BankUnited, Inc. v. United States of America, US District Court Southern District of Florida, Case no. 1:23-cv-20379-KMM[^1], revolves around a tax refund dispute initiated by BankUnited, Inc. (BUI) against the United States of America. The dispute arose from BUI’s 2009 acquisition of a failed bank and the subsequent tax treatment of the acquired assets.

The central issue concerns BUI’s classification of certain assets, specifically loans held by a subsidiary REIT, and its attempt to deduct losses related to those assets in a later tax year after the statute of limitations for the original tax year had expired--and if the treatment the taxpayer had initially used was a method of accounting or a series of errors in reporting income on each return. The court granted the government’s motion for summary judgment, denying BUI’s refund claim.

Factual Background

• Acquisition of Failed Bank: In May 2009, BUI acquired a failed bank that had been placed into Federal Deposit Insurance Corporation (FDIC) receivership. The assets acquired included cash, investment securities, a portfolio of loans secured by real estate, other real estate owned properties, and stock in BU REIT, a subsidiary real estate investment trust. BUI also assumed liabilities of the failed bank in the amount of $12,766,043,000. As part of the acquisition, BUI entered into loss-sharing agreements with the FDIC covering certain residential and commercial loans.
• Classification of Assets: For tax purposes, BUI was required to categorize the acquired assets into seven classes based on liquidity, following Treasury Regulations §§ 1.597-5(c) and 1.338-6(b), (c)(1) and (2). BUI classified the real estate loans it directly acquired, and the loans held by BU REIT, as Class II assets. The court noted that while BUI directly owned the real estate loans, BUI did not directly own the loans held by BU REIT.
• Section 597 Basis: IRC §597 governs the “Treatment of transactions in which Federal financial assistance provided” per the section’s title. BUI assigned a fair market value of $1,946,945,094 to the loans held by BU REIT. This value was termed the “Section 597 Basis”. BUI included this amount as part of its Class II assets. The court noted that if BUI had not included the fair market value of the BU REIT Loans in its Class II assets, BankUnited’s purchase price of $12.766 billion would have been greater than the fair market value of the Class I and Class II assets it acquired. Under I.R.C. § 597, if a bank’s purchase price exceeds the fair market value of the Class I and Class II assets it acquires, the bank is not required to recognize any income. Thus, no Section 597 income would have been reported on subsequent returns.
• Liquidation of BU REIT: On November 30, 2011, BU REIT was liquidated in a tax-free transaction under I.R.C. § 332. Following the liquidation, BUI continued to account for BU REIT’s assets and liabilities, including any tax attributes, in the same manner as BU REIT had.
• IRS Audit and Initial Refund: In 2015, the IRS selected BUI’s 2013 income tax return for examination, which was later expanded to include 2014. BUI then filed a claim for refund for 2012, arguing that it had incorrectly reported income as “§ 597 Gain”. The IRS allowed BUI’s claim for 2012 and made adjustments for 2013 and 2014, issuing refunds totaling $289,630,554 (exclusive of interest). The IRS did not issue refunds for 2009, 2010, or 2011, as the statute of limitations for those years had expired.
• 2019 Refund Claim: In 2019, BUI filed an amended return, claiming a $1,104,002,623 “independent capitalized asset”. This amount was calculated by subtracting the previously refunded § 597 gain from the value of the BU REIT loans BUI had originally classified as Class II assets. BUI claimed a tax deduction under I.R.C. § 165 for a “Loss on 597 Asset” or, in the alternative, argued that the Section 597 Basis should be treated as a premium paid on the loans, amortizable over 15 years. BUI argued that the Section 597 Basis existed only because of the FDIC Loss Guarantees, which terminated in 2019, thus the basis should be deductible in that year. This refund claim was denied, which led to the lawsuit. BUI conceded that its refund request stemmed from the classification of the Failed Bank for the 2009, 2010, and 2011 tax years and that the statute of limitations for those years had lapsed.

Court’s Application of Law and Regulations

• Jurisdiction and Statute of Limitations: The court first addressed whether it had subject matter jurisdiction, which depends on whether the refund claim was timely filed. The court cited Mut. Assur., Inc. v. United States, 56 F.3d 1353, 1355 (11th Cir. 1995), which states that the U.S. is immune from suit unless it consents to be sued. The U.S. has waived this immunity to allow taxpayers to file actions seeking tax refunds. The court also cited 28 U.S.C. § 1346(a)(1), which allows taxpayers to sue the government for tax refunds. However, the court noted that a timely administrative refund claim is a jurisdictional prerequisite for maintaining a tax refund suit. Citing Mut. Assur., 56 F.3d at 1355 and I.R.C. § 6511(a), the court stated that a taxpayer must file an administrative claim for refund with the IRS within three years from the time the return was filed or two years from the time the tax was paid, whichever of such periods expires later. The court stated that a taxpayer who fails to file an administrative claim for refund within the time frame required in I.R.C. § 6511(a) is barred from filing a refund suit in the district courts. The court cited Vintilla v. United States, 931 F.2d 1444, 1446 (11th Cir. 1991) which held that general principles of equity may not override the statutory requirements for timely filing of tax refund claims. The court explained that this requirement is jurisdictional and that claims for erroneously paid taxes are not entitled to equitable tolling. The court also cited United States v. Brockamp, 519 U.S. 347, 354 (1997), which held that Congress did not intend the equitable tolling doctrine to apply to § 6511’s time limitations. The court noted that once the statute of limitations for a given tax year has expired, the court is without jurisdiction to adjudicate the merits. The court held that BUI’s attempt to claim a deduction in 2019 was essentially an attempt to circumvent the statute of limitations for the 2009-2011 tax years, for which the statute of limitations had expired in 2015, as conceded by BUI. Because BUI’s claim was directly related to those previous years, the court determined it did not have jurisdiction.
• Duty of Consistency: Even if the statute of limitations had not run, the court ruled that BUI was barred from asserting its claims based on the duty of consistency. The court cited Kielmar v. Comm’r, 884 F.2d 959, 965 (7th Cir. 1989), which held that the duty of consistency applies when there is (1) a representation or report by the taxpayer, (2) on which the Commissioner has relied, and (3) an attempt by the taxpayer after the statute of limitations has run to change the previous representation or to recharacterize the situation in such a way as to harm the Commissioner. If this test is met, the Commissioner may act as if the previous representation, on which he relied, continued to be true, even if it is not. The court found that BUI had made a representation in a letter to the IRS in August 2016, before the statutory period for 2012 tax year expired, requesting a refund for 2012. The letter stated that the $1,946,945,094 of “phantom” basis assigned to the captive REIT’s loans may be viewed as giving rise to an improper method of accounting or series of errors. The letter also stated that BUI requested the IRS determine whether BUI was entitled to a correction for its previous treatment of the captive REIT’s loans and whether this correction would be made under the accounting method change procedures or by way of amending prior year tax returns. The court noted that after receiving this request, the IRS found BUI incorrectly classified the BUI REIT as a Class II asset and issued BUI $289,630,554 (exclusive of interest) for tax years 2012, 2013, and 2014, collectively. The court noted that the IRS relied on the assertion that BUI had made an error when it issued the refund. The court held that because BUI requested the IRS determine if it was entitled to a correction, and because the IRS granted BUI a refund based on this assertion, BUI could not now argue it had followed the § 597 regulations. The court stated that BUI was estopped from arguing that its original classification of the BU REIT loans was correct and claim a deduction related to that classification.

Why Does It Matter Whether the Reporting of 597 Gain Was an Accounting Method or an Error?

The question of whether BankUnited, Inc.’s (BUI) treatment of loans under Section 597 of the Internal Revenue Code was a method of accounting or an error is crucial because it impacts the availability of tax refunds and deductions. The IRS initially allowed BUI’s claim for a refund for 2012 and made adjustments for 2013 and 2014 to remove the Section 597 income, which suggests the IRS viewed BUI’s initial reporting as an error. However, BUI’s subsequent attempt to claim a deduction in 2019 based on the same underlying issue was challenged by the IRS, which argued the claim was an attempt to circumvent the statute of limitations for tax years 2009-2011.

Here’s why the distinction is important:

• Statute of Limitations: If BUI’s treatment of the loans was simply an error, then the statute of limitations for claiming a refund for those errors would apply. The statute of limitations for 2009, 2010 and 2011 tax periods had expired by December 2015. The court notes that tax refund claims are not entitled to equitable tolling, so even if BUI learned of the error after the statute of limitations had passed, their claim would still be considered untimely. If it was an error, BUI would be barred from claiming a refund for those years.
• Method of Accounting: If the treatment was a method of accounting, the taxpayer would have had available a Section 481(a) adjustment to indirectly recover the overpaid tax, by claiming a deduction for the income reported under the method of accounting it had used in excess of what would have been reported under the proper method the corporation was now going to use. If it was an accounting method, BUI could potentially change their method of accounting prospectively via filing a Form 3115 (creating a reduction in tax in the year of change). It would still be barred from amending past returns once the statute of limitations had expired, but it would no longer be asking for any refunds directly from those years.

BUI’s argument was that its initial classification of the loans was a series of errors, and thus they were entitled to refunds for the overpayment of taxes. In its claim for a refund for 2012, BUI stated that the $1,946,945,094 of “phantom” basis assigned to the captive REIT’s loans may be viewed as giving rise to an improper method of accounting or series of errors. BUI also requested that the IRS determine whether BUI was entitled to a correction and whether that correction would be made under the accounting method change procedures or by amending prior year returns.

The IRS agreed with BUI that it had incorrectly classified the BUI REIT as a Class II asset, and issued refunds for 2012, 2013, and 2014. This suggests that the IRS viewed the issue as a series of errors. However, the IRS did not issue refunds for 2009, 2010, or 2011, as the statute of limitations for those years had lapsed.

BUI then tried to claim a deduction in 2019 for what it called an “independent capitalized asset,” which was based on the value of the BUI REIT loans they had classified as Class II assets, minus the amount of Section 597 gain previously refunded for tax years 2012, 2013 and 2014. BUI asserted that the Section 597 Basis existed only because of the benefit provided by the FDIC loss guarantees and that the benefit ended when the FDIC stopped financially compensating BUI. The court found that this was an attempt to circumvent the statute of limitations for 2009, 2010 and 2011. The court found that allowing this deduction would render the statute of limitations ineffective because any taxpayer could deduct overpaid taxes after the statute of limitations had expired.

The court also found that the duty of consistency applied in this case. The court determined that BUI had made a representation to the IRS, which relied on that representation, and BUI was now attempting to change that representation after the statute of limitations had expired. The court stated that BUI’s letter to the IRS requested that the IRS determine whether BUI was entitled to a correction. The court further stated that BUI did not simply “accept” an unsolicited refund, but that BUI had affirmatively asserted it was due the refund. The court also found that BUI’s claim that it had “strictly followed” the Section 597 regulations was contradicted by their admission that the reporting of the Section 597 income could be regarded as a series of errors.

In conclusion, the distinction between a method of accounting and an error was critical for BUI because it determined whether they could claim refunds or deductions related to their classification of the loans under Section 597, given the statute of limitations. The court ultimately decided that whether the treatment of the loans was an accounting method or an error, BUI was barred from claiming the refund because they had asked the IRS to refund taxes from the open years if the agency determined that reporting was an error (as opposed to an erroneous method of accounting) and could not, after accepting that benefit, attempt to take a contrary position to attempt to indirectly recover taxes from the closed years.

[^1]: BankUnited Inc. v. United States, US District Court Southern District of Florida, Case No. 1:23-cv-20379, January 7, 2025, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/refund-stemming-failed-bank-acquisition-denied/7q150