Transcript Tax Practice and Procedure Unit X Interest

Tax Practice and Procedure
Chapter 9
Refund Claims & Litigation
David M. Wooldridge
Sirote & Permutt, P.C.
205.930.5219
[email protected]
© David M. Wooldridge 2007
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Scope of Unit XII
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Nature and requirement of claims
Full payment rule
Informal claims
Variance doctrine
Review of claims
Statute of Limitations/TEFRA/Exam
Refund Litigation
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Nature of Refund Claims
• Refund claims are:
– Substantive: informing IRS of request
– Procedural: prerequisite to obtain a refund
• § 6513: No refund authorized without claim
– Jurisdictional:
prerequisite to filing suit
• § 7422: No suit unless claim filed
• § 6532: No suit until six months after claim filed or
claim disallowance
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Claim Requirement
• Refund after S/L on claim runs =
erroneous refund, §6514, and
• Recoverable summarily §7405(a)
– within 2 years of payment (4, if fraud)
• Variance Doctrine limits recovery to
grounds stated in claim (infra)
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“Overpayment”
• Amounts paid > amount properly due
• Lewis v. Reynolds – §6501 not a bar to
proper computation
• Equitable recoupment – generally defensive
only
– But see Bull case, text p. 242 – Payment of
asserted deficiency, then claim for refund
• Not amounts treated as “deposit” or “bond”
– Rev. Proc. 2005-18; 2004 Act
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Full Payment (Flora) Rule
• Flora v. U.S.
• Absent statutory relief, all of tax for the
period must be paid before jurisdiction lies
for refund suit
– Income tax: per TP, per year
– FICA & §6672: per employee, per quarter
– Any independently taxable item; “divisible
taxes”
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Full Payment Rule
• Availability of pre-assessment forum
– Notice of Deficiency; Tax Court
• Issue: Staying collection
– if pay only for some periods
– if don’t pay interest & penalties
• e.g., 6672 refund actions
– often voluntary withholding of action pending
result
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Full Payment: Section 6166
• Jurisdiction over IRC § 6166 deferral issues
– 1998 Act extended to Federal District Courts
and Claims Court, even though payment of the
estate tax has not been made in full
– Issues such as qualification for deferral, but
also valuation disputes, etc.
• In addition to Tax Court declaratory
judgments
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Form of Claim
• Various Official Forms
– Form 843 for generic claims
– Forms 1040X, 1120X, etc. for specific taxes
– “Refund” amounts on original returns
• Most frequent case
– Overpayments scheduled on Form 870
• Not Form 1139: Tentative Carryback
Adjustment under § 6411
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Informal Claims I
• Use of forms not mandated by statute
CONTENTS:
• ID TP, period, desire for refund
• Amount and type of tax
• In detail, EACH GROUND upon which
claim is based, and sufficient facts, to
apprise IRS of the exact basis of the claim
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Informal Claims II
• Example of Extent of Leniency:
– Oral claim for a refund was sufficient as
a claim (to confer court jurisdiction)
when supplemented by a letter stating
legal and factual basis of claim
– Tinari v. U.S. (E.D. Pa. 10/28/98)
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Variance Doctrine
• Court jurisdiction only grounds stated in
claim
– basis for refund that varies from bases in
claim is PROHIBITED
• Requirements may be waived by IRS
– implicit if basis is litigated
• Alternative (or inconsistent) claims are OK
and common, EVEN ADVISED
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Variance: Ground vs. Theory
• OK to assert two alternative legal theories
of deductibility of a specific economic loss
– Claim: “business bad debt loss” (no citation)
– At trial: raised § 165 loss & § 166 bad debt as
alternative theories of recovery
• Court: not a new ground
– claim contained enough info about merits for
IRS to “reasonably deduce the existence of”
the theory; alerted IRS of legal conclusion
asserted
© David M. Wooldridge 2007
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Protective Claims
• Claim forms are signed under penalties of
perjury
– true and correct, best of knowledge
• Nevertheless, alternative positions and
protective claims are appropriate, e.g.,
– E.g., year of deduction unclear; dispute affects
other tax periods; contingent liabilities of estate
not claimed on 706; etc.
© David M. Wooldridge 2007
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Review of Claims
• Refund claims are treated as an “amended
return”
– may be granted upon recent and manual review
– may trigger an exam of the “amended” return
– Examinations of amended returns proceed
generally on same procedures as examination
of initial returns; Appeals review
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Notices of Claim Disallowance
• IRS required to provide notice explaining
why a claim is disallowed. § 6402(j)
• Statute of limitations on refund suit
commences upon mailing of Notice. § 6532
– Or, upon WAIVER. A trap for unwary.
• May request prompt disallowance
– To allow suit earlier
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TEFRA Procedures (RAA)
• Request for Administrative Adjustment of a
TEFRA partnership return
– By any partner, not just TMP
• IRS Options
– Accept RAA, make adjustments summarily
• Which requires partners to adjust consistently
– Treat as non-partnership item
– Conduct a TEFRA proceeding exam
– Suit in all 3 courts allowed, if not allowed
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S/L on Refund Claims
• No refund unless a timely claim is filed
– Section 6511(b)(1)
– Refund upon untimely claim = erroneous void
• § 6514; recoverable in suit per § 7405
• § 6511 limits both
– time of filing
– amount of refund allowable
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No Extension by Agreement
• Unlike the assessment S/L may not be
extended by agreement
• However, may be extended or suspended or
mitigated for other reasons
– Bad debts, loss carrybacks
– Financial incapacity (infra)
– Double inclusion, or disallowance of deduction
• Can extend period to file suit afterward
© David M. Wooldridge 2007
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Suspension
• Suspension – prior discussions
• ADDITIONAL ITEM – Statute of
limitations for filing claims is suspended
while a TP is “financially disabled.” IRC §
6511(h)(2)(B).
– Incapable of handling financial affairs
– Power of attorney may negate disability
– Added in 1998 Act
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Mitigation Relief Provided
• § 1311 allows TP/IRS to correct an
otherwise time-barred erroneous income tax
treatment, in limited situations involving
inconsistent treatment of tax items
• § 1314 provides the mechanism: a 1-year
reopening of the S/L for the aggrieved party
to claim a refund (TP) or seek to assess a
tax (IRS -- through NOD)
© David M. Wooldridge 2007
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Refund Raised in Collection
• Collection Due Process provisions
– 1998 additions, §§ 6320, 6330; Administrative
appeal of liens & levies
– Assertion of refund claim
– If TP did not receive NOD, or
– If TP did not otherwise have opportunity to
contest the tax
• Also, Offers in Compromise – on Liability
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Refund Actions in Court
• No suit commenced before
– 6 months elapsed since claim filed, or
– claim disallowed
• No suit commenced after
– 2 yrs following Notice of Claim Disallowance
– or, Waiver of Notice
• Trap for unwary
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Available Forums
• On an original claim for refund –
– Court of Federal Claims
• Original court of jurisdiction
– Federal District Court
• Forum Selection Criteria (prior
material)
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Refunds in Tax Court
• Tax Court has jurisdiction to determine
overpayments, if year properly before it
– Only years properly petitioned §6512(b)
– i.e., IRS mails NOD, claiming deficiency, but
Court determines overpayment instead
– Amount limitation: amts paid after petition,
plus amount recoverable if claim filed on date
the NOD was mailed
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Rules of Procedure
• FRCP in both
• Court of Federal Claims – some special
rules, covering unique differences
– E.g., trial in multiple locations
• Opposing Counsel
– DOJ Tax Division Trial Section (Dist. Ct.)
– DOJ Court of Federal Claims Section
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Settlement
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Much More DIFFICULT in Refund Cases
Absence of Appeals Office
No culture of resolution
Review procedures
Involvement of Office of Review
Joint Committee review
Appellate Section handles appeals
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