Kaffenberger v. U.S., 01-2171.

• Decision Date: 03 January 2003
• Docket Number: No. 01-2171.,No. 01-2919.,01-2171.,01-2919.
• Parties: Edward J. KAFFENBERGER; Cora S. Kaffenberger, Appellees, v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

314 F.3d 944

Edward J. KAFFENBERGER; Cora S. Kaffenberger, Appellees, v. UNITED STATES of America, Appellant.

No. 01-2171.

No. 01-2919.

United States Court of Appeals, Eighth Circuit.

Submitted: January 14, 2002.

Filed: January 3, 2003.

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Joel McElvain, argued, Washington, DC (Eileen J. O'Connor and Bruce R. Ellisen, on the brief), for appellant.

Eugene G. Sayre, argued, Little Rock, Arkansas, for appellee.

Before WOLLMAN,¹ Chief Judge, HANSEN, Circuit Judge, and OBERDORFER,² District Judge.

HANSEN, Circuit Judge.

The United States appeals from the district court's judgment awarding Edward and Cora Kaffenberger refunds of overpaid income taxes based on a jury verdict that found that Edward and Cora Kaffenberger made a timely informal claim for a refund. The United States also appeals the district court's order requiring the United States to pay the Kaffenbergers' costs and attorneys' fees. We affirm in part and reverse in part the district court's judgment regarding the tax refunds and reverse its award of costs and fees.

I.

There is no dispute that the Kaffenbergers overpaid their tax liability for the years involved. The dispute revolves around whether they timely requested that the IRS give back the overpayment. Edward Kaffenberger was a partner in a partnership with his son. During the late 1980s and early 1990s, Edward was unable to obtain complete financial information about the partnership from his son. As a result, Edward and Cora failed to timely file their personal income tax return, Form 1040, for the years ending December 31, 1988, through December 31, 1993. For each of these years, the Kaffenbergers filed extension requests, which gave them an additional six months to file their returns, and made estimated payments by the tax return's due date in an attempt to cover each year's tax liability, except for the tax year 1990 as discussed below.

The Kaffenbergers filed their 1988 Form 1040 (which was due on October 15, 1990, after the applicable extensions) on February 11, 1991 reflecting a refund due of $26,794. The Form 1040 indicated that the refund should be applied to the following year's (1989) tax liability. The Kaffenbergers had already made an estimated payment of $35,000 against their 1989 tax liability. The Kaffenbergers received a notice from the IRS dated April 15, 1991, stating that they were due a refund of income taxes in the amount of $26,770. The notice of refund from the IRS led the Kaffenbergers to believe that the IRS had not applied the 1988 refund to the 1989 liability. The Kaffenbergers filed a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return (hereinafter "Automatic Extension Request") for their 1990 tax return on the same day they received the notice, April 15, 1991, a date open under the statute of limitations, and included the amount of $26,700 on the line of Form 4868 for "other payments and credits" to cover their estimated 1990 liability. Edward Kaffenberger testified that he did not make an estimated payment for 1990, as he had done for prior years, because he thought that the refund, as reflected in the notice from the IRS, would cover the estimated 1990 liability. At the time the Form 4868 Automatic Extension Request was filed for 1990, the Kaffenbergers had not yet completed their Form 1040 tax return for 1989.

In 1993, the IRS contacted the Kaffenbergers to discuss the tax returns that they had failed to file. An IRS agent began an audit and undertook to prepare the Kaffenbergers' 1989 Form 1040 on November 30, 1993. The Kaffenbergers retained a Certified Public Accountant (CPA) to prepare their Form 1040s for 1990 through 1992 and submitted those returns to the IRS agent in December 1993. The Form 1040 returns for tax years 1990 through 1992 were filed on March 14, 1994. The 1990 return showed that the Kaffenbergers owed $36,329 to the IRS, as no estimated payments had been made for 1990, and the 1989 return had not yet been completed. The taxpayers received refunds for the 1991 and 1992 returns, which are not in dispute. The IRS agent did not finish and file the 1989 return until July 29, 1994. When the 1989 return was originally prepared by the IRS agent and signed by the Kaffenbergers, it reflected the estimated payment for 1989 of $35,000 and the overpayment from 1988 of $26,770, which totaled $61,770, as payments to be applied against the 1989 liability, resulting in an overpayment in 1989 of $38,309. (Appellant's App. at 35-36.) The IRS agent told the Kaffenbergers that the $38,309 could be applied to the taxes still due on the 1990 return, leaving liability only for penalties and interest. The Kaffenbergers gave the IRS agent a check for $12,161 to cover the penalties and interest on July 24, 1994.

The IRS agent called the Kaffenbergers back later the same day and informed them that the $38,309 refund from 1989 could not be used to offset the 1990 tax liability because the statute of limitations for claiming the refund from 1989 had expired. The IRS deemed the 1989 return, filed July 29, 1994, to be the refund claim. The IRS sent formal notice of the denial of the refund claim on April 28, 1995. (Id. at 29-30.) The taxpayers filed Form 1040X for 1989 on September 26, 1995, claiming an additional $3,286 refund based on errors made by the IRS agent in preparing the original return related to depreciation and SEP contributions. (Id. at 37-38.) That claim was also denied as beyond the statute of limitations in a notice dated October 24, 1995. (Id. at 31-32.) The IRS applied overpayments from the years 1994 through 1996 totaling $17,256 toward the Kaffenbergers' 1990 liability. Even after application of the overpayments, the IRS claimed that the Kaffenbergers owed over $64,000, stemming from the 1990 tax liability and related penalties and interest. The Kaffenbergers filed Form 1040X for each of the tax years 1994, 1995, and 1996, in November and December 1997, seeking refund of the overpayments applied to the 1990 liability. The IRS did not respond to those forms.

On October 17, 1997, the Kaffenbergers and the IRS signed two Form 907 Agreements to Extend Time to Bring Suit (hereinafter "Form 907 Agreement") until December 31, 1998; one covered the tax period ending December 31, 1989, and one covered the tax period ending December 31, 1990. The taxpayers filed suit on December 31, 1998, seeking refunds from 1989 (based on the original Form 1040 return and the amended Form 1040X return), refunds from 1994 through 1996 for the overpayments that were applied to the 1990 liability, and an order that the 1990 taxes were paid in full. The district court denied the government's motion to dismiss for lack of jurisdiction, based on the allegation that the suit was untimely filed, or for summary judgment, based on the allegation that the administrative refund claims were untimely. The district court found that the government had waived its sovereign immunity when it entered the Form 907 Agreements and found that a fact issue existed regarding whether the Kaffenbergers made an informal claim for refund.

The case proceeded to trial on the issue of whether the Kaffenbergers made a timely request for refund of the 1989 overpayment. The jury returned a special verdict, finding that the Kaffenbergers established "by a preponderance of the evidence that they filed an informal claim for their refund of their 1989 tax overpayment before October 15, 1993." (Appellant's App. at 14.) On March 9, 2001, the district court entered judgment for the Kaffenbergers, ordering a refund of $17,778 and ordering the abatement of the IRS's claim for income taxes related to 1990 in its entirety. On June 5, 1991, the district court granted the Kaffenbergers' motion for costs and attorneys' fees, but limited the fee rate to $125 per hour instead of the requested $175 per hour.

The government now appeals the district court's judgment, arguing that the district court erred in denying its motion for judgment as a matter of law on the informal claim issue, and that the district court lacked jurisdiction to order a refund related to the original 1989 return as well as the overpayments from 1994 through 1996 that were applied to the 1990 liability, and lacked jurisdiction to order the abatement of the 1990 tax liability. The government also appeals the district court's order granting costs and attorneys' fees to the Kaffenbergers.

II.

The government's appeal involves two statutes of limitations: one governing the time in which a taxpayer may administratively claim a refund from the IRS, and one governing the time in which a taxpayer may bring suit against the United States for recovery of a refund withheld by the IRS. We begin by addressing the statute of limitations for bringing suit, as the outcome of that issue determines the district court's jurisdiction over the bulk of this case.

A. Statute of Limitations for Bringing Suit Against the United States

Sovereign immunity protects the United States from being sued unless Congress has expressly waived the government's immunity. United States v. Shaw, 309 U.S. 495, 500-01, 60 S.Ct. 659, 84 L.Ed. 888 (1940); United States v. Kearns, 177 F.3d 706, 709 (8th Cir.1999). A district court lacks jurisdiction to hear a case against the United States unless its sovereign immunity has been waived, and the court's jurisdiction is limited by the scope of the waiver. Kearns, 177 F.3d at 709. "[A] waiver of the government's sovereign immunity will be strictly construed, in terms of its scope, in favor of the sovereign." Lane v. Pena, 518 U.S. 187, 192, 116 S.Ct. 2092, 135 L.Ed.2d 486 (1996). Once consent has been expressly provided and its scope defined, however, the waiver of immunity is liberally construed within the parameters of the consent. Shaw, 309 U.S. at 501, 60 S.Ct. 659.

Congress has expressly waived sovereign...