Judge suggests IRS issued $4K refund over tax lawsuit based on quality of lawyers: Report

Oral arguments began on July 26 for an appeals case on a complaint a Tennessee couple filed against the United States Internal Revenue Service (IRS) on calculating their taxes based on earnings from staking tokens. 

Joshua and Jessica Jarrett received a refund check from the IRS in 2021 after filing a lawsuit arguing the IRS had no right to tax income or profit from staked Tezos (XTZ), as the tokens were “created” and not sold. The couple originally reported the staked crypto as “other income” on their 2019 tax returns, resulting in a payment from them of $9,407. Later, they requested a partial refund as well as a tax credit from the IRS based on their income.

Following the initial complaint, the IRS paid the Jarretts a roughly $4,000 refund, resulting in the case ending in September 2022. However, they refused to accept the check, which has since expired. The pair filed an appeal in November 2022, aimed at obtaining a ruling that would protect them from similar actions by the IRS in filing future returns.

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Related: IRS reminds taxpayers of crypto income reporting ahead of 2022 filing

In the first oral arguments heard on July 26, Chief Judge Jeffrey Sutton of the U.S. Court of Appeals for the Sixth Circuit reportedly suggested the IRS may have issued the refund as a way of “picking off taxpayers with very good lawyers.” Without a ruling in their favor for the initial complaint, the Jarretts could be forced to go to court annually — depending on their crypto activities — should the IRS reject their claims on staking.

“The rule in tax cases is pay first, litigate later,” reportedly said Cameron Norris, representing the Jarretts in appeals court. “It is not pay first, litigate only if [the Department of Justice] wants you to. [...] Mr. Jarrett has this problem every single year, and the government outside of this litigation is saying that his tax position is wrong.”

The couple’s initial complaint alleged the IRS was taxing creative endeavors such as “newly created cakes, books or tokens” as income. Many in the space released messages in support of the Jarretts’ case, including software firm ConsenSys, which argued crypto users “deserve fair treatment under the tax code.”

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