We previously reported about  a case in which a Tennessee couple, the Jarretts,  sued the U.S. Internal Revenue Service seeking a refund for taxes they paid on Tezos tokens that they earned through staking.  On February 14, 2022, the IRS delivered the requested refund with interest, thinking that would end the lawsuit.  But the Jarretts “rejected” the refund  and argued that their lawsuit should continue.  The IRS has now moved to dismiss the case.

One can posit that the Jarretts’ lawsuit is not simply about their own refund but that there is an interest in obtaining a ruling for the greater cryptocurrency community.  That notion is certainly supported by the reporting that the case has been funded in part by the Proof of Stake Alliance.  And that is certainly the way the IRS sees the matter.

In its motion to dismiss, the IRS argues that the case is now moot because the Jarretts received the full refund that they requested in their lawsuit.  The relevant statute grants a taxpayer the right to sue for a refund, but that is all it provides for.  According to the IRS, when the United States tenders full payment of a refund – even during litigation – no case or controversy remains and the refund claim is moot.

The IRS framed the issue as follows:

Despite obtaining the full relief they ask for in their Complaint, the Jarretts believe this is still a “live” case or controversy because the Court has not yet ruled on whether staking rewards are taxable as income when received. They suggest in their letter that they can simply refuse the refund for which they sued in order to “vindicate their rights.”  The Jarretts essentially argue they can continue this case to force the United States to explain why it granted the refund and then obtain an advisory opinion from the Court about those reasons.

But is well established that US courts are not in the business of providing advisory opinions.  There must be a live controversy.  Furthermore, while parties sometimes seek declaratory relief, the IRS argued that prospective relief is unavailable in a refund suit. The Declaratory Judgment Act does not authorize declaratory relief “with respect to federal taxes.” And, to the extent that Plaintiffs seek through the lawsuit to enjoin the IRS in future years, the Tax Anti-Injunction Act bars suits “for the purpose of restraining the assessment or collection” of tax.

The IRS also addressed the argument that the case is not moot because the challenged conduct might recur.  “Plaintiffs may, as they hypothesize, seek a refund in a future tax year. Or they may not. That depends not only on whether they are earning staking rewards for any given year, but also on whether – accounting for all the other income, deductions, and payments they report on a future return – they report another overpayment.”  Thus, according to the IRS, a future refund suit premised on a challenge to the taxability of staking rewards is little more than a possibility, which is not enough to keep the case alive.

The Jarretts will undoubtedly be submitting their own brief before the matter is submitted to the court for decision.


David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. David has been included in Chambers for his expertise in international arbitration. He is the editor of the firm's blockchain blog.