According to Mertens Law of Federal Income Taxation:
"Under the variance doctrine (or substantial variance doctrine), a taxpayer may not sue the government for a refund until he first files a claim for refund.1 The claim must set forth in detail each ground on which a refund is claimed in facts sufficient to apprise the Service of the basis of the claim. Any subsequent litigation of the government's denial of the refund claim is limited to the grounds contained within the refund claim—that is, to grounds that do not materially vary from the refund claim. A federal court has no jurisdiction to entertain taxpayer allegations that impermissibly vary or augment the grounds originally specified by the taxpayer in the administrative refund claim. The purpose of the variance doctrine is to allow the Service to resolve disputes without litigation." § 58A:17. Variance between refund suit and refund claim, 15 Mertens Law of Fed. Income Tax'n § 58A:17
Taxpayer went through an employment tax IRS examination and the IRS proposed to reclassify several independent contractors to employees. Although I wasn't involved with client at the time, Taxpayer elected to pursue refund litigation in U.S. District Court instead of deficiency suit in U.S. Tax Court based on favorable precedent and opportunity for jury trial.
Taxpayer paid tax under Flora case divisible tax rule.
Taxpayer filed refund claims (I was not involved in initial decision to file refund suit or preparation of refund claims) in which:
1. The cover letter raised Section 530 of the Revenue Act of 1978 (safe harbor even if workers would be employees under IRS Factor Test in certain circumstances) as the basis for relief; and
2. The Form 941-X/843 submitted with refund claim stated "The Taxpayer respectfully asserts the employment taxes assessed for the ___ Quarter of the _____ Tax Year are erroneous as a matter of law" but did not specifically state that Taxpayer's claim is based upon relief under Section 530 of the Revenue Act of 1978 (safe harbor even if workers would be employees under IRS Factor Test in certain circumstances), IRC 3509 (employer pays reduced employment tax amounts) or IRC 3402(d) (employer's tax liability reduced by certain related tax amounts actually paid by the worker).
In preparing the Complaint in the refund suit, I would like to:
1. Argue that the Taxpayer is entitled to relief under Section 530 of the Revenue Act of 1978 (if win this argument, treatment as independent contractor would have been correct resulting in no employment tax liability);
2. In the alternative, if Taxpayer cannot win under Section 530 of the Revenue Act of 1978, argue that Taxpayer is entitled to reduced rates under IRC 3509; and
3. In the alternative, if Taxpayer cannot win under Section 530 of the Revenue Act of 1978 or IRC 3509, argue that Taxpayer is entitled to credit for certain taxes actually paid by the workers under IRC 3402(d) and 6651.
Does the variance doctrine preclude Taxpayer from raising alternative grounds for refund relief based on IRC 3509 or IRC 3402(d) since these appear to have not been raised in the refund claim?