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Case Highlights Issues Relating to Refund Statutes of Limitation

Posted on Aug. 20, 2014

Statutes of limitation are tricky. The statute of limitations (sol) dealing with refund claims is especially challenging. Last week’s Court of Federal Claims decision in Montiel v US highlights one aspect of the refund sol I had not considered, namely what happens when a nonresident taxpayer files a return as a resident alien that she later claims is mistaken, and corrects the error within three years from when the return would have been due if she filed correctly as a nonresident alien.  The problem here was that corrected filing was outside the three-year period from when the original supposedly incorrect return was filed. The case highlights the complexity in this area, and how a matter of days or months can make the difference between a refund and possibly no refund.

The taxpayer Maria Esther Montiel is a Mexican citizen who spent some time in the US and filed timely original returns for 2007 and 2008. Those returns reflected her claimed status as a resident alien. She later determined she mistakenly classified herself as a resident alien and filed refund claims for $8,772 in 2007 and $2,254 in 2008 based on nonresident alien status within three years of the due date applicable to nonresident returns (June 15), but outside the three-year window applicable to other individual returns (April 15). She filed her 2007 refund claim on June 10, 2011. IRS denied her claim in May of 2012. On June 13, 2012, she filed her 2008 refund claim. IRS also denied that claim. IRS denied the claims on the basis that the general three year sol on refund claims ran from April 15 of 2008 and April 15 of 2009, the original filing due date of the returns Montiel filed reflecting her supposedly incorrect residency. Montiel of course took a different view, arguing that her claims were timely because the sol on refund claims should run from the original tax return filing due date applicable to nonresident aliens, which is June 15.

Montiel sued in the Court of Federal Claims. The government filed a motion to dismiss the refund suit for lack of subject matter jurisdiction. In large part the main procedural issue here is whether she locked herself into one time period by filing the original return as if she were a US resident. Did the filing of the return serve as a type of admission against interest that fixes the sol or is the sol period as well as the underlying taxable nature of her status something she can change by changing her status? We think of amended returns fixing a tax problem and not an sol problem. Can an amended return fix or alter an sol? As I discuss below, the court essentially punted on these issues and denied the government’s motion to dismiss.

Before I address some of the case’s issues, a few more facts and statutory background.

Maria Esther Montiel is a citizen of Mexico who spent some time in California in both years. On advice of her tax return preparer, she filed the  original 1040s in 2007 and 2008 as if she were a resident alien of the US. She listed the address on the return as a US address of a family member and filed those returns prior to April 15 of 2008 and 2009 with the Fresno Service Center. Later, she determined that she was due a refund from those years because she in fact was a nonresident alien who spent less than 60 days a year in the US on a B1/B2 visa and should have filed a 1040NR for each year. To claim her refund, she filed refund claims through amended returns and also included original 1040 NRs for the 2007 and 2008 years prior to June 15, 2011 and 2012, respectively.

IRS denied the refund claims as untimely. It did so because the refund claims were filed after April 15, 2011 for the 2007 year and after April 15, 2012 for the 2008 year. This brings us to some general rules. Recall that Section 6511(a) contains the general rule for timeliness of refund claims. Under 6511(a), when an original retun is filed, a claim must be “filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later...”

How does residency status of the taxpayer impact the deadlines under Section 6511(a)? The court succinctly described how:

Residency status directly affects the filing deadlines set by Subsection 6511(a). Unlike citizens and resident wage earners, who must file a Form 1040, Individual Income Tax Return, with the IRS by April 15 every calendar year, see I.R.C. § 6072(a), nonresidents have until June 15 to file their comparableForm 1040NR, see I.R.C. § 6072(c). The IRS deems all timely returns as filed on their due dates, regardless of when they are actually submitted. I.R.C. § 6513(a). The statute of limitations imposed by Subsection 6511(a) begins to run on the effective filing date.

Montiel thus claimed her refund claims were timely, because they were filed within three years of the filing deadline for the nonresident alien returns. Thus the case boils down to which return due date triggers the statutory 6511(a) deadline, the 4/15 date applicable for 1040s pertaining to resident aliens that she initially filed, or the 1040 NR June 15 date that she claimed applied in the later returns?

Here is how the court further refined the issue, also providing a handy summary of the rules relating to residency status:

Whether Ms. Montiel’s refund claims were timely within the statute of limitations set by Subsection 6511(a) depends upon her resident status. I.R.C. § 7701 defines an individual as a nonresident alienif she is neither a citizen nor a resident of the United States. I.R.C. § 7701(b)(1)(B). An alien isdeemed a resident for tax purposes if she has been lawfully admitted for permanent residence or has been substantially present in the United States. I.R.C. § 7701(b)(1)(A)(i), (ii). Paragraph 7701(b)(3) stipulates that an individual is substantially present in the United States for tax purposes if she (i) was present in the United States on at least 31 days during the calendar year, and (ii) the sum of the number of days on which she was present in the United States during the current year and the two preceding calendar years (when multiplied by an applicable multiplier) exceeded 183 days. I.R.C. §7701(b)(3)(A)

Court Analysis

So how did the court resolve the matter? It essentially punted on the merits. Recall the government filed a motion to dismiss on the grounds that the court did not have jurisdiction. The court agreed that the statute of limitations dispute under 6511(a) was a jurisdictional matter. We have discussed in this blog before whether deadlines in the code truly are jurisdictional. In addition to a post this year on PT by Carlton Smith here on that topic see Carl’s Cracks Appear in the Code’s Jurisdictional Time Provisions in Tax Notes from a couple of years ago. Generally speaking, taking the cue from a bunch of nontax cases, courts have started to question whether Code deadlines are in fact jurisdictional or are more in the nature of claim processing deadlines. It is generally thought that the 6511(a) deadline is jurisdictional (though Carl raises strong reasons why courts need to think harder about this issue in light of more recent nontax Supreme Court precedent and the actual language and reasoning in the Supreme Court’s Brockamp case). Montiel considered the 6511(a) deadline as jurisdictional but not, for example, matters implicating 6511(b) (relating to limitations on the amount of a refund claim).

[t[he effective filing dates of Ms. Montiel’s tax returns for 2007 and 2008 pose disputed issues of jurisdictional fact, as they ultimately determine whether or not Ms. Montiel complied with the statute of limitations imposed by Subsection 6511(a) and can now file suit for refunds.

There is a lot to be said about the court’s jurisdictional analysis, but I will save that for another day because it seems somewhat tangential to the underlying procedural sol issue. Carl’s article in Tax Notes and his prior post on the issue suggest that courts need to be careful in discussing the jurisdictional issue, and Montiel seems to have only scratched the surface.

As to the sol issue, the court avoided a decision at this stage of the case because it wanted more information than the pleadings afforded. It denied the government’s motion concluding that the facts plausibly indicated that Montiel “may well have complied” with the refund procedures, so the suit survived the dismissal motion. The case moves forward now to trial or summary judgment. As to the court’s approach in this matter, it seems like that this is a question of law that it might have been able to reach at this stage, although the IRS did also dispute if  Montiel’s 2008 claim was filed on or prior to June 15, 2012. As to the law, the court found that there was no controlling precedent, and perhaps it was looking for more briefing on the issue. The government had argued as support of its position a case that held that a taxpayer is subject to 6511 even if it mistakenly paid tax but did not file a return and was not in fact required to file a return. It also looked to venerable procedure cases like the Supreme Court case of Germantown Trust analyzing whether a taxpayer’s mistaken trust return (it should have filed a corporate tax return) constituted a return for purposes of the statute of limitations on assessment. Characterizing those cases as of “tangential relevancy” the court found that they did not support treating the claims as barred.

The taxpayer had claimed that a 2002 GCM supported her position. In that GCM, the Service considered a taxpayer who mistakenly filed an original return on a 1040 but in fact was a nonresident alien and should have filed a 1040 NR. The Service concluded that it could effectively convert the original 1040 into a 1040 NR and make concomitant adjustments without issuing a stat notice for changes that flowed from the shift to a 1040 NR, like not allowing an EITC, which nonresident aliens cannot claim. Rather than address the relevance of that analysis, the court noted that it was not precedential.

Some Additional Thoughts on the Case

On a more technical issue, it is possible that even if Montiel prevails on 6511(a), she may run into issues in 6511(b) relating to the amount that the IRS can refund even in a timely claim.  The problem would be the look-back amounts under 6511(b)(2) — i.e., may she have failed to state a claim for failing to meet those requirements?  If she is held to have filed her claim within the 3-year period of 6511(a), then the amount that may be refunded under 6511(b) is “the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return.”

This takes us down a further thicket. Section 6072 allows a non-resident alien to file on June 15, but that is not denominated an “extension” in the Code.  So, the look-back period from the actual dates she filed the claims (around June 15) would be only three years.  It would not go as far back as taxes paid on April 15 of the year following the close of the taxable year.

The opinion does not indicate when or how Ms. Montiel made her tax payments. 6513(b) provides the rules on when payments are deemed made. Section 6513(b) provides:

b) Prepaid income tax. For purposes of section 6511 or 6512–
   (1) Any tax actually deducted and withheld at the source during any calendar year under chapter 24 [IRC Sections 3401 et seq.] shall, in respect of the recipient of the income, be deemed to have been paid by him on the 15th day of the fourth month following the close of his taxable year with respect to which such tax is allowable as a credit under section 31 [IRC Sec. 31].

(2) Any amount paid as estimated income tax for any taxable year shall be deemed to have been paid on the last day prescribed for filing the return under section 6012  for such taxable year (determined without regard to any extension of time for filing such return).

(3) Any tax withheld at the source under chapter 3 or 4 [IRC Sections 1441 et seq. or 1471 et seq.] shall, in respect of the recipient of the income, be deemed to have been paid by such recipient on the last day prescribed for filing the return under section 6012 [IRC Sec. 6012] for the taxable year (determined without regard to any extension of time for filing) with respect to which such tax is allowable as a credit under section 1462 or 1474(b).

Paragraphs (2) and (3) make certain tax deemed paid on the filing date (which presumably is June 15 under 6072(c)), but paragraph (1) makes income tax withholding deemed paid on April 15.

If the refund she is seeking is from income tax withholding, she would not meet the 3-year look-back amount rule of 6511(b)(2).  A similar result arose in the Boeri case from the Federal Circuit last year involving a nonresident who had no US liability but had over $70,000 mistakenly withheld from a severance payment; his original 1040 claiming an overpayment was filed more than three years after the June 15 date that the withholdings would have been deemed paid. The refund claim itself was timely under Section 6511(a), as is always the case when the claim is made in an original return. Nonetheless, in that case the Federal Circuit (though with a spirited dissent on the equities) dismissed the suit under 6511(b) because Boeri’s taxes were deemed paid via withholding and as per 6513(b)(3) more than three years prior to the filing of his refund request.

Because it is not clear how or when Ms. Montiel paid the taxes in the years at issue, it is also not clear if 6511(b) is at issue. But it may be.

As the above hopefully shows, this case raises lots of interesting procedural issues. We will keep you posted as this case moves forward.

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