A number of those with an interest in the taxation of virtual currencies, in particular those looking at the taxation of staking, had voiced excitement back in February over an announcement that the IRS had made a settlement offer in a case brought by Joshua Jarrett.[1]

As a news article authored by Cheyenne Ligon on the CoinBase website noted:

In December 2021, attorneys for the IRS wrote to Jarrett and his wife’s attorneys to inform them the IRS had been “authorized and directed to schedule an overpayment of $3,793, plus statutory interest.”[2]

Some took this news to suggest that there was now binding guidance that made staking income nontaxable.

However, it was important to note that while this offer was made in December of 2021, the “news” broke in February from information provided by the plaintiff whom, it was later noted, had rejected the offer.  Many of the articles on this issue relied heavily on comments from the acting executive director of the Proof of Stake Alliance, an industry group that Ms. Ligon noted was involved in funding the lawsuit[3] and, presumably, involved in the decision to take the offer public even as the taxpayers were rejecting (or at least attempting to reject) the offer.

In a follow-up article, Ms. Ligon noted the concerns expressed by many in the crypto-tax community regarding this development, and had the following quote from Seth Wilks, director of TaxBit:

“What happened is the IRS simply came out and said ‘Look, the issue before the court is whether or not you get a refund, and if we give you a refund the case is dead in the water – it just goes away’,” Wilks told CoinDesk. “And so, from a precedent-setting standard, there is no court ruling, there’s nothing to stand behind it.”[4]

This week the Justice Department confirmed Mr. Wilk’s suspicions on the reason for the settlement, filing a motion in the case to have it dismissed as being moot.[5]

The Memorandum begins by stating:

Plaintiffs Joshua and Jessica Jarrett sought a refund of $3,793, plus statutory interest, for their 2019 federal income taxes. The United States authorized and delivered the requested refund, with interest, to the Jarretts' counsel on February 14, 2022. This action therefore presents no case or controversy: it is moot. It should be dismissed under Rule 12(b)(1) of the Federal Rules of Civil Procedure.[6]

The government’s argument is that as this presents a case asking for $3,793 plus interest from the government, if the government agrees to pay back that amount there is no longer any relief being requested for the Court to grant.  The government argues:

What Plaintiffs really seek at this point is an advisory opinion. And since this Article III court lacks jurisdiction to issue advisory opinions, this action must be dismissed under Fed. R. Civ. P. 12(b)(1) for lack of jurisdiction.[7]

The memo continues:

Here, the United States granted a full refund of the amount the Jarretts asked for in the Complaint, with interest and without receiving anything in return. It was not an offer to compromise the case with each party giving up something. Thus, there is nothing left to adjudicate: Plaintiffs sued for a refund and received a full refund. When the United States tenders full payment of a refund — even during litigation — no case or controversy remains and the refund claim is moot. Drs. Hill & Thomas Co. v. United States, 392 F.2d 204, 205 (6th Cir. 1968); 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.”).[8]

Specifically, the government argues that the plaintiffs have no ability to force the Court to issue a ruling on why the refund is being granted:

Despite obtaining the full relief they ask for in their Complaint, the Jarretts believe this is still a “live” case or controversy because the Court has not yet ruled on whether staking rewards are taxable as income when received. They suggest in their letter that they can simply refuse the refund for which they sued in order to “vindicate their rights.” Dkt. No. 37. The Jarretts essentially argue they can continue this case to force the United States to explain why it granted the refund and then obtain an advisory opinion from the Court about those reasons. Not so. Roberts v. United States, No. 71-H-40, 1971 WL 428, at *1 (S.D. Tex. Oct. 20, 1971) (“The Court is not empowered to decide moot questions or abstract propositions, or to declare rules of law to be applicable in future cases but which are not in issue in the case in chief. As a result of the defendant's gesture in tendering the moneys which were the subject of the suit, there is no longer a case or controversy before this Court[.]”).[9]

The government argues as well that this case does not meet the limited exception to mootness that the matter is “capable of repetition yet evading review” as this is the first case the taxpayers have brought so there is no history of repeated cases escaping review.  Nor, argues the government, does this case meet the “voluntary cessation exception” since the IRS has agreed to close any inquiry into the tax return in question for these taxpayers.[10]

Unfortunately, I’ve seen some commentary that has overreacted to this motion in a similar, but opposite, manner as happened with the announcement of the IRS offer to refund back in February. In this case the Justice Department’s action does not establish that staking is taxable income, that the IRS will take the position such items are taxable income in the future, nor even that this case cannot move forward—rather, it is a request that the Court dismiss the case, a request the Court will eventually take up at a later date.

I suspect that the Justice Department will prevail in their motion, but even if they don’t we may not get anything near a precedential ruling in this matter unless this case progresses outside the District Court in Tennessee to at least the U.S. Court of Appeals.  So, unless the IRS actually issues guidance on the matter, those wanting absolute clarity on the taxation of staking aren’t likely to be satisfied anytime soon.  For even if the Justice Department prevails on this motion, that merely means there will be no ruling on the proper tax treatment of the transaction made in this case.

[1] Cheyenne Ligon, “IRS Offers Tezos Staker Refund on Rewards Tax in Break From Current Policy,” CoinDesk web site, February 3, 2022, https://www.coindesk.com/policy/2022/02/03/irs-offers-tezos-staker-refund-on-rewards-tax-in-break-from-current-policy/ (retrieved March 5, 2022).  Cheyenne’s articles in this area were the best this author ran into, providing key details, such as the relationship of those being quoted to the case and the fact that the offer was in the process of being rejected.

[2] Cheyenne Ligon, “IRS Offers Tezos Staker Refund on Rewards Tax in Break From Current Policy,” CoinDesk web site, February 3, 2022

[3] Cheyenne Ligon, “IRS Offers Tezos Staker Refund on Rewards Tax in Break From Current Policy,” CoinDesk web site, February 3, 2022

[4]  Cheyenne Ligon, “Crypto Tax Pros Throw Cold Water on Staking Excitement,” CoinDesk web site, February 9, 2022, https://www.coindesk.com/policy/2022/02/09/crypto-tax-pros-throw-cold-water-on-staking-excitement/ (retrieved March 5, 2022)

[5] Memorandum in Support of United States’ Motion to Dismiss, Joshua Jarrett et al. v. United States, Case No. 3:21-cv-00419, United States District Court Middle District of Tennessee, February 28, 2022, https://www.taxnotes.com/tax-notes-today-federal/cryptocurrency/refund-suit-moot-government-says-motion-dismiss/2022/03/02/7d7fw (subscription required, retrieved March 5, 2022)

[6] Memorandum in Support of United States’ Motion to Dismiss, Joshua Jarrett et al. v. United States, Case No. 3:21-cv-00419, United States District Court Middle District of Tennessee, February 28, 2022

[7] Memorandum in Support of United States’ Motion to Dismiss, Joshua Jarrett et al. v. United States, Case No. 3:21-cv-00419, United States District Court Middle District of Tennessee, February 28, 2022

[8] Memorandum in Support of United States’ Motion to Dismiss, Joshua Jarrett et al. v. United States, Case No. 3:21-cv-00419, United States District Court Middle District of Tennessee, February 28, 2022

[9] Memorandum in Support of United States’ Motion to Dismiss, Joshua Jarrett et al. v. United States, Case No. 3:21-cv-00419, United States District Court Middle District of Tennessee, February 28, 2022

[10] Memorandum in Support of United States’ Motion to Dismiss, Joshua Jarrett et al. v. United States, Case No. 3:21-cv-00419, United States District Court Middle District of Tennessee, February 28, 2022