On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil No. 93-06965)
BEFORE: GREENBERG, LEWIS, and ROSENN, Circuit Judges
GREENBERG, Circuit Judge.
(Filed: November 7, 1995)
I. FACTUAL & PROCEDURAL BACKGROUND
This matter is before the court on an appeal by taxpayers in a suit involving claims for income tax adjustments and refunds. The facts are not in dispute, and we set them forth as found by the district court. Appellant David A. Koss, a member of the Pennsylvania bar since 1957, agreed with a client in 1971 to perform legal services in exchange for stock in Video Systems Corp. In 1973, a dispute between Koss and his client over the number of shares to be paid Koss escalated into a court action. In January 1974, the parties reached a settlement in which Koss would receive 22,000 shares on February 1, 1974, as well as the proceeds from the intended sale of an additional 20,000 shares. The 22,000 shares were not registered under the Securities Act of 1933, so their sale to the public was restricted.
In their 1974 federal income tax return, Koss and his wife, appellant Freya Koss, reported the value of the 22,000 shares as $4,400 of gross ordinary income. In 1977, the Internal Revenue Service started examining the Kosses' 1974 return. However, in 1977 the shares became worthless. While this examination was pending, the Kosses filed a federal income tax return for 1977 which did not claim a loss sustained on the 22,000 shares of Video Systems stock received in 1974.
On December 5, 1980, the IRS asserted an income tax deficiency of $48,788.05 against the Kosses for 1974. *fn1 The deficiency was attributable to the IRS placing the fair market value of the 22,000 shares of Video Systems stock at $110,000 rather than $4,400. On February 28, 1981, the Kosses timely petitioned the United States Tax Court for a redetermination of this asserted deficiency. Ultimately, the Tax Court upheld the IRS and determined that the Kosses owed $48,788.05. We affirmed the decision of the Tax Court. Koss v. Commissioner, 57 T.C.M. (CCH) 882 (1989), aff'd, 908 F.2d 962 (3d Cir. 1990). The Tax Court decision became final on September 23, 1990, when the time for petitioning for certiorari expired.
On August 3, 1991, the Kosses filed an amended tax return for 1977 indicating that the 22,000 shares of Video Systems stock had become worthless. Accordingly, they requested an adjustment of their income tax liability and a refund of the $899.07 in tax they paid for that year. On that same date, the Kosses also filed an amended tax return for 1974 that requested an adjustment based on the carryback of the net operating loss incurred in 1977 due to the worthlessness of the 22,000 shares. At that time, they paid a tax of $2,148.41 for 1974, which they computed was the amount due after application of the carryback loss. The IRS disallowed the requested adjustments on November 21, 1993.
On December 27, 1993, the Kosses brought this action for recovery of the $899.07 and for allowance of the requested adjustments on their 1974 return. The district court entered summary judgment in favor of the government on December 21, 1994. It reasoned that the complaint was barred by the statute of limitations in 26 U.S.C. Section(s) 6511 and could not be salvaged by the mitigation sections at 26 U.S.C. 1311-14. The Kosses then timely appealed, asserting that the district court had jurisdiction under 28 U.S.C. Section(s) 1346(a)(1) (civil action against United States for recovery of tax allegedly erroneously or illegally assessed or collected) and 26 U.S.C. Section(s) 7422 (civil action for refund). We have jurisdiction pursuant to 28 U.S.C. Section(s) 1291 and exercise plenary review. See Pleasant Summit Land Corp. v. Commissioner, 863 F.2d 263, 268 (3d Cir. 1988), cert. denied, 493 U.S. 901, 110 S.Ct. 260 (1989).
A. Limitations on Jurisdiction
The United States "is immune from suit, save as it consents to be sued . . . and the terms of its consent to be sued in any court define that court's jurisdiction to entertain the suit." United States v. Testan, 424 U.S. 392, 399, 96 S.Ct. 948, 953 (1976) (quoting United States v. Sherwood, 312 U.S. 584, 586, 61 S.Ct. 767, 769 (1941)). Thus, although 28 U.S.C. Section(s) 1346(a)(1) provides that the district court has jurisdiction over "[a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected . . . under the internal-revenue laws," other statutory provisions placing requirements or restrictions on such actions limit and determine the scope of this grant of jurisdiction. United States v. Dalm, 494 U.S. 596, 601, 110 S.Ct. 1361, 1364 (1990).
The statute of limitations in 26 U.S.C. Section(s) 6511 is one such limitation on jurisdiction. The basic rule is as follows:
Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later . . . . U.S.C. Section(s) 6511(a).
Where, however, the claim for credit or refund relates to an overpayment of income tax on account of bad debts or worthless securities, the limitations period is "7 years from the date prescribed by law for filing the return for the year with respect to which the claim is made." 26 U.S.C. Section(s) 6511(d)(1). A claim for credit or refund of tax brought after the expiration of the limitations period is ...