US Tax Agency Moves to Dismiss Lawsuit by Tezos Stakers Who Refused Refund, Demanded Trial

The U.S. Internal Revenue Service on Monday filed to dismiss a lawsuit from two Tezos stakers, saying the agency had already refunded just under $4,000 in taxes plus interest to the individuals.

Joshua and Jessica Jarrett sued the IRS in 2021 on claims they should not have had to pay income tax on Tezos tokens they gained by staking on the network. In December, the IRS offered a refund to the couple, who refused to accept it to force a federal court to make a ruling on whether the IRS can tax crypto gained through staking as income (in addition to taxing crypto transactions as a capital gain or loss).

In a motion to dismiss and a supporting 12-page memorandum of law filed earlier this week, the IRS said the Jarretts could not refuse the refund, and the case should be dismissed. The Jarretts’ legal case has been funded in part by the Proof of Stake Alliance (POSA).

Read more: IRS Offers Tezos Staker Refund on Rewards Tax in Break From Current Policy

“Despite obtaining the full relief they ask for in their Complaint, the Jarretts believe this is still a 'live' case or controversy because the Court has not yet ruled on whether staking rewards are taxable as income when received. They suggest in their letter that they can simply refuse the refund for which they sued in order to ‘vindicate their rights,’” the filing said. “The Jarretts essentially argue they can continue this case to force the United States to explain why it granted the refund and then obtain an advisory opinion from the Court about those reasons. Not so.”

The tax refund ($3,793) plus interest ($208.03) was delivered on Feb. 14, the IRS said.

According to the filing, the IRS expects the plaintiffs to dispute the IRS’s motion to dismiss, but said none of the possible exceptions would apply, pointing to how tax and tax refund cases are viewed within the U.S. judicial system.

“Even if the Jarretts make future refund claims based on the argument that staking rewards are not taxable income when received, that controversy would be ‘at most a similar one.’ That is not enough. And given that this is the Jarrett’s [sic] first suit to seek a refund after paying tax on the receipt of Tezos rewards tokens, the Jarretts cannot show repeated cases evading review,” the memo said.

The IRS said there is “nothing left to adjudicate,” that the refund was “not an offer to compromise” and therefore the case is over.

“Plaintiffs may, as they hypothesize, seek a refund in a future tax year. Or they may not. That depends not only on whether they are earning staking rewards for any given year, but also on whether – accounting for all the other income, deductions, and payments they report on a future return – they report another overpayment,” the IRS said.