If you pay tax for another party, can you recover the payment if the tax is not owed?
The answer is generally “no,” as you cannot sue the Federal government unless it consents and it only consents in limited circumstances. One such consent is the ability to sue for a refund. The rules that allow for a refund are limited to refund suits by the taxpayer. One might think that there is no remedy in this situation.
There may be another option, however. The Court of Federal Claims might be able to order a refund. The Roman v. United States, No. 2022-1015 (Fed. Cir. 2023) case provides an example of this. It involves an ex-husband who paid his ex-wife’s taxes and the question of whether he can sue the IRS to recover the taxes paid.
Taxpayers should take note of this case, as it can apply in a number of circumstances. While this case involves an ex-husband and ex-wife, the same principles can apply to a business owner or investor and a business, a trustee and a trust, etc.
Facts & Procedural History
This case involves a husband and wife who were divorced in 2009. As part of the divorce, the husband agreed to pay the wife $150,000 in exchange for the couple’s residence. The husband also agreed to pay for the income taxes that arose from the sale of the house. The wife reported the sale of the house on her income tax return and it triggered a $50,000 tax.
It is difficult to tell from the case, but it appears that the parties treated the transfer to the spouse as a sale. They apparently did not treat it as a transfer of assets between a then-married couple–which are generally not taxable. It also appears that the husband agreed to pay the tax, as he believed there would be no tax given the $500,000 exemption allowable for the sale of a primary residence. Continuing to read between the lines, it appears that the wife or her tax preparer did not know about the $500,000 exclusion, which is why income taxes was triggered in the first place.
The court opinion does say that the IRS revenue officer attempted to collect the taxes but did not accept the taxpayer’s husband’s explanation that no tax was due, and the IRS revenue officer threatened to collect the taxes by levying on the now ex-husband’s house. This part of the court opinion seems a little odd too, as the IRS generally does not have a lien against property owned by a third party–particularly if they paid fair market value for it and no lien notice was filed by the IRS (it would likely even have to be a nominee lien in a case like this, which is rare).
Regardless, the now ex-husband paid his wife’s $50,000 income taxes, filed a refund claim, and sued for a refund. The Federal Court of Claims found in his favor, and the IRS appealed.
About the Federal Claims Court
Before getting into the issues in this case, we should stop to consider the courts at issue as this issue is unique to this court.
The trial court was the United States Court of Federal Claims. This is a court that is open to all taxpayers for just about every type of tax matter that involves a refund claim.
The court was established by the Tucker Act in 1887 and has exclusive jurisdiction over certain types of cases involving monetary claims against the Federal government, including claims for breach of contract, takings of private property by the government, and claims under certain federal statutes. This includes Federal tax litigation to recover refunds.
The court is composed of sixteen judges who are appointed by the President with the advice and consent of the Senate. The court has its own set of procedural rules, and its decisions are subject to appeal to the United States Court of Appeals for the Federal Circuit. The Federal Circuit court is the appellate court that issued the current decision.
Is the Ex-Husband the “Taxpayer”
With that background, we can get to the questions in the case. The first question the court had to address was whether the ex-husband was the “taxpayer” who could file a refund suit. This starts with an analysis of Section 1346(a)(1) of Title 28 of the United States Code.
Section 1346(a)(1) deals with the jurisdiction of courts. Section 1346(a)(1) gives the district courts original jurisdiction, concurrent with the United States Court of Federal Claims, over any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under our tax laws. When it comes to taxes, this works in tandem with Section 6511 of the tax code.
Section 6511 allows taxpayers to file suits against the IRS to recover tax refunds. It sets out the rules for the statute of limitations for filing refund claims with the IRS for overpaid taxes. Generally, a taxpayer must file a claim for a refund within three years from the time the original tax return was filed or within two years from the time the tax was paid, whichever is later. There are other nuanced rules, naturally. We don’t need to get into those rules for this post.
This court only addressed the Section 6511 rules in the context of the question of who is the “taxpayer.” The trial court found that the now ex-husband was the “taxpayer” even though the tax was only assessed against his ex-wife. The appeals court reversed, as the case law is clear that the taxpayer means the taxpayer, not their former spouse. This part of the court’s opinion is expected. The next part of the court’s ruling was not.
Can the Ex-Husband Sue Under a Contract Theory
The appeals court then went on to consider whether the now ex-husband had pleaded a contractual claim against the government under 28 U.S.C. § 1491(a)(1).
Section 1491(a)(1) grants the United States Court of Federal Claims jurisdiction over any claim against the United States founded either upon the Constitution, federal statutes, executive regulations, or contracts, expressed or implied in law or fact. The court has the power to award money damages and other appropriate relief, such as declaratory judgments or injunctive relief, if a claimant proves their entitlement to such relief.
The court cited its prior court cases for the proposition that “a party who pays a tax for which he is not liable may sue to recover that tax if it was paid under duress because the duress creates an ‘implied in fact contract.'” This is the Collins v. United States, 532 F.2d 1344 (Fed. Cir. 1976) case in which a business owner voluntarily paid the tax liability for his company. The court in Collins said that the IRS’s acceptance of the payment in issue created a contract implied in fact even though the plaintiff was not a taxpayer entitled to maintain an action for the overpayment of taxes. According to the court, the court can order a refund if the payment was not voluntary:
In order to consider this question, we first have to examine the voluntariness of plaintiff’s payment. In cases involving the payment of tax liabilities by a third party, it is fundamental that the plaintiff cannot recover if the payment in issue was voluntary and the plaintiff bears the burden of proving some element which would remove him from the category of volunteer.
In the present case, the court noted the ex-husband’s arguments for this position:
Mr. Roman argues that the IRS agent’s action “put Roman under duress to pay his ex-wife’s taxes.” Appellee’s Br. 2. Supporting that argument are factual allegations that (1) Roman paid the tax “in protest,” suggesting involuntary acceptance, J.A. 27-28; (2) Roman advocated for his position to the IRS agent, who told him that he nonetheless had to pay, suggesting no alternative; and (3) the IRS threatened to levy his home, suggesting a coercive act.
Based on these arguments, the appeals court concluded that the ex-husband might in fact be able to sue the government to recoup the payment he made for his wife’s income taxes. The appeals court remanded the case to the trial court to rule on this issue.
Other Options to Consider
This may not have been the party’s only remedy in this case. The ex-wife may also have been able to file a refund claim and, if disallowed, the ex-wife could pursue litigation. This would have resulted in the ex-wife recovering the refund. The ex-husband may have then had to use the family law court to recoup the funds from the ex-wife.
The parties may have also filed a collection due process hearing request in response to the IRS levy notice and challenged the issue in the U.S. Tax Court. With this option, at least the funds would not have been paid to the IRS in the first place. It is often easier to fix errors when the IRS does not already hold the funds, as getting the funds back can add an additional layer of complexity.
The husband may also have found some relief by reporting the payment as alimony to his ex-wife. The law allowed for such a deduction in the tax years at issue. While this may not have made him whole, it might have mitigated the issue. In fact, it may be that the ex-husband can still pursue this remedy even with the $50,000 award from the court.
There are times when one party pays taxes for another taxpayer. As evidenced by this case, the IRS maintains its position that the third party cannot recover these funds. The courts are generally closed to the third party. There is an exception for the Federal Claims Court. It may be able to order a refund if the third party paid the taxes involuntarily. If taxes are paid to the IRS by a third party, it is good to know that the third party–such as an ex-husband–may be able to sue the government to recoup their overpayments.