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Illinois Lumber and Material Dealers Association Health Insurance Trust v. United States

United States Court of Appeals, Eighth Circuit

July 23, 2015

Illinois Lumber and Material Dealers Association Health Insurance Trust, Plaintiff - Appellee
v.
United States of America, Defendant - Appellant

Submitted March 10, 2015.

Appeal from United States District Court for the District of Minnesota - Minneapolis.

For Illinois Lumber and Material Dealers Association Health Insurance Trust, Plaintiff - Appellee: Andrew T. Brever, Thomas E. Brever, Foster & Brever, Saint Anthony, MN.

For United States of America, Defendant - Appellant: Jonathan S. Cohen, Gilbert Steven Rothenberg, Senior Attorney, Anthony T. Sheehan, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC; Michael Pahl, U.S. Department of Justice, Tax Division, Civil Trial Section, Central Region, Washington, DC.

Before WOLLMAN, BEAM, and LOKEN, Circuit Judges.

OPINION

Page 908

LOKEN, Circuit Judge.

Illinois Lumber and Material Dealers Association Health Insurance Trust (" Illinois Lumber" ) is a tax-exempt insurance trust operating under 26 U.S.C. (I.R.C.) § 501(c)(9). Illinois Lumber purchased life insurance policies issued by General American Mutual Holding Company (" GAMHC" ), a mutual insurance company. In 2003, GAMHC began the process of demutualization, converting from an insurer owned by its policyholder members to one owned by stockholders. See generally Dorrance v. United States, 877 F.Supp.2d 827, 829-30 (D. Ariz. 2012).[1] In September 2003, Illinois Lumber received a $1,474,442.30 liquidating distribution and a letter reporting that GAMHC had obtained a private ruling from the IRS that membership interests qualified as capital assets and " the entire amount of the initial distribution . . . will constitute long-term capital gain." Illinois Lumber reported the gain on its Unrelated Business Income Tax Return for fiscal year 2004 and paid a capital gains tax of $200,686. Illinois Lumber received additional GAMHC distributions of $285,647 and $213,567, which it reported as taxable capital gains on its fiscal 2006 and 2008 tax returns.

The IRS adopted the position that a policyholder's proprietary interest in a mutual insurance company has a tax basis of zero in Revenue Ruling 71-233, 1971-1 C.B. 113. In 2008, the Court of Federal Claims rejected that position. Fisher v. United States, 82 Fed.Cl. 780, 795-97 (2008). Illinois Lumber then filed refund claims for the capital gains taxes paid in 2004, 2006, and 2008. The IRS delayed ruling on the refund claims until the Federal Circuit affirmed the Court of Claims in Fisher v. United States, 333 F.Appx. 572 (Fed. Cir. 2009). Citing the Federal Circuit's decision, the IRS allowed Illinois Lumber's refund claims for 2006 and 2008 and paid refunds of $42,847 and $32,035 in July 2010. However, in June 2011, the IRS denied Illinois Lumber's claim for a 2004 refund because the claim was not filed within the three year statute of limitations in I.R.C. § 6511(a).

After exhausting administrative appeals, Illinois Lumber brought this action seeking a refund of the alleged capital gains tax overpayment in fiscal year 2004. See 28 U.S.C. § 1346(a)(1). The district court denied the government's motion to dismiss for lack of jurisdiction because the claim was time-barred and granted Illinois Lumber's motion for summary judgment, concluding that the Internal Revenue Code's

Page 909

mitigation provisions, I.R.C. § § 1311-1314, apply and permit correcting the erroneous recognition of gain in 2004 that would otherwise be time-barred. See Ill. Lumber . . . Health Ins. Trust v. United States, Civil No. 13-CV-715, 2014 WL 1757861 (D. Minn. Apr. 30, 2014). The government appeals. Reviewing the interpretation and application of the mitigation provisions de novo, we reverse.

I.

Generally, a taxpayer must file an administrative claim for refund with the IRS within three years of the time the tax return was filed or within two years of the time the tax was paid. I.R.C. § 6511(a). Because the United States cannot be sued without its consent, filing a timely refund claim with the IRS is a jurisdictional prerequisite to a tax refund lawsuit. See I.R.C. § 7422(a); Chernin v. United States,149 F.3d 805, 813 (8th Cir. 1998). Illinois Lumber's 2004 return ...


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