United States of America v Page

In a case of first impression for the circuit, the Ninth Circuit Court of Appeals (the Ninth Circuit) ruled that the two-year limitations period to sue to recover an erroneous refund starts on the date the refund check is cashed, not when it is received, reversing the district court.  United States of America v Page, ___ F. 4th ___, 2024 WL 3169963 (9th Cir. June 26, 2024).  To view the opinion, click here:

https://cdn.ca9.uscourts.gov/datastore/opinions/2024/06/26/21-17083.pdf

FACTS:

On May 5, 2017 the IRS mailed Jeffrey Page a $491,104.01 check for his 2016 tax refund.  The refund check was a clerical error by the IRS since Page was only entitled to a $3463.00 refund.  Almost a year later, on April 5, 2018, Page cashed the check.  After several demands by the IRS, Page returned $210,000.00 but kept the remaining $277,641.01.  On March 31, 2020 the government sued Page for the balance in district court under 26 U.S.C. § 7405.  After Page failed to file an answer, the clerk entered a default against him.  The government then moved for a default judgment under Federal Rule of Civil Procedure 55(b), but the district court denied the motion because it appeared that the complaint was untimely. The district court concluded that the statute of limitations was triggered when Page received the check, a date which was unclear from the complaint but likely was more than two years before the suit was filed.   As a result, it issued an order to show cause, requiring the government to show why the case should not be dismissed with prejudice.

The government responded, arguing that the check-clearance date, not the check-receipt date triggered the statute of limitations.  Alternatively, it requested time to do limited discovery to ascertain the check-receipt date.  After the district court granted the limited discovery, Page responded to an interrogatory that he did not recall when he received the check.  The government submitted that response to the district court, arguing again that the check-cashed date applied and further that the date uncertainty meant the complaint should not be dismissed on the face of the pleading.  The district court rejected those assertions and dismissed the case.  The government appealed to the Ninth Circuit, which reversed.

REASONING:

The Ninth Circuit began with the wording of 26 U.S.C. § 6532(b) regarding when the government could sue for a refund:  the suit must be filed “within 2 years after the making of such refund.”  Therefore, it needed to decide when the refund was “made.”  It did not write on a clean slate, since the Supreme Court had addressed that question but in different contexts.  In United States v. Wurts, 303 U.S. 414, 417-18 (1938), the Court addressed when a refund was “made” where the parties were arguing it was either the date it was “allowed” or when it was “paid.”  Since the “common understanding” of refund is “repayment,” the Court ruled the statute of limitations began running from the date of payment.  A similar case was O’Gilvie v. United States, 519 U.S. 79, 91-92 (1996), where the dispute was whether the time commenced when the government mailed the check or the taxpayer received it.  The Court held the time began running upon the “receipt of the payment.” 

Although these cases were not precisely on point, the Ninth Circuit concluded that both made clear that payment triggered the statute of limitations.  The Court gave four reasons why that meant the check-cashing date was applicable.  First, payment cannot be made until the funds change hands, which occurs after the check is presented to the Federal Reserve Bank and the Secretary of the Treasury authorizes payment.  This construction ensures the statute does not begin to run before the government can sue, which it cannot do until the tax is erroneously refunded; hence, the check is cashed.

Second the check-clearance date is the most certain date and can be ascertained without doubt.  Third, statutes of limitations must be strictly construed in the government’s favor per Supreme Court precedent.  And fourth, this decision avoids a circuit split with the Seventh and First Circuits, both of which had previously held that the check-cashing date triggered the statute of limitations.

The Ninth Circuit also noted other errors by the district court.  By sua sponte issuing the order to show cause regarding the statute of limitations (an affirmative defense), the court had shifted the burden to the government to demonstrate the suit was timely, whereas the burden of proving an affirmative defense is on the defendant.  The district then “compounded this error” by construing Page’s vague interrogatory responses against the government and dismissing, when the flaw was not on the face of the complaint.

The Ninth Circuit reversed the dismissal and remanded for further proceedings.

AUTHOR’S COMMENTS:

Based on the prior Supreme Court decisions which answered narrowly different questions, this holding makes the most sense.  Not only do the words lend themselves to such interpretation by common usage, but the fact that the check-cashing date can always be precisely ascertained makes the decision practical.  It was wise to avoid a circuit split on such a straight-forward holding. 

[The Commercial Financial Newsletter is written by an ad hoc group of the California Lawyers Association (CLA) Business Law Section.  This article was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), a member of the ad hoc group.  The opinions contained herein are strictly those of the author.].