Veteran's Refund Action for Tax Paid on Recouped Separation Pay Was Time-Barred

(Parker Tax Publishing July 2022)

The Federal Circuit affirmed the dismissal of a tax refund action brought by a U.S. Navy veteran because the veteran filed the refund claim outside of the time limits provided in Code Sec. 6511(a) and those time limits are jurisdictional and not subject to equitable tolling. As a result, the veteran could not recoup taxes he paid on Navy separation payments received in 1997 which he was required to repay in order to receive Navy retirement payments beginning in 2015. Forrest v. U.S., 2022 PTC 194 (Fed. Cir. 2022).

Background

Thomas Forrest served in the U.S. Navy. In 1997, he separated from active duty and received a separation payment of $45,877, of which $12,845 was withheld for tax purposes. Subsequently, Forrest joined the Navy Reserves for several years, after which he rejoined active duty with the Navy. In 2015, Forrest retired from active duty and became eligible for retirement payments. Because service members cannot receive both separation and retirement pay for the same period of service, the Defense Finance and Accounting Service determined that the gross pre-tax amount of Forrest's 1997 separation payment would be deducted from his retirement payments as required by 10 U.S.C. Section 1174(h)(1), even though he had dutifully paid income taxes on that amount in 1997.

On May 20, 2016, Forrest and his wife, Jamie, filed an amended 1997 tax return seeking to exclude the separation payment as taxable income and to obtain a refund of $12,838 based on taxes previously paid on the separation payment. The IRS denied the claim, after which the Forrests initiated a tax refund action in the Court of Federal Claims. The government moved to dismiss the Forrests' complaint on the basis that the tax refund request was not timely filed with the IRS prior to the bringing of the action as required by Code Sec. 7422(a). The Court of Federal Claims granted the motion and dismissed the action for lack of subject matter jurisdiction. The Forrests appealed to the Federal Circuit.

Under Code Sec. 7422(a), a taxpayer can bring a tax refund action against the government only after filing a timely refund claim with the IRS. To be considered timely, Code Sec. 6511(a) provides that a refund claim must ordinarily be filed with the IRS within three years from the time the return was filed or two years from the time the tax was paid, whichever is longer. In U.S., v. Dalm, 494 U.S. 596 (S. Ct. 1990), and U.S. v. Brockamp, 519 U.S. 347 (S. Ct. 1997), the Supreme Court held that these time limits are jurisdictional and not subject to any equitable tolling.

Analysis

The Federal Circuit affirmed the dismissal of the Forrests' refund action. The Federal Circuit noted that the Forrests first sought a tax refund for the 1997 tax year on May 20, 2016, when they filed an amended 1997 tax return. Because their request fell well outside the time limits set forth in Code Sec. 6511(a), the Federal Circuit held that the Court of Federal Claims correctly dismissed the action for lack of subject matter jurisdiction.

The court said that it was sympathetic to the Forrests' argument that Code Sec. 6511(a) and 10 U.S.C. Section 1174(h)(1) lead to an unfair result for veterans who dutifully paid taxes on a separation payment, only to learn years later that they must pay back the gross separation payment before receiving retirement pay. However, the court reiterated that the time limits of Code Sec. 6511(a) are jurisdictional and not subject to tolling for equitable reasons.

For a discussion of the tax consequences relating to the interaction of military separation pay and military retirement pay, see Parker Tax ¶15,355.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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