Court allows taxpayer’s refund suit to proceed

A district court recently rejected a magistrate’s recommendation to dismiss a refund suit, holding that the taxpayer had an “arguably colorable claim” as to whether the court had jurisdiction to hear the action.

Facts: Krystal M. Johnston timely filed her 2019 Form 1040, U.S. Individual Income Tax Return, claiming a total refund of $6,477. Her return was subsequently audited by the IRS, which proposed to reduce her income tax withholding by $864, disallow her claimed earned income tax credit (EITC) and additional child tax credit (ACTC), and change her filing status to single. Johnston “did not properly contest the audit” or file a petition with the Tax Court, as a result of which the IRS adjusted Johnston’s income tax withholding, disallowed her EITC and ACTC, changed her filing status to single, and assessed her $69 of income tax. The IRS issued Johnston a total refund of $640.91.

Johnston filed suit in district court. She alleged that she could file suit under Sec. 7422(a), pursuant to Sec. 6532(a)(1), because six months had expired from the filing of her refund claim.

In his recommendation report to the district court, Magistrate Judge Mitchell Katz recommended that the case be dismissed without prejudice and with leave to amend, claiming that Johnston’s federal claim was untimely because she failed to file an administrative claim for her refund. Katz further concluded that since the federal claim was untimely, the government did not waive its sovereign immunity, so the district court did not have subject matter jurisdiction over Johnston’s action. Katz therefore recommended dismissal without prejudice to determine whether equitable tolling applied to Johnston’s action.

Johnston objected to Katz’s recommendation that she was required to file a new administrative claim, beyond her 2019 income tax return before the case could commence in district court. She contended that her 2019 income tax return constituted her required refund claim. Johnston further contended that she was not required to submit a second administrative claim prior to suing, claiming that the district court case relied on by Katz was “factually distinct and [did] not warrant a dismissal based on a jurisdictional defect in this case” (Houghmaster, No. 5:17-cv-1328 (FJS/ATB) (N.D.N.Y. 1/15/20)).

Issues: Absent a waiver, the federal government and its agencies are shielded from suit under the doctrine of sovereign immunity (Federal Deposit Insurance Corporation v. Meyer, 510 U.S. 471 (1994)). A waiver must be “‘unequivocally expressed’ in statutory text,” with its scope strictly construed in favor of immunity (Federal Aviation Administration v. Cooper, 566 U.S. 284 (2012)). The terms of the United States’ consent to be sued “in any court defines that court’s jurisdiction to entertain that suit” (Meyer, 510 U.S. at 475). If the precise terms of the waiver are not met, the court does not have jurisdiction to hear the action (Kirsh, 131 F. Supp. 2d 389 (S.D.N.Y. 2000)).

Through 28 U.S.C. Section 1346, Congress has broadly consented to suits brought in district court where a taxpayer has sought a refund of taxes that were alleged to be erroneously assessed or collected against them (Kirsh, 131 F. Supp. 2d at 391). Despite its “spacious terms,” 28 U.S.C. Section 1346(a)(1) must be read in conformity with “other statutory provisions which qualify a taxpayer’s right to bring a refund suit upon compliance with certain conditions” (Dalm, 494 U.S. 596, 601 (1990)). Prior to a plaintiff’s bringing suit, Sec. 7422(a) requires a claim to be duly filed with the IRS. This means that the claim must be filed within the statutory period prescribed by Sec. 6511 (Kirsh, 131 F. Supp. 2d at 391). Sec. 7422(a) requires a taxpayer to have either received a notice of denial from the IRS or failed to have received one within six months after its filing. Sec. 6532 further requires that the suit be brought in federal court within two years of receiving notice from the IRS that the taxpayer was denied a refund. Since the government’s waiver is predicated on timely filing of a suit, the “statute of limitations requirement is jurisdictional” (Dalm, 494 U.S. at 608). The court further noted that “statutes of limitation are jurisdictional in tax cases,” meaning if a statute of limitation has not been complied with, Congress has not given its consent to suit (Costa, No. 97-cv-2688 (E.D.N.Y. 8/2/99)). Absent such compliance with the statute of limitation, a court lacks jurisdiction over a case.

Katz’s recommendation to dismiss Johnston’s case relied on two separate but related deficiencies he found in the filing of her action. First, Katz concluded that Johnston did not “duly file a claim” since she did not bring a new administrative claim after her 2019 return was audited, which resulted in her being issued an “adjusted tax refund.” In coming to this conclusion, Katz relied on Houghmaster, in which the court stated that “after a taxpayer is denied a claim for a refund made on his 1040 tax return form, he must file a new claim, called an ‘administrative claim,’ with the Treasury Secretary before filing suit” (slip op. at 3). Johnston suggested that other than being factually distinct from her case, Houghmaster “improperly interpreted the prerequisite requirement as it relates to claims for refunds from individual original income tax returns.” To support her position, Johnston pointed to Regs. Sec. 301.6402-3(a)(5), which provides that “[a] properly executed individual … original income tax return or an amended return … shall constitute a claim for refund or credit within the meaning of [Sec.] 6402 and [Sec.] 6511 for the amount of the overpayment disclosed by such return.” This position was not advanced by the defendant in Houghmaster. Johnston also contended that one other court in the Second Circuit relied on Regs. Sec. 301.6402-3(a)(5) for the premise that an “individual original income tax return does constitute a proper claim for refund in the context of a civil action for wrongfully denied income tax return refunds” (Suvak, No. 12 Civ. 6004, slip op. at 2 (S.D.N.Y. 5/21/13), adhered to on reconsideration (S.D.N.Y. 6/7/13)).

The second deficiency noted by Katz related to the timeliness of Johnston’s filing of the civil action in federal court. Katz observed that Johnston filed the complaint on July 14, 2025, which was “four years after the IRS disallowed the tax credits — without ever filing an administrative claim.” The district court concluded that the timeliness of Johnston’s claim was likely predicated on information that was not currently before it, “including, for example, whether [Johnston] ever received a notice of disallowance, and when” (Breland, No 5:10-cv-0007 (GTS/GHL), slip op. at 6 (N.D.N.Y. 9/15/11)). The court in Breland recognized the application of a six-year general statute of limitation where a plaintiff “never received a notice of disallowance” (28 U.S.C. §2401(a)).

Holding: As noted by Katz, the statutes of limitation are jurisdictional in tax cases. Therefore, the district court held that in a case like Johnston’s, where the plaintiff has an “arguably colorable claim” as to whether the court has jurisdiction over their refund action and there is nothing preventing the court’s jurisdiction, then the case “may proceed to service.” However, the issue of jurisdiction might be revisited upon motion by the defendant or the court’s “sua sponte review of a more complete record.” The district court found, quoting APWU v. Potter, 343 F.3d 619, 627 (2d Cir. 2003), that a court “should take care to give the plaintiff ample opportunity to secure and present evidence relevant” to establishing jurisdiction.

Based on these reasons, the district court rejected Katz’s recommendation report, further ordering the clerk of the court to issue the summonses submitted by Johnston and that they be served in accordance with federal and local rules.

• Johnston, No. 5:25-cv-917 (N.D.N.Y. 11/24/25)

— John McKinley, CPA, CGMA, J.D., LL.M., and Thomas Godwin, CPA, CGMA, Ph.D., are both professors of the practice in accounting and taxation in the SC Johnson College of Business at Cornell University. To comment on this column, contact Paul Bonner, the JofA‘s tax editor.