Refund litigation is a key avenue for recovering a refund from the federal government, but only if the taxpayer has the foresight to raise – sometimes years prior – the right grounds for relief in their administrative refund claims to the Internal Revenue Service (IRS). An administrative refund claim must set forth in detail each ground upon which the refund is sought and facts sufficient to apprise the IRS of the basis of the claim. Treas. Reg. § 301.6402-2(b)(1). If the IRS does not grant the refund claim, the taxpayer may file a refund suit. However, under the variance doctrine, the taxpayer's recovery will be barred to the extent that the refund complaint varies substantially from the taxpayer's administrative refund claim. The doctrine ensures that the IRS has adequate notice of the taxpayer's refund claim that allows it to conduct an investigation, make a determination, and correct any errors. Two recent district court opinions shed light on potential variance doctrine traps for taxpayers. 

On July 24, 2025, the U.S. District Court for the District of South Dakota held that the variance doctrine barred the taxpayer's challenge to the validity of regulations in Trail King Industries, Inc. v. United States. The taxpayer did not raise a regulatory validity challenge during the IRS's audit of its original excise tax returns or when the case went to IRS Appeals, though one of the key issues was whether the taxpayer qualified for an exemption from excise tax in Treasury Regulation § 48.4052-1. The parties did not settle the case in Appeals, and the IRS issued an assessment in September 2024. The taxpayer filed its administrative refund claim in March 2024, just prior to the expiration of the statute of limitations to do so. Three months later in June 2024, the U.S. Supreme Court issued its opinion in Loper Bright Enterprises v. Raimondo. When the taxpayer filed its refund suit in September 2024, it included a regulation validity challenge based on Loper Bright. Unfortunately for Trail King, the court held that this was a substantial variance from the administrative refund claims. There was no reference to a challenge to the regulation's validity in the administrative refund claim. This absence was not excused by proposed regulations (made final after the administrative claim was submitted) or provisions in the Internal Revenue Manual that prevented IRS Appeals from considering most regulatory validity challenges; those provisions did not change the taxpayer's obligation under Treasury Regulation § 301.6402-2(b)(1) to submit a sufficient administrative refund claim. Furthermore, Loper Bright merely changed the framework used to analyze regulatory validity challenges, it did not create a new cause of action that had not been available at the time that the administrative claims were filed (which can sometimes excuse a variance).

On June 9, 2025, the U.S. District Court for the Southern District of Florida held that the variance doctrine precluded a litigation argument that a deduction would have been allowable if reported on the correct tax return schedule in Shleifer v. United States. The individual taxpayer had approximately $6 million in expenses related to the depreciation of a fractional share of an airplane. He claimed the deduction on an amended return (considered an administrative refund claim), but his accountant improperly put the deduction on Schedule C instead of Schedule E. At the end of the IRS's audit, the accountant orally told the IRS agent about this error and they agreed that the deduction would be allowable if it was on Schedule E. The IRS agent said it would be futile to further amend the return, however, and then disallowed the deduction. The refund suit argued that the deduction was proper and simply should have been on Schedule E. Even though the parties appeared to agree to the essential facts (e.g., the operative Code provision, the amount of the deduction, and the resulting overpayment on taxpayer's account) and that the IRS agent knew the deduction should have been taken on Schedule E, the court held that the refund suit was barred. Allowing the deduction on Schedule E would have required the IRS to investigate new facts (regarding an unreimbursed partnership expense) that were not implicated by the Schedule C (regarding a business expense). In addition, the "mere notice" provided by the oral conversation with the accountant was insufficient to meet the regulatory requirement to provide the IRS with the essential requirements of a refund claim.

The Shleifer opinion is pending appeal with the U.S. Court of Appeals for the Eleventh Circuit, so more may be said regarding whether the facts of that case present an impermissible variance. The Trail King opinion has yet not been appealed (a motion for reconsideration was denied on October 2), but it is getting attention in other cases where the taxpayer is allegedly advancing a new regulatory validity challenge in litigation after Loper Bright. (The Department of Justice (DOJ) flagged the opinion for the U.S. District Court for the Southern District of Texas in Halliburton's refund suit that challenges the validity of regulations under IRC § 162 on September 12.) These opinions are a reminder that the variance doctrine can be a real barrier to recovery in a refund suit. Taxpayers should carefully investigate and consider all grounds that they may wish to raise in an administrative refund claim. Taxpayers must be wary of being overinclusive by adding grounds that are too tangential merely to preserve them for possible trial; I.R.C. § 6702 imposes civil penalties for filing frivolous tax returns, including administrative refund claims. If a new discovery is made or an error is found after filing an administrative refund claim, taxpayers should raise the issue in a written supplement, even if outside the statute of limitations, to help ameliorate future disputes over whether the IRS received sufficient notice.

For more information, please contact:

Robert J. Kovacev, rkovacev@milchev.com, 202-626-5857

Jaclyn Roeing, jroeing@milchev.com, 202-626-5929

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.