On January 2, 2019, a federal district court in Advanced Refining Concepts, LLC v. United States dismissed a taxpayer’s claims seeking declaratory and injunctive relief and breach of contract claims against the United States related to the IRS’ denial of fuel tax credits claimed on the sale of fuel that combined compressed natural gas with diesel fuel. The decision of the district court highlights the very limited jurisdiction of the federal courts when a taxpayer pursues claims against the United States related to a claim for refund.

Factual Background

Advanced Refining Concepts (“ARC”) created a new fuel that combines compressed natural gas with diesel fuel—what ARC calls GDiesel. The IRS imposes taxes on the sale of certain types of fuels; however, entities that deal in these fuels may register with the IRS to file claims for tax credits. Beginning in 2009, ARC applied to the IRS for both an “AM” and “S” designation, but each was denied. ARC continued to apply to the IRS for designations, and in February 2011, the IRS granted ARC three designations: “S”; “UV,” and “X” which allowed ARC to claim and receive tax refunds. However, in 2014, the IRS revoked ARC’s “S” registration, which had allowed ARC to sell red-dyed diesel fuel. The IRS also required ARC to repay the tax credits it had already received.

ARC repaid the credits, gave up its “S” designation, and applied for “AM” registration for an “alternative fuel.” The IRS initially denied this “AM” designation, but just a few months later sent ARC notice that it had been approved. ARC then filed amended tax returns in order to obtain the tax credit lost from the “S” designation revocation. But ARC’s claim was denied in September o2015 after the IRS found ARC’s GDiesel was created using natural gas compressed at 700-1000psi; to qualify for the tax credit, the natural gas must have been compressed at 2800-3600psi.

Following this denial, ARC chose to utilize the Fast Track Settlement process and sought mediation. The mediator recommended the IRS pay 80% of the tax credit amount ARC claimed. ARC agreed to the settlement and was informed the agreement would need to be approved by the IRS’s Territory Manager. The mediator orally represented to ARC on October 30, 2015, that the settlement agreement had been approved. However, on November 2, 2015, ARC was informed that IRS superiors overruled the Territory Manager’s approval, and denied the settlement. The claim was referred to IRS Appeals, which subsequently denied ARC’s claim, finding GDiesel did not meet the requirements for the “AM” designation.

ARC’s refund suit alleged five causes of action against the United States: (1) Refund of Federal Excise Tax pursuant to 26 U.S.C. § 7422 for denial of the “AM” tax credit; (2) Refund of Federal Excise Tax pursuant to 26 U.S.C. § 7422 for revocation of “S” designation and subsequent tax penalties; (3) declaratory judgement as to ARC’s registration status and qualification of “AM” tax credit designation; (4) injunctive relief to enforce the terms of the Fast Track Settlement Session Report; and (5) breach of contract for denying the settlement after the Territory Manager had approved it. The United States moved to dismiss ARC’s third, fourth, and fifth claims for lack of subject matter jurisdiction. The United States asserted a facial attack arguing that even if ARC’s allegations are true, they are insufficient to invoke federal court jurisdiction.

District Court’s Analysis

Any claim against the United States is subject to the general precept of sovereign immunity. Absent an express waiver of sovereign immunity by Congress, the federal courts lack subject matter jurisdiction to hear claims brought against the United States.

Declaratory Relief

Federal courts have jurisdiction over claims for declaratory relief pursuant to the Declaratory Judgment Act (DJA). But the DJA specifically exempts courts from granting declaratory relief for actions involving federal taxes in order to protect the public fisc. In considering ARC’s claim for declaratory relief, the district court noted California by Deukmajan v. Regan, where the Ninth Circuit stated that “[t]he purpose of the federal tax exception to the Declaratory Judgment Act is to protect the government’s ability to assess and collect taxes free from pre-enforcement judicial interference, and to require that disputes be resolved in a suit for refund.”

To determine if ARC’s claim for declaratory relief precluded judicial review, the court looked to the Anti-Injunction Act (“AJA”), where courts have held that if the AJA bars the suit, so does the DJA. In Alexander v. Americans United, Inc., the Supreme Court held that a taxpayer’s injunction against the United States must be dismissed unless the taxpayer can satisfy that (1) the United States under no circumstances could succeed on the merits of the tax claim; and (2) the taxpayer has no other available legal remedy and will be irreparably harmed. Applying the two-prong test, the court concluded that ARC “failed to show that under no circumstances will the government succeed.” The court noted that the taxpayer had offered no evidence to refute the government’s argument that ARC’s GDiesel failed to meet the specific requirements for the tax credits. According to the court, the taxpayer also failed the second prong because it had an adequate and available remedy; taxpayer could pay the tax and file suit for a refund. Because the court concluded that it was prohibited from review under the AJA, judicial review was also prohibited under the DJA.

Injunction Relief

Taxpayer asserted, relying on the Administrative Practice Act (“APA”), that the government unequivocally waived sovereign immunity and must be enjoined and must comply with the terms of the IRS fast track report because the Session Report constituted a final agency action, and thus was reviewable under the APA. The APA provides that “[a]gency action made reviewable by statute and final agency action for which there is no other adequate remedy in a court are subject to judicial review.” According to the taxpayer, because there was no other statute implicated here, the Session Report was a final agency action, and thus, the decision is reviewable under the APA. The court disagreed and found that the Session Report was not a final or binding agreement between the parties. The Fast Track Settlement Procedures provide that “[t]he signature of the parties on the FTS Session Report does not constitute a final settlement.... The taxpayer acknowledges that the Service may reconsider a proposed settlement, as reflected in a signed FTS Session Report, upon receipt of comments on the proposed settlement from the Joint Committee on Taxation.” According to the court, the provisions of the process articulate in clear concise language that the Session Report was not binding, and it is not final. Thus, the court held that the United States had not unequivocally waived sovereign immunity and dismissed taxpayer’s injunction claim.

Breach of Contract

Taxpayer sued for breach of contract alleging that it settled $623,913 in damages resulting from the IRS’ breach of the Session Report. Taxpayer asserted that it was not demanding money damages, but rather that it asserted a claim of specific performance to enforce a contract. To avoid the government’s sovereign immunity defense (immunity shall not be waived for claims of money damages. 5 U.S.C. § 702), the taxpayer argued that it was not demanding money damages, but rather presented a claim to simply enforce a contract. The court disagreed.

In making this determination, the court looked to whether the actual relief resulting from review of the claim would be monetary. Here, the court concluded that based on the plain language of the complaint, this claim was one for monetary relief. Therefore, the APA does not provide the proper waiver of sovereign immunity. However, even if the APA did provide for a waiver of sovereign immunity, the court held that the taxpayer had failed to state a claim for breach of contract because the settlement agreement between the parties was not a final, binding agreement. Therefore, because the Session Report was not binding, there was no breach when the IRS exercised its discretion to reject the settlement.

Finally, to the extent that a claim for breach of contract does exist, the district court stated that it lacked jurisdiction because the Court of Federal Claims has exclusive jurisdiction to decide this breach of contract claim on the merits.

For these reasons, the court dismissed the taxpayer’s declaratory and injunctive relief and breach of contract claims.