Credit Carry Forward as Timely Refund Claim

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In Libitzky v. United States, No. 3:18-cv-00792 (N. D. Cal. 2021) the district court dismisses cross motions for summary judgment in a refund suit and pushes the case forward for a determination by a jury.  The parties agree that the Libitzkys overpaid their 2011 liability by almost $700,000.  They disagree on the issue of whether the Libitzkys timely filed a claim for refund seeking return of their money.  The court finds the filing of a timely refund claim jurisdictional, a determination at odds with at least one other court.  The court also finds that the possibility exists that the forms filed by the Libitzkys requesting a carryover of their 2011 refund could meet the requirements of an informal claim.  A jury will decide the issue.  The case raises interesting issues regarding both jurisdiction and informal claims.

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The Libitzkys were investors in real estate and did well.  They regularly had income tax liability in the half million dollar range.  Because of the way their investment income fluctuated, making a precise determination of the amount of estimated payments they should pay difficult, they elected each year to roll over their tax refunds to apply the refunds against the estimated tax payments for the subsequent year.  This practice regularly created large refunds for them which they left with the IRS.

Something happened with respect to their 2011 return.  They unquestionably seem to have prepared the return on time in their usual manner.  They requested an extension, sending it by certified mail on April 17, 2012.  The extension estimated a tax liability of about $1.5 million, stated they had made payments of about $1.2 million and included a check for about $300,000.  The taxpayers believe they timely filed their 2011 return before the extended due date but acknowledged that they had no mail receipt showing that they did so.  The return, which may or may not have been filed, showed an overpayment of $692,690 with a request that this amount be applied to their 2012 taxes as per their usual practice.

In 2013, they requested an extension of time to file their 2012 return, estimated a liability of about $500,000 and stated they had made payments already of about $1.15 million.  They did not get around to filing the 2012 return until February 6, 2015.  The filed return reflected almost the same liability and payment amounts as they stated when requesting the extension.  The payment amounts included $692,690 from their 2011 overpayment.  The 2012 return reported an overpayment of $645,119 which they elected to apply to their 2013 estimated taxes.

They filed their 2013 return in December 2014, showing tax owed of about $1 million and payments of $1.12 million which included the $645,119 credit forwarded from the 2012 overpayment.  On December 15, 2014, the IRS sent the taxpayers a notice stating that they owed $577,924.18 based on changes to their 2013 form.  This started a back and forth which led to the discovery that the 2011 return had never been filed. 

On January 20, 2016, a Revenue Officer (RO) showed up at their property (the opinion skips over that the IRS must have sent a series of collection notices including a Collection Due Process (CDP) notice that the Libitskys did not pursue).  On that date, they gave the RO a signed copy of the 2011 return.  The court states that the “Libitzkys’ 2011 return was deemed filed on January 20, 2016”, showing the tax and payments resulting in an overpayment of $692,690.  (Note that handing a signed return to an RO or a revenue agent does not always result in the IRS treating the return as filed.  This is at issue in a case currently before the 9th Circuit – Seaview Trading, LLC, AGK Inve v. CIR, No: 20-72416.)

On April 20, 2016, the IRS issued a letter to the Libitzkys informing them that their claim for the $692,690 could not be allowed because “[y]ou filed your original tax return more than 3 years after the due date. Your tax return showed an overpayment; however, we can’t allow your claim for credit or refund of this overpayment because you filed your return late.” Dkt. No. 1-1, Ex. B. The letter continued, “We can only credit or refund an overpayment on a return you file within 3 years from its due date. We consider tax you withheld and estimated tax as paid on the due date (i.e., April 15) for filing your tax return.” Id.

By letter dated August 3, 2016, plaintiffs’ counsel appealed the denial of the Libitzkys’ $692,690 claim for the 2011 tax year to the IRS. Dkt. No. 1-1, Ex. C. On November 29, 2017, the IRS again determined that there was “no basis to allow any part of your claim” for the $692,690. Dkt. No. 1-1, Ex. D. The letter advised plaintiffs that they could further pursue the matter by filing suit with the district court within two years of the April 20, 2016 claim denial letter. Id.

The 9th Circuit points out that the three year look back rule of IRC 6511(b) presents a problem here since the 2011 return was not deemed filed until January 20, 2016, but the payment giving rise to the overpayment would have been deemed paid on April 17, 2012, more than three years prior to the filing of the claim.

For that reason, the Libitzkys argue that “[w]hether through the 2012 Form 4868, or through the 2012 Form 1040, or the combination thereof, or other documents and communications, [they] made a formal or informal claim (either of which is legally sufficient), timely.” Dkt. No. 51 at 35. Ordinarily the Court would have been inclined to find that what is recoverable is a merits inquiry, while the Section 6511(a) timely claim requirement is satisfied by the 2011 tax return at a minimum, thus establishing the Court’s jurisdiction over this dispute. The circuit has stated, however, that “§ 6511(b)(2)(A) is jurisdictional.” Zeier v. United States Internal Revenue Service, 80 F.3d 1360, 1364 (9th Cir. 1996). As another court has observed, this essentially collapses the jurisdictional and merits inquiries in cases like these. See Stevens v. United States, No. 05-03967 SC, 2006 WL 1766794, at *3 n.3 (N.D. Cal. June 26, 2006) (“accepting that Section 6511(b)(2)(A) creates a jurisdictional bar to Plaintiff’s case, Plaintiff may clear that bar with proof that the estate submitted an adequate informal claim, the same thing it will need to prevail on the merits.”).

The court finds that in order to determine if the overpayment is recoverable questions of fact exist on which a jury will need to decide.  By taking the position that the timeliness of the claim creates a jurisdictional issue, the court makes the inquiry slightly more difficult and places it at odds with at least one other jurisdiction.

The court says it has recognized the informal claim doctrine and that could provide a path forward for the taxpayers.  The IRS counters that neither the 2012 extension request nor the 2012 return could meet the test for an informal claim because neither provides the IRS with the information necessary to determine if the claim is correct.  If the court finds that the subsequent year return can serve as a formal or informal claim for refund for the year in which the taxpayer seeks a credit carryforward on an unfiled return, the decision would expand the informal claim doctrine and would offer a large benefit to taxpayers who fail to timely file their returns. 

The equities are interesting here.  You could say the IRS led the taxpayers on by accepting the 2012 return with the somewhat phantom 2011 overpayment.  The IRS did not start questioning the overpayment until the taxpayers filed their 2013 return, lulling the taxpayers into a false sense of security.  On the other hand, the taxpayers not only failed to file the 2011 return for unknown reasons, but also failed to react quickly when the IRS brought them the problem.

Disallowing the credit would be a harsh result here, particularly if the taxpayers have a history of filing and apparently only missed the 2011 year filing due to inadvertence of some type. For those interested in credit carryover issues, a CDP case involving these issues just had an order entered which you can read here.

Comments

  1. As Keith reports, the Libitzky district court wrote: “The circuit has stated, however, that ‘§ 6511(b)(2)(A) is jurisdictional.’ Zeier v. United States Internal Revenue Service, 80 F.3d 1360, 1364 (9th Cir. 1996).” But Zeier was decided long before the Supreme Court began severely curtailing the use of the jurisdictional label for mere claim processing rules.

    There is no Circuit that has yet discussed whether, in light of the new Supreme Court jurisdictional rules, section 6511(b)(2)’s timely payment rules are jurisdictional. However, as Keith alluded, there is at least one Circuit that disagrees with the Ninth Circuit and holds that section 6511(b)(2)’s payment rules are not jurisdictional. In Boeri v. United States, 724 F.3d 1367, 1369 (Fed. Cir. 2013) (on which Stephen blogged on August 26, 2014 and which I discussed in a post on another case on January 16, 2014), the Federal Circuit held that the payment rules of section 6511(b)(2) are not jurisdictional, though without discussing recent Supreme Court case law on jurisdiction.

    Although no Circuit has yet so held, panels of two Circuits, in dicta, have questioned even whether, under current Supreme Court case law, the filing (section 7422(a)) and timely filing (section 6511(a)) refund claim rules should still be considered jurisdictional. See my posts on Walby (May 13, 2020) and Gillespie (November 15, 2016). The Center for Taxpayer Rights (in an amicus brief authored by the Tax Clinic of the Legal Services Center of Harvard Law School) is currently arguing before the Federal Circuit, in a case named Brown, that the filing requirement is no longer jurisdictional, consistent with the recent dicta in that Circuit’s Walby opinion. For access to the Brown amicus brief, see Keith’s post on a different case, dated July 26, 2021.

    I am not sure how unusual this is, but the posture of Libitzky is now that a jury (not the court) will decide the “jurisdictional” question of whether there was a valid informal refund claim that sets the date of claim filing for purposes of the lookback payment rules of section 6511(b)(2). I wish the Libitzky court had taken the time to decide whether the Ninth Circuit’s holding in Zeier should no longer be followed in light of more recent Supreme Court case law.

  2. Joseph B Schimmel says

    The Webber CDP case linked at the end of this post may deserve a blog post of its own. It addresses an issue I had failed to previously consider: How long can a taxpayer wait before depositing a check or claiming that a check has been lost or stolen? The answer appears to be “1 year, unless the IRS feels like cutting the taxpayer some slack.” The applicable statute is 31 USC § 3702(c)(1): “Any claim on account of a Treasury check shall be barred unless it is presented to the agency that authorized the issuance of such check within 1 year after the date of issuance of the check.” Courts have repeatedly considered, and rejected, 28 USC 2401/2501 as providing an alternative 6 year rule. Cf. 31 USC 3328, and I.R.M 21.4.2.1.2.1.3(2) (“IRS may recertify a refund check presented after the period of limitations”). The take-away is, “If you receive a refund check, cash it. If you don’t receive a refund check, file Form 3911.” Holding the check is not an alternative to “credit carry forward.”

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