By Dennis Crouch
Sheridan v. US (3rd Cir. 2014)
Sheridan’s Patent No. 7,415,982 covers a pipe for smokeless tobacco that he alleges is being infringed to the tune of $20 billion over the past several years. Now, rather than filing suit against the infringers, Sheridan wrote-off the loss and then claimed that loss on his income tax returns. The IRS disagreed – finding that Sheridan had failed to establish any loss actually sustained and served him with a notice of deficiency for taxes owed of $40k.
Sheridan then filed a pro se complaint in federal court seeking an injunction against the IRS from any further audits or tax collection and an order directing a refund. District court sided with the IRS – finding that it lacked subject matter jurisdiction over the case. On appeal, the 3rd Circuit affirmed – citing the Anti-Injunction Act.
The Anti–Injunction Act, 26 U.S.C. § 7421(a), states that, with limited exceptions not applicable here, “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” Although the Act does not apply if it is clear that under no circumstances could the Government ultimately prevail in its claim of tax liability, Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 7 (1962), the exception does not apply to Sheridan’s case. The Act likewise would not apply if Sheridan had no alternative remedy, see South Carolina v. Regan, 465 U.S. 367, 378 (1984), but he could either petition the Tax Court pursuant to 26 U.S.C. § 6213 or, after paying the assessed taxes, file a refund suit under 26 U.S.C. § 7422(a). Thus, the Act applies in this case, and the District Court lacked subject matter jurisdiction to entertain Sheridan’s claims regarding the tax deficiency identified in his 2009, 2010, and 2011 returns.
The court also ridiculed Sheridan – calling his claim of “$20 billion in losses constitutes a tax for which he is owed a refund is nonsensical.”
I don’t know the facts here, but Sheridan’s claim of $20 billion in losses for the smokeless tobacco pipe may well be nonsensical. However, what’s not so nonsensical is the general notion that written-off patent infringement constitutes a business loss that could serve as the basis of a tax deduction. Would an opinion of counsel with supporting documents be sufficient to establish that the loss (past infringement) was real?