Seize the Day: The Vagaries of the Pennsylvania Tax Refund Limitations Period

Mission-Funding-Alpha-v.-CommonwealthCarpe diem, the Latin exhortation to “seize the day” (or more accurately pluck it) has been a favorite theme of poets ranging from Horace to Andrew Marvell. And for Pennsylvania taxpayers, it happens to be good advice concerning tax refunds, because the seemingly straight-forward limitations provision for refund claims continues to confound courts, lawyers, and taxpayers.

Here’s what it says:

For a tax collected by the Department of Revenue, a taxpayer who has actually paid tax, interest or penalty to the Commonwealth or to an agent or licensee of the Commonwealth authorized to collect taxes may petition the Department of Revenue for refund or credit of the tax, interest or penalty.

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Jurisdiction: The Full Payment Rule for Refund Claims and Divisible Taxes

divisible-taxesIf a tax is not subject to Tax Court review, the taxpayer is free to pursue a refund claim, but full payment is a jurisdictional prerequisite. Flora v. United States, 362 U.S. 145, 150-51 (1960). In some contexts the full payment requirement is relaxed because the tax is divisible; for example, a corporate officer challenging a trust fund recovery penalty assessment need only pay the tax for one employee to establish jurisdiction. Psaty v. United States, 442 F.2d 1154, 1159 (3d Cir. 1971). While the trust fund recovery penalty is recognized as a divisible tax, the question whether a tax is divisible remains open in a number of other contexts.… Read More

Partnerships, Interest, and Refund Claims: A Recipe for Misfortune, Part II

tax refund, general millsThis will continue coverage of the refund claim by General Mills that went awry. For a detailed review of the facts, look at my earlier post.

The case involved a series of overlapping audits of General Mills and an affiliated LLC, General Mills Cereals, LLC (the “Partnership”). To summarize, the situation was as follows:

  • As a C Corporation, General Mills was subject to what is known as LCU interest, a two percent increase in the underpayment rate that applies to underpayments by C Corporations that exceed $100,000. See I.R.C. § 6621(c).
  • There were gaps between the time when the IRS issued proposed deficiency notices in the corporate audits and the time when it outlined the impact on General Mills of the adjustments made in the audits of the Partnership.
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Partnerships, Interest, and Refund Claims: A Recipe for Misfortune

tax refund, general millsLast 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.… Read More

Jurisdiction: A Refund Action Runs Afoul of Flora, Part II.

Last week, I reported on Diversified Group, Inc. v. United States, 2015 U.S. Claims LEXIS 1101 (Aug. 26, 2015), a case on divisible taxes and jurisdiction, but I did not examine the cases that the taxpayer relied upon in the detail that they deserved.

Two cases were central to the taxpayer’s divisibility argument: Noske v. United States, 911 F.2d 133 (8th Cir. 1990), and Humphrey v. United States, 854 F. Supp. 2d 1301 (N.D. Ga. 2011). See Diversified Group, 2015 U.S. Claims LEXIS 1101, slip op. at *19. The Court of Federal Claims concluded that neither supported the taxpayer’s jurisdictional argument.… Read More

Jurisdiction: A Refund Action Runs Afoul of Flora.

A taxpayer who wants to pursue a refund claim must “pay first and litigate later.” Flora v. United States, 375 U.S. 63, 75 (1958) (citations omitted). Some taxes, however, are divisible, including the trust fund recovery penalty imposed under Section 6672 of the Internal Revenue Code. Pstay v. United States, 442 F.2d 1154, 1159 (3d Cir. 1971). Because the trust fund recovery penalty is a divisible tax, the payment of a single assessment relating to a single employee is sufficient to create jurisdiction over a refund claim, and the government counterclaims for the balance.

Last week, the Court of Federal Claim considered an interesting argument over the full payment rule of Flora.… Read More

Don’t Try This at Home: Tax Refund Barred by Judicial Estoppel.

After accepting a negotiated plea deal on tax evasion and other charges, one newly released inmate decided to file for a tax refund, arguing he had overpaid his taxes for several years covered by his plea agreement. It didn’t end well.

The case was decided by the Sixth Circuit this week. Mirando v. United States Dep’t of Treasury, 2014 U.S. App. LEXIS 17313 (6th Cir. Sept. 8, 2014). Mr. Mirando first entered a guilty plea on mail fraud, money laundering and tax evasion in 2001 and was incarcerated. Id., slip op. at *2.

Apparently the lesson didn’t sink in. After he was released from prison, he was indicted again on charges of evasion for additional years, including the tax year after he was released.… Read More

A Reminder: Records Matter in Tax Cases.

With the deadline for filing personal income tax returns nearly upon us, a recent district court case from California offers a timely reminder that recordkeeping is important in reducing tax liability.

The case, Gragg v. United States, 2014 U.S. Dist. LEXIS 44862 (N.D. Cal. Mar. 31, 2014), involved a married couple whose rental real estate activities ran afoul of the passive activity loss limitations in Section 469 of the Code, which bar the use of losses from passive activity to offset other income. The Graggs had two rental properties, which had generated losses; after an audit, the IRS determined that the rental properties were subject to the passive activity rules and assessed the Graggs with two deficiency assessments of $14,874 and $43,499.… Read More

Refund Claims: The Substantial Variance Rule and Legal Theories.

To obtain a tax refund, a taxpayer must submit an administrative claim to the IRS. There are regulations that address the content of the claim, and they require that a refund claim “set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof.” Proc. & Admin. Regs. § 301.6402-2(b).

Based upon the requirement that taxpayers exhaust administrative remedies, along with the regulations imposing requirements on the content of refund claims, courts have developed a “substantial variance rule,” which limits the extent to which a taxpayer can vary the legal theories and factual basis that support a refund claim.Read More

Refund Claims: The Second Circuit Upholds the Use of Informal Protective Claims.

Normally, a taxpayer who wants a refund makes a formal administrative claim by filing an amended return. The claim usually has to be filed within three years of the filing of the return or two years of the payment of the tax, whichever is later. I.R.C. § 6511(a). Courts also recognize informal claims in certain circumstances. In addition, where the taxpayer’s right to a refund is contingent, a protective claim can be filed to preserve its right to seek a refund at a later time. See, e.g., Swietlik v. United States, 779 F.2d 1306, 1307 (7th Cir. 1985).

Recently, the Second Circuit applied these principles, ruling that an informal protective claim sufficed to satisfy the requirement that a timely refund claim be made.Read More