In Borenstein v. Commissioner, 149 T.C. No. 10 (2017), the Tax Court addressed an issue of first impression regarding the time for filing a refund claim after filing a request for extension. The decision came out at the end of August, just as the fall semester was starting. The Harvard tax clinic filed an amicus brief in this case in support of the petitioner. The filing of the amicus brief did not help the petitioner as the Tax Court determined that she filed her return too late to obtain a refund. Because my clinic filed the amicus brief and because the opinion came out at a busy time of year, I hoped that someone else might write the blog post to avoid having one that was too biased. No one else has stepped up and perhaps that is the result of the somewhat metaphysical statutory language and result. So, we are a little slow in reporting on this narrow but important issue. She has now filed an appeal. So, a circuit court will get the opportunity to review the decision.
The Borenstein case is in many ways a follow up to the Supreme Court’s decision in Commissioner v. Lundy, 116 S. Ct. 647 (1996), where the Court held that the Tax Court lacked jurisdiction to find that the taxpayer was entitled to a refund when the Service issued a stat notice, the taxpayer filed a delinquent return claiming a refund and then petitioned the Tax Court. After finding for the Service, Congress in 1997 attempted to “fix” the problem by essentially by permitting taxpayers in the Tax Court to recover the overpaid tax deemed paid on the return due if the notice of deficiency was issued within three years. The 1997 legislative fix does not help taxpayers who have not filed returns when the notice of deficiency is issued more than three years from the due date of the return. Now following Borenstein, unless reversed, the legislative overrule of Lundy does apply for a non-filer when the notice of deficiency is issued during the second year after the due date (with extensions) but prior to the third year. I doubt Congress thought about this odd situation when overruling Lundy.
Ms. Borenstein made payments totaling $112,000 toward her 2012 tax liability. All of the payments were deemed made on April 15, 2013. Although she requested a six month extension to file her 2012 return, she did not file a return for 2012 by the extended due date of Oct. 15, 2013, or during the ensuing 22 months. On June 19, 2015, the IRS issued Ms. Borenstein a notice of deficiency for 2012.
On Aug. 29, 2015, shortly before filing her Tax Court petition, she filed a delinquent return for 2012, reporting a tax liability of $79,559 on which she sought a refund of $32,441. The IRS agreed that she was entitled to an overpayment of $32,441; however, the IRS took the position that she was not entitled to a refund under I.R.C. sec. 6511(a) and (b)(2)(B) because her tax payments were made outside the applicable “look back” period keyed to the date on which the notice of deficiency was mailed. Ms. Borenstein contended that she remained eligible for the three-year look back period specified in the final sentence of I.R.C. sec. 6512(b)(3) and to the refund she claimed.
Once again, in what is a theme that runs throughout the posts on our blog, the taxpayer faces dire consequences because of not filing the return on time. The IRS concedes her entitlement to the refund and contests only the timeliness of her request for the refund. While the Tax Court is normally associated with determining deficiencies, once it has jurisdiction because of the issuance of a notice of deficiency and the timely filing of a petition, the Tax Court has the ability to determine that a taxpayer has no deficiency and is instead due a refund. Section 6512(b)(1) provides in relevant part that:
“… if the Tax Court finds that there is no deficiency and further finds that the taxpayer has made an overpayment of income tax for the same taxable year, … in respect of which the Secretary determined the deficiency, or finds that there is a deficiency but that the taxpayer has made an overpayment of such tax, the Tax Court shall have jurisdiction to determine the amount of such overpayment, and such amount shall, when the decision of the Tax Court has become final, be credited or refunded to the taxpayer…”
The parties agreed that the relevant limitation on the refund is the limitation in section 6512(b)(3)(B) which provides that :
(3) Limit on amount of credit or refund – No such credit or refund shall be allowed or made of any portion of the tax unless the Tax Court determines as part of its decision that such portion was paid—
(B) within the period which would be applicable under section 6511(b)(2), (c), or (d), if on the date of the mailing of the notice of deficiency a claim had been filed (whether or not filed) stating the grounds upon which the Tax Court finds that there is an overpayment
Because section 6512(b)(3)(B) refers back to specific provisions of section 6511, it then becomes necessary to follow the code there. The Supreme Court engaged in this exercise two decades ago in the case of Commissioner v. Lundy, 516 U.S. 235, 242 (1996). The parties agreed that the relevant time period for the look back described in section 6511 is found in section 6511(b)(2) and not in (c) or (d). Section 6511(b)(2) provides that:
(2) Limit on amount of credit or refund
(A) Limit where claim filed within 3-year period – If the claim was filed by the taxpayer during the 3-year period prescribed in subsection (a), the amount of the credit or refund shall not exceed 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. If the tax was required to be paid by means of a stamp, the amount of the credit or refund shall not exceed the portion of the tax paid within the 3 years immediately preceding the filing of the claim.
Petitioner’s brief summed up the situation as follows:
“Under respondent’s proposed reading of the statute, if the deficiency notice had been issued on or before April 15, 2015 (two years from the April 15, 2013, return due date), then petitioner would get her refund. If the notice had been issued after October 15, 2015, but before April 16, 2016, then petitioner would get her refund. But because her deficiency notice was issued during the six-month period between April 16, 2015, and October 15, 2015, respondent argues that a two-year look-back rule applies. Respondent’s reading of the 1997 amendment would mean that petitioner would not get her refund, whereas a similarly situated taxpayer who had not secured an extension of time to file would get a refund—a result that betrays the plain meaning of the statute, and, if not absurd, certainly is unreasonable. Consistent with the unambiguous legislative intent, the final flush language of section 6512(b)(3) should be interpreted so as to not inject filing extensions into the look-back period mechanism.”
Petitioner’s brief also contains a helpful chart showing the situation and the positions of the parties.
The Tax Court found that the hypothetical refund claim was filed on June 19, 2015, the date of the mailing of the notice of deficiency for 2012 and not August 29, 2015, the date of the filing of the delinquent tax return. Because the refund claim was filed before the return, the claim was not filed within three years of the time the return was filed. The Tax Court points out that this happens frequently with non-filers who will experience the issuance of the notice of deficiency before filing their return. If the taxpayer cannot satisfy the look back period of section 6511(b)(2)(A), which the Tax Court finds that Ms. Borenstein did not do, then the statute provides a look back period in section 6511(b)(2)(B). That period limits the taxpayers to a refund of money paid within two years of the claim. Here, that is zero, as the money was deemed paid on the original due date of the return on April 15, 2013.
The IRS argued for a plain language interpretation of section 6512(b)(3) interpreting the phrase “with extensions” to modify due date. Because this was an issue of first impression in the Tax Court, it rendered a precedential T.C. opinion while citing to some non-precedential and precedential opinions that suggested the result reached in this case.
The taxpayer, and the tax clinic, argued that the plain language reading of the statute suggested by the IRS created a result that did not make sense. If the notice of deficiency were issued prior to April 15, 2015 or after October 15, 2015 (and before April 15, 2016), the Tax Court would have jurisdiction to determine the refund. It lost that jurisdiction, according to the “plain language” if the notice of deficiency was issued during the six month window of time more than two years after the due date of the return and less than two and one half years. How could Congress have intended such a result?
In arguing that the IRS reading of the statute produced an absurd result, petitioner pointed to the legislative history:
“Here, the legislative history is unambiguous and precise. Congress intended to legislatively reverse Lundy and provide for a three-year look-back period for all taxpayers, even if a notice of deficiency is issued within three years from the initial due date of a return. The relevant legislative record provides:
In Commissioner v. Lundy, 116 S. Ct. 647 (1996), the taxpayer had not filed a return, but received a notice of deficiency within 3 years after the date the return was due and challenged the proposed deficiency in Tax Court. The Supreme Court held that the taxpayer could not recover overpayments attributable to withholding during the tax year, because no return was filed and the 2-year “look back” rule applied. Since over withheld amounts are deemed paid as of the date the taxpayer’s return was first due (i.e., more than 2 years before the notice of deficiency was issued), such overpayments could not be recovered. By contrast, if the same taxpayer had filed a return on the date the notice of deficiency was issued, and then claimed a refund, the 3-year “look back” rule would apply, and the taxpayer could have obtained a refund of the overwithheld amounts.
* * *
The House bill permits taxpayers who initially fail to file a return, but who receive a notice of deficiency and file suit to contest it in Tax Court during the third year after the return due date, to obtain a refund of excessive amounts paid within the 3-year period prior to the date of the deficiency notice.
H. Conf. Rept. 105-220, at 701 (1997), 1997-4 C.B. (Vol. 2) 1456, 2171.
There is nothing vague or confusing about the legislative history. Congress intended to treat all nonfiling taxpayers the same during the three years after the initial due date of their tax returns (regardless of whether a Tax Court petition was filed).”
Congress, undoubtedly, did not expect this result; however, sometimes the statutory language it chooses produces unexpected results. Maybe the circuit court will read the language to produce a result that fits what Congress appears to have intended or perhaps Ms. Borenstein will be another taxpayer who has found a way, by filing her return late, to lose a refund to which she would have been entitled had she filed on time.