The instant controversy was limited to whether Plaintiffs were entitled to a refund of taxes paid for the 2019 tax year. This particular issue is not reasonably expected to recur, given that any subsequent controversy would necessarily involve a different tax year. Christian Coalition, 662 F.3d at 1196 (“The tax amounts in dispute and the nature of the claim for a refund are specific to each individual tax year.”).

…

Plaintiffs also argue that a decision on whether Tezos tokens created through “staking” are taxable income is of significant public importance because there are other taxpayers who engage in the same activity. The Court is not persuaded that the existence of an unanswered tax question, which is unquestionably of interest to the group of taxpayers who create Tezos tokens, provides an exception to mootness in this case. [10]

[1] Jarrett et al v. United States, US District Court MD Tennessee, Case No. 3:21-cv-00419, September 30, 2022, https://www.taxnotes.com/tax-notes-today-federal/cryptocurrency/cryptocurrency-staking-refund-suit-dismissed-moot/2022/10/04/7f6wz (subscription required, retrieved October 4, 2022)

[2] Jarrett et al v. United States, US District Court MD Tennessee, Case No. 3:21-cv-00419, September 30, 2022

[3] Jarrett et al v. United States, US District Court MD Tennessee, Case No. 3:21-cv-00419, September 30, 2022

[4] Jarrett et al v. United States, US District Court MD Tennessee, Case No. 3:21-cv-00419, September 30, 2022

[5] Jarrett et al v. United States, US District Court MD Tennessee, Case No. 3:21-cv-00419, September 30, 2022

[6] Jarrett et a v. United States, US District Court MD Tennessee, Case No. 3:21-cv-00419, September 30, 2022

[7] Jarrett et al v. United States, US District Court MD Tennessee, Case No. 3:21-cv-00419, September 30, 2022

[8] Jarrett et al v. United States, US District Court MD Tennessee, Case No. 3:21-cv-00419, September 30, 2022

[9] Jarrett et al v. United States, US District Court MD Tennessee, Case No. 3:21-cv-00419, September 30, 2022

[10] Jarrett et al v. United States, US District Court MD Tennessee, Case No. 3:21-cv-00419, September 30, 2022