© David M. Wooldridge 20071 David M. Wooldridge Sirote & Permutt, P.C. 205.930.5219...

© David M. Wooldridge 2007 1

David M. Wooldridge

Sirote & Permutt, P.C.

205.930.5219dwooldridge@sirote.com

Tax Practice and ProcedureChapter 9

Refund Claims & Litigation

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Scope of Unit XII

• 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

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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.

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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

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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)

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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

• 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