Details Matter: Tax Refund Claims in Bankruptcy Court.

Federal tax refund claims are generally subject to an exhaustion requirement under Section 7422(a) of the Internal Revenue Code, which requires that a claim for a refund be “duly filed” according to applicable law “and the regulations of the Secretary . . . .” While this language would appear to require strict compliance, courts have periodically recognized informal claims to be sufficient to satisfy the exhaustion requirement.

In the bankruptcy context, Section 505(a) of the Bankruptcy Code gives the bankruptcy court the power to address the propriety of taxes owed or paid by the debtor’s estate. That power is subject to certain limits, which include an exception indicating that the court cannot determine a tax refund “before the earlier of 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed”; or until the relevant tax authority rules on the request.Read More

Think Before You Sue: Bad Planning Leads to Bad Results.

When taxpayers have a dispute with the federal government concerning the appropriate amount of income tax due, they have a broad array of choices. Assuming that the case involves a notice of deficiency, the taxpayer can file a petition for tax court review; alternatively, the taxpayer can pay the disputed tax and file suit for a refund in either district court or the Court of Federal Claims.

Selecting the appropriate forum should involve careful thought and planning, but cases arise where the taxpayer appears not to have thought the issue through carefully. Recently, the Court of Federal Claims addressed a refund claim brought by a taxpayer that could not make up its mind and pursued overlapping cases in tax court, district court and the Court of Federal Claims.Read More

A Victory Attributable to Common Sense: Refund Claims and Partnership Items.

The limitation period for filing a refund claim is governed by Section 6511 of the Internal Revenue Code, and typically claims must be within three years of the filing of the taxpayer’s return or two years of payment. I.R.C. § 6511(a). There are, however, exceptions.

For partnerships, because of the procedure for handling administrative adjustments, Section 6511(g) imposes a special rule: if the refund claim is based on a tax item “which is attributable to any partnership item (as defined in section 6231 (a)(3)), the provisions of section 6227 and subsections (c) and (d) of section 6230 shall apply in lieu of the provisions of this subchapter.” Section 6230 sets up special limitations periods for refund claims attributable to partnership items:

  • for refund claims based upon an erroneous computation or penalty, the claim must be made within six months;
  • for refund claims that are based on a settlement of an administrative adjustment request, a final partnership administrative adjustment or a court decision, the claim must be presented within two years of the relevant event.
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A Series of Unfortunate Events: Mishandled Mail Bars A Refund.

Refund claims are subject to a strict limitations period: they must be submitted to the IRS within three years of filing of the return or two years of payment, whichever is later. I.R.C. § 6522(a). If a refund claim is not submitted to the IRS, the taxpayer is precluded from filing suit for a refund by Section 7422(a) of the Code. As a consequence, proof of the timely submission of the refund claim is an important issue in any refund action, as I discussed earlier in reviewing the Maine Medical Center case.

In Stocker v. United States, 2013 U.S. App. LEXIS 1089 (6th Cir.… Read More

Informal Refund Claims: a Potential Fix for Taxpayer Errors.

Generally, a taxpayer who wants to obtain a refund from the IRS should either file an amended return or a Form 843. If the refund is not granted within six months, the taxpayer is free to file a suit in district court or the Court of Federal Claims; alternatively, the taxpayer can wait for the IRS to act on the claim and then file suit within two years of its denial. See I.R.C. § 6502(a)(1).

While courts strictly enforce the requirement that a taxpayer make an administrative claim, they traditionally have shown some flexibility in determining what is a sufficient refund claim.Read More

Refund Claims- A Look At The Substantial Variance Rule.

Before filing suit for a refund, the taxpayer must make an administrative claim. The Treasury Regulations that govern refund claims require that a taxpayer set forth each of the grounds for a credit or a refund, along with “facts sufficient to apprise the Commissioner of the exact basis thereof.” Treas. Reg. § 301.6402-2(b). Courts have construed this to create a “substantial variance rule,” barring a taxpayer from presenting claims in a refund suit that vary substantially from what was presented as an administrative claim.

The reference in the regulation to “facts sufficient to apprise the Commissioner of the exact basis” for the refund claim creates a potential problem: can a taxpayer provide additional evidence in court that was not presented as part of a refund claim?Read More

Refund Claims for Holders of Partnership Interests, a Cautionary Tale.

What would you do if you realized that a tax return filed in the past three years treated an item as ordinary income that qualified for capital gains treatment? Generally, if you decided that the  amount was worth the trouble, you would file an amended return and seek a refund.

But there is one situation where that is not the right move: when the income came from a partnership covered by TEFRA. The Fifth Circuit recently issued an opinion that illustrates the point nicely. Rigas v. United States, 2012 U.S. App. LEXIS 17636 (5th Cir. Aug. 21, 2012).

In Rigas, the taxpayers had an interest in a limited liability company known as Odyssey Energy Capital, LLC (“Odyssey”) that managed oil and gas assets and had elected to be taxed as a partnership.Read More

More on Mailing: Federal Circuit Invalidates Tax Assessment Due to Lack of Proof.

Seemingly minor details can have a big financial impact: in an earlier post, I discussed a tax refund case that failed because the plaintiff could not establish timely mailing of its refund claim, a jurisdictional prerequisite. The IRS is also bound to establish mailing in certain contexts, as a recent decision by the Federal Circuit illustrates.

In Welch v. United States, 2012 U.S. App. LEXIS 10099 (Fed. Cir. May 18, 2012), the question was whether the IRS had provided sufficient proof that it had made a timely mailing of the statutory notice of deficiency. The taxpayers won a substantial tax refund because the IRS could not provide sufficient evidence.Read More

For Want of a Postmark, a Refund Was Lost: Tax Refunds, Jurisdiction and the Mailbox Rule.

Both district courts and the Court of Federal Claims have jurisdiction over refund actions brought by a taxpayer to recover an overpayment of a tax. 28 U.S.C. § 1346(a)(1). Section 7422(a) of the Internal Revenue Code provides that a taxpayer must first make an administrative claim with the IRS before filing suit. To be timely, a refund claim must be filed with the IRS either within three years of the filing of the return or within two years of the payment of the tax, whichever is later. I.R.C. § 6511(a).

Since the timely filing of an administrative refund claim is jurisdictional, an untimely claim means the taxpayer is out of luck.Read More