We have previously reported (here and here) on the refund lawsuit that a couple, the Jarretts, brought against the U.S. Internal Revenue Service. Mr. Jarrett produced Tezos tokens, a form of cryptocurrency, through a process known as “staking” — a system being used by more and more blockchains. As Jarrett saw things, staking uses existing Tezos tokens and computing power to produce new tokens. Thus, he argued, he would owe taxes on the tokens only on sale or transfer because it was only then that he would “realize” income for tax purposes. The view of the IRS was that staking involved an exchange of goods and services, just like payments, wages, compensation, and other sources of income and, therefore, Jarrett realized income when he received each token and owed tax on the income that year.
In 2019, Jarrett’s staking efforts yielded 8,876 Tezos tokens. Based on the IRS position, he paid taxes on those tokens on his 2019 return. He subsequently sued the IRS for a refund. The government then reversed course and issued a full refund for the amount paid, plus statutory interest. But Jarret refused to cash the refund check or dismiss the lawsuit. The district court granted the government’s motion to dismiss on the ground that the claim was moot. In an opinion issued on August 18, 2023, the Sixth Circuit affirmed the dismissal.
As the Sixth Circuit explained, mootness arises when a plaintiff receives all the relief she requested or could receive in the case. An offer to settle does not moot a case. But here, actually sending a check to the plaintiff for the full amount “gives the plaintiff all the relief she could receive, and as a result it moots any claim for damages.” Put another way, the IRS satisfies its repayment obligation when it issues and mails a refund check to the taxpayer for the full amount of the overpayment.
Jarrett argued that the government had not admitted liability or agreed to an entry of a judgment. But that was not the measure of mootness. In response to Jarrett’s argument that the decision allowed for strategic game-playing by the IRS, the court said that the reality that the government had to pay the full refund (plus interest) to achieve mootness, and do so in the context of a lawsuit generating a published opinion about the government’s concession, makes any game-playing far from cost free.
The IRS’s recent revenue ruling on cryptocurrency staking did not change the court’s view. The ruling (which we reported on here) formalized the Service’s long-tentative view that new tokens arising from staking constitute income when the taxpayer receives them. While releasing this “official interpretation” for the “guidance of taxpayers” might very well suggest that the government will not issue similar refunds going forward to that paid to the Jarretts, whatever it portends for future tax years, the ruling had no bearing on the Jarretts’ 2019 taxes.
Jarrett also argued that the refund did not moot his request for alternative relief — for an injunction preventing the IRS from treating tokens created by Jarrett in the future as income. But such an injunction, the court said, would run afoul of the statutory limitations that prevents a court from restraining the assessment or collection of taxes in future years. As the Sixth Circuit explained, “Yes, a judgment today might help [Jarrett] in future tax years. But a good-for-tomorrow-only judgment would transgress the statutory ban on declaratory judgments in tax cases.”