Last week, General Mills, Inc., the cereal maker, lost a significant refund case because its administrative claim was deemed untimely. General Mills, Inc. v. United States, No. 14-89T, 2015 U.S. Claims LEXIS 1311 (Fed. Cl. Oct. 14, 2015). The case involves the intersection of complex facts with confusing statutory provisions; not surprisingly, a partnership was involved.
General Mills is the parent of a number of subsidiary corporations, which were partners in General Mills Cereals, LLC (the “Partnership”), a limited liability company that was taxed as a partnership. General Mills, 2015 U.S. Claims LEXIS 1311 at *1. The refund claim related to interest accruals on tax items addressed in parallel audits of General Mills and the Partnership. While tax items associated with a partnership were in play, the taxpayer’s refund claim was focused elsewhere:
- As a C Corporation, General Mills was subject to a higher rate on any deficiency over $100,000 under Section 6621(c) of the Code, which provides a higher rate for “large corporate underpayments,” known as “LCU interest”. See I.R.C. § 6621(c)(1).
- Under Section 6621(c), LCU interest begins to accrue thirty days after the earlier of a notice of proposed deficiency and a notice of deficiency. See I.R.C. § 6621(c)(2).
- General Mills believed that the IRS improperly calculated its liability for LCU interest by using the wrong commencement dates for the interest accrual. 2015 U.S. Claims LEXIS 1311 at *1-*2
The audit process began in January 2005, when the IRS advised the partners that it was commencing administrative proceedings concerning the Partnership for the 2002 and 2003 tax years. It then commenced an audit of General Mills for the same years on April 4, 2005. Id. at *5. The two audits were resolved as follows:
- The corporate audit was completed first; on June 15, 2007, the IRS sent General Mills a notice of proposed deficiency, which included language indicating that LCU interest would be applied. Id. at *5-*6.
- On July 27, 2010, General Mills entered into a settlement agreement with the IRS to resolve the partnership proceeding. The agreement provided that General Mills was waiving the restrictions on assessment that would normally apply and consenting to the assessment and collection of a deficiency for items relating to the adjustments made to the partnership items, “plus any interest provided by law.” Id. at *6-*7.
- On August 27, 2010, the IRS sent General Mills a letter and audit statement that outlined “how the adjustments made during our examination of [the Partnership] affect your income tax return.” Id. at *8. An assessment, which included LCU interest, followed the next week.
- On April 11, 2011, General Mills paid additional taxes and interest for the 2002 and 2003 tax years, including LCU interest. Id. at *10.
The substantial gap between the June 15, 2007 notice of proposed deficiency from the corporate audit and the August 27, 2010 audit statement from the audit of the Partnership would become central to the merits of the taxpayer’s refund claim, as the IRS asserted that the earlier notice triggered the accrual of LCU interest in July of 2007, while General Mills contended that the later notice triggered the accrual of LCU interest in September of 2010.
A second round of audits was conducted for the 2004-2006 tax years. The IRS began examining the corporate return in September of 2007, and it commenced a partnership proceeding in November 2007. Id. at *11. These audits were resolved in a manner similar to the audits for 2002 and 2003:
- On April 29, 2009, the IRS completed the corporate audit and issued a notice of proposed deficiency, which again referenced the potential for LCU interest. Id. at *11-*12.
- On November 1, 2010, General Mills and the IRS entered into a settlement agreement to resolve the partnership audit; the agreement again provided for a waiver of the restrictions on assessment and collection, along with identical language concerning interest. Id. at *12.
- On March 4, 2011 the IRS issued another letter and audit statement, advising General Mills of the proposed changes to its tax liabilities. Id. at *12-*13. An IRS Form 870 providing for immediate assessment and collection of the additional taxes and interest accompanied the letter; General Mills executed this and returned it to the IRS. Id. at *13.
- On April 11, 2011, General Mills paid the additional taxes and interest, including the LCU interest. Id. at *15.
Again, the gap between the initial notice of proposed deficiency in the corporate audit and the audit statement from the partnership audit would be the crux of the dispute between General Mills and the IRS over the proper calculation of LCU interest.
On March 28, 2013, General Mills filed a refund claim seeking to recoup a portion of the LCU interest. The claim had two key elements:
- For tax years 2002-2003, the taxpayer argued that the LCU interest should not have started to run in July of 2007, positing that the correct date to commence LCU interest was September 26, 2010, thirty days after it had received the August 27, 2010 audit statement. Id. at *16.
- For tax years 2004-2006, the taxpayer argued that LCU interest should have started to accrue on April 3, 2011 (thirty days from the audit statement), and not the May 29, 2009 date used by the IRS. Id. at *17.
The IRS denied the refund claim, and General Mills filed a complaint in the Court of Federal Claims. The government responded with a motion to dismiss for lack of subject matter jurisdiction.
While there was no question that General Mills had filed its refund claim with the IRS within two years of paying the relevant tax and interest, the premise of the government’s motion was that the normal refund limitation of Section 6511(a) was not applicable. Instead, the government asserted that a specialized provision, Section 6230(c), applied and that General Mills had to file a refund claim within six months to preserve its right to challenge the LCU interest. Id. at *19.
The issue is not a simple one. Consequently, I will lay out the relevant analysis in a follow-up post.