Tax Notes logo

A Counterclaim as an Informal Claim for Refund or as the Starting Date for Calculating the Refund Amount

Posted on Aug. 30, 2018

Last year I wrote about a case in which the 9th Circuit accepted a request for injured spouse relief as an informal claim for refund in a situation in which the taxpayer should have filed a claim for refund. In Appelbaum v. United States, No. 5:12-cv-00186 (W.D.N.C. August 6, 2018) the court found that a counterclaim filed in a lawsuit operated as the time for starting the refund claim even if the counterclaim did not operate as a refund claim itself. Allowing the counterclaim to start the look-back period for measuring payments allows the taxpayer to obtain a larger refund. Treating a document as a type of informal claim for one purpose when it clearly does not work for another purpose bifurcates the refund claim in a manner that I do not recall seeing previously.

Mr. Appelbaum held a position with Warde Electric Contracting, Inc. that caused the IRS to assess a trust fund recovery penalty (TFRP) against him in 2003 for over $2 million. Once it made the assessment the IRS began taking collection action against him. From the description in the opinion, it seems that Mr. Appelbaum did not affirmatively send payment to the IRS but it offset his refunds and levied on his social security payments.

Almost 10 years after making the assessment, the IRS brought suit against Mr. Appelbaum seeking a judgment of almost $4 million due to the accrual of interest and penalties since the initial assessment. The IRS usually brings such a suit when the statute of limitations is about to run out but it believes that it can collect more by extending the time for collection. I have written before about the unlimited period of time the IRS can obtain to make collection when it has a judgment. Usually, the decision to bring a suit to reduce the liability to judgment is a low cost and low risk maneuver; however, the decision backfires in Mr. Appelbaum’s case.

Representing himself, Mr. Appelbaum argued that the IRS failed to follow the notice requirements of 6672 which, at the time of the assessment against him, were still relatively new. After a bench trial, the court found that the IRS did indeed fail to give Mr. Appelbaum proper notice of the assessment. This meant that the IRS had to abate the assessment against him and because the statute of limitations on assessment of the TFRP had long since passed, it also meant that the IRS could not “fix” its mistake. So, Mr. Appelbaum was completely relieved of the liability. He was, however, not satisfied with simply being relieved of the liability but wanted his money back.

He counterclaimed in the case seeking the money the IRS had taken from his Social Security payments and “any and all payments received by the IRS that have been applied over the years against the Assessments from April 10, 2003 to the present.” The court said that it construed this counterclaim as a claim for refund under 28 U.S.C. 1346(a)(1). The court dismissed the claim for lack of subject matter jurisdiction because Mr. Appelbaum did not first file an administrative claim for refund as required by IRC 7422(a).

Mr. Appelbaum filed correct administrative claims in March of 2016. In August of 2016 the IRS granted him a refund of $19,556.00 of the $43,095.00 it had taken from him over the years. It determined this refund amount by looking to the payments it had recovered within two years prior to the filing of the claim. Mr. Appelbaum administratively appealed the determination arguing that the IRS should grant him refunds from a date two years prior to the time he filed the counterclaim for refund on May 1, 2013. In March of 2017 the IRS increased the refund amount it allowed Mr. Appelbaum to $31,162.00. At issue before the court is whether to compel the IRS to refund the remaining amount of levied Social Security and refund payments not yet returned to Mr. Appelbaum. The court states that the IRS can retain the monies received more than two years before the filing of the claim and notes that equitable tolling does not apply to refund claims citing to United States v. Brockamp, 519 U.S. 347, 354 (1997).

Then the court examined the facts to determine the correct date from which to apply the two year rule. It determined that the answer and counterclaim filed in the suit the IRS brought to reduce the liability to judgment “adequately put the IRS on notice that Defendant believed he was subjected to an erroneous tax exaction and that he desired a refund.” So, the court allowed him to obtain a refund from two years prior to the date of his counterclaim.

The decision to treat the counterclaim as an informal claim for refund after dismissing the counterclaim on jurisdictional grounds presents an interesting extension of the informal claim doctrine. The court did not cite any authority that a jurisdictionally flawed pleading could serve as an informal claim. I agree with the court that the pleading did put the IRS on notice that the taxpayer thought he should receive a refund. Certainly, in that respect it fits the norm for an informal claim but since it was a failed pleading, it also stands outside the norm for most informal claims.

For those seeking to assess the informal claim doctrine, the decision provides another example of something that can serve as an informal claim in one context even if it is a failed claim in another. The court seems to allow the use of the claim as the starting date for the refund only as a result of the “regular” claim for refund filed later. Is the filing of the regular claim for refund a predicate to using a pleading as an informal claim? Is this really an informal claim or an addendum to a formal claim allowing it to move the time period for calculating the refund to an earlier date? The case may raise more questions than it answers. Meanwhile, Mr. Appelbaum goes home very happy that the IRS decided to try to reduce his liability to judgment and the IRS realizes that it did not properly make a risk/reward calculation in this case.

Subject Areas / Tax Topics
Copy RID