Melva Shanker, Appellant, v. United States of America, Appellee, 571 F.2d 8 (8th Cir. 1978)

Melva Shanker is an individual taxpayer who suffered a net operating loss and, based on that loss, filed a claim for refund of income taxes paid by her in the years 1968, 1969 and 1970. The Internal Revenue Service reviewed the taxpayer's accounts and on March 15, 1976, issued statements of adjustment, acknowledging that she was entitled to refunds of taxes and interest thereon in the following amounts: for 1968 $8,256.66; for 1969 $8,490.00; and for 1970 $1,222.00.¹  The taxpayer was notified that before the overpayment could be refunded the government had to check its records to see that she owed no other taxes. She was later notified that the overpayments had been credited to other alleged tax liability as follows:

Amount applied Form Tax period ended -------------- ---- ---------------- $8,256.66 1040 12-31-69 158.06 1040 12-31-69 7,192.72 1040 2002 1,222.00 1040 2002 118.00 1040 2001 256.00 1040 2001  504.11 1040 Dec. 31, 1969

The notification did not indicate to the taxpayer that if she questioned the application of her refunds it would be necessary for her to file another claim; and she never filed a claim regarding the taxes to which the refunds were credited.

On August 27, 1976, the taxpayer filed suit in the United States District Court for the Eastern District of Missouri, claiming that she was not indebted for any taxes and asking for judgment in the amount of the refund acknowledged by the IRS. The district court, finding it lacked jurisdiction because of the taxpayer's failure to file a claim based on the government's allegedly erroneous application of the refunds, pursuant to 26 U.S.C. § 7422(a),³  granted the government's motion for summary judgment. The taxpayer appeals.

On appeal the taxpayer contends that during discovery she learned for the first time that the overpayments acknowledged by the IRS had been applied to an alleged transferee estate tax liability. In August of 1972 the IRS had advised the taxpayer that it had made an assessment against her as a transferee of property from the estate of Sam Melman, Jr.⁴  Shanker contends that the underlying liability of the Melman estate, and thus her transferee liability, had been extinguished by an action of the United States Tax Court⁵  and that action is res judicata here; that she has fully complied with § 7422(a); and that the government has waived its right to require her to file additional claims for refunds.

The government argues that the court lacks jurisdiction because the taxpayer has not fully complied with § 7422(a). It contends that her original claim for refund, based on her net operating loss, was acted on favorably by the IRS, and the overpayments were credited to other tax liabilities pursuant to 26 U.S.C. § 6402(a);⁶  that she did not file a claim subsequent to the application of that credit; and that she now seeks to litigate the transferee liability for which she has filed no claim.

Technically the government is correct. Section 7422(a) makes the filing of a claim a jurisdictional prerequisite to a suit for refund in federal court. Since the requirement is jurisdictional it cannot be waived. See Bohn v. United States, 467 F.2d 1278, 1280 (8th Cir. 1972). We agree that there is good reason for the requirement. The filing of a claim allows the IRS to investigate, make an administrative determination of the taxpayer's liability, and possibly avoid court action. The claim "advise(s) the appropriate officials of the demands or claims intended to be asserted, so as to insure an orderly administration of the revenue, * * *." United States v. Felt & Tarrant Manufacturing Co., 283 U.S. 269, 272, 51 S. Ct. 376, 377, 75 L. Ed. 1025 (1931). This works very well in a singular refund action. However, in this case it appears that the taxpayer is riding a merry-go-round operated by the IRS in an irresponsible manner. The matter should have been settled without the necessity of court action.

Although we find it necessary to uphold the district court's determination that it lacked jurisdiction, we are advised that the taxpayer filed the necessary § 7422(a) claim, challenging the application of her acknowledged refund, on July 11, 1977, and the statutory⁷  six month period has elapsed. We, therefore, remand this case and order that the district court allow the taxpayer to amend her complaint so that the two issues may be litigated jointly, and the circularity created by the administrative merry-go-round may come to an end.⁸  "The law needs to be precise, but it should not travel in circles." Transport Manufacturing & Equipment Co. v. Commissioner, 480 F.2d 448, 451 (8th Cir. 1973).