We welcome back frequent guest blogger Carl Smith who writes today about a potential issue not reached by the court. Whether the taxpayer will seek to raise the issue in a request for reconsideration or attempt to raise it on appeal remains to be seen. Keith
I don’t usually do posts on opinions where an interesting issue is presented, but the court didn’t reach the issue, and I don’t know how the issue should come out. But, when I mentioned the issue in this post to Les, and asked whether Saltzman & Book answered the issue, and Les told me that the book did not and that he thought the issue was “fascinating,” I decided: Why not do a post?
The potential issue is presented in Voulgaris v. United States, 2018 U.S. Dist. LEXIS 150724 (E.D. Mich. Sep. 5, 2018), a refund suit that was dismissed for lack of jurisdiction because the administrative claim, although timely made under section 6511(a), was limited by section 6511(b) to zero because the taxpayer had not made any tax payments in the 3-year period looking back from the date the claim was made through the filing of a late original return.
The court does not discuss the informal claim doctrine, which was not raised by the taxpayer’s counsel or mentioned in the government’s motion to dismiss. However, taken from the government’s summary of the facts, the court includes in its opinion facts demonstrating that the taxpayer had made an informal claim long before that claim was perfected by the filing of a late original return showing the overpayment. The Supreme Court held in United States v. Kales, 314 U.S. 186 (1941), that where an informal claim is later perfected, the perfected claim is treated as made on the date of the informal claim for purposes of what is today section 6511(a). But, Kales doesn’t answer the question of what is the limit under section 6511(b) of the amount of the claim when a claim is deemed timely filed under the informal claim doctrine. Section 6511(b) says that if a claim is filed within three years after the filing of the original return (one of the alternative requirements of subsection (a)), then the claim is limited to the amount of any tax paid in the 3-year period prior to the filing of the claim (plus the period of any extension to file the original return). Section 6511(b), though, also provides that if a taxpayer is relying on the 2-years-after-payment rule of subsection (a) to make a refund claim timely, then the section 6511(b) amount limit is to the taxes paid in the 2-year period prior to filing the claim. In Kales, whether the lookback period was two years or three years from the filing of the claim, the amount was not limited because the amount of the tax in dispute had been paid on the very day the informal claim was filed.
If the taxpayer in Voulgaris had raised the informal claim doctrine, should the court have used the 2-year or 3-year lookback rules from the date of the informal claim for purposes of applying the tax payment amount rules of 6511(b)? Is the late-filed return treated as filed on the date of the informal claim so that the 3-year lookback rule applies from the informal claim date? If so, the refund amount sought was paid within that lookback period. However, if the 2-year lookback rule applied, the refund claim would be limited to zero.
read more...Here are the facts of Voulgaris, which involves a refund claim for overpaid 2003 income taxes. The taxpayer, a foreigner, was a grad student during 2001 at the University of Michigan. While studying, he set up a bank account in the U.S, in which he kept a fair amount of money. In 2003, I am not sure if he was in the U.S. (probably not, from the court’s finding that he went back to Europe after 2001), but he bought and sold stocks through a (probably U.S-based) Scottrade account. He did not file a timely U.S. 2003 income tax return.
The IRS later sent a notice of deficiency for 2003 income taxes to the taxpayer at some address (probably in the U.S.) in which the IRS computed his tax based on gross sales proceeds of $77,000 reported on Forms 1099-Bs. The computation did not include any basis information.
Voulgaris never received the notice of deficiency, so, of course, he did not go to Tax Court and the deficiency was later assessed.
In 2009, the IRS issued a notice of intention to levy to Voulgaris, which he also did not receive. So, of course, he did not request a Collection Due Process hearing.
The IRS then levied on Voulgaris’ U.S. bank account, and on Feb. 24, 2010, the IRS received $28,000 from the bank. That amount apparently fully paid the liability.
On Feb. 10, 2013 (i.e., more than two years, but less than three years after the levy payment), the IRS received a letter from Voulgaris seeking a complete refund and including “Schedule D, Schedule D-1, and a Composite Substitute 1099 showing his Scottrade stock transactions,” but not an original Form 1040 for 2003. The Schedule D showed that, when basis information was included, Voulgaris’ 2003 stock transactions actually had resulted in a net capital loss of about $5,000. There is no mention in the opinion of Voulgaris having any other U.S.-source income in 2003.
The IRS responded to this letter by asking Voulgaris to file a complete Form 1040 for 2003. After much back and forth, on Aug. 19, 2015, the IRS finally received from Voulgaris a Form 1040, which it processed. The return sought a refund. But, the IRS denied the refund, and the taxpayer brought a timely suit.
The court correctly observes that the claim is timely under 6511(a) because made on the original return. Given that timely claim, the lookback period under 6511(b) was three years, not two, from the time the return was filed. Since the tax was paid on Feb. 24, 2010 – more than three years before the return was filed – the court holds that the amount of the claim must be limited to zero. But, is this right?
Wasn’t the Feb. 10, 2013 letter an informal claim that just later got perfected? The court does not discuss the informal claim doctrine, since Voulgaris’ lawyer did not argue that he had made an informal claim prior to the filing of the Form 1040. If the Feb. 10, 2013 letter in fact constituted an informal claim, that claim would come with a lookback period. Is the lookback period two years (in which case, the claim would be limited to zero) or three years (in which case the claim could encompass the entire amount paid by levy on Feb. 24, 2010)?
I have never run across this fact pattern and haven’t done research on it. I suspect that there is no case law on this informal claim issue because only in the last 20 years have all the courts come around to the idea that a late return showing an overpayment gets the 3-year lookback period under (b) because the claim shown on that return is timely under (a) (having been made within three years after the return was filed – indeed, on the same day). See Baral v. United States, 528 U.S. 431, 433 (2000) (in the case of a return filed more than three years after the due date, the IRS “did not dispute that Baral had timely filed the request under the relevant filing deadline – “within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later.’ § 6511(a)”); Omohundro v. United States, 300 F.3d 1065 (9th Cir. 2002) (overruling Miller v. United States, 38 F.3d 473 (9th Cir. 1994), which had held that the 2-year lookback period applied when a late original return was filed showing an overpayment); Rev. Rul. 76-511, 1976-2 C.B. 428.
Les tells me that Saltzman & Book does not address the issue of how the section 6511(b) amount limits apply when an informal claim is filed before a late original return showing an overpayment is filed. And he doesn’t know whether there is case law on this question, either. Both of us are inclined to think that, on these facts, the return is deemed filed on the date of the informal claim, so, logically, the 3-year lookback period from the date of the informal claim should apply. But, I would not bet my shirt on it. If any reader of PT has encountered authority on this issue, I would urge you to help us all out by citing pertinent authority in the comments section to this post.
About Carlton Smith
No answers, but a few questions:
1) Why did IRS assert that a return was required? The claimant apparently had no gross income for the year in question. “Gross proceeds” are not “gross income.”
2) The facts indicate that the claimant, who moved to Amsterdam in August 2001, was a nonresident alien by 2003. (His citizenship is not mentioned in the opinion, but IRS makes no claim that he should have been taxed on his worldwide income that year.) Why did IRS ask him to file a Form 1040 when, if anything, a Form 1040NR would have been required?
3) Not that anyone pays much attention to the Internal Revenue Manual, but it does say there that
An “informal claim” is a request for refund submitted by the taxpayer either on a non-standard form (written request) or by some other means as long as the required claim elements are identified, e.g., tax year, identification number, refund requested and reason for the refund. Several court cases discuss this concept including United States v. Kales, 314 U.S. 186 (1941); Newton v. United States, 163 F. Supp. 614 (Ct. Cl. 1958). For example, a letter from the Taxpayer can be an informal claim. 4.90.7.1 (05-09-2013)
The answer to Bob Kaymman’s question #1 is that while it is true that “gross proceeds” don’t always equal gross income, for the years in issue, brokers did not include cost basis on the info submitted to IRS. Therefore, when IRS matched up the 1099B to the return or lack thereof, the IRS was not in a position to know whether there was a cost basis or what it was. Once brokers were required to provide cost basis beginning in 2011 ( I think), this issue largely went away. I can’t tell you how many CP2000 notices I have responded to over the last 15 years providing cost basis for clients that omitted stock sales. This was especially prevalent where the stock sales were from stock options and the client thought because the option proceeds were included in their W2 they did not need to report the transaction even though it resulted in a small capital loss from the brokerage fees to sell the stock.
That explains why IRS might think a return was required, before being presented with evidence that there was no gross income. I, too, have helped clients respond to CP-2000’s based on IRS computation of tax that assumes zero cost basis to broker proceeds. (And, I have had many online discussions with other preparers who believe that gross income DOES include gross proceeds.) The issue here, though, is that not only was no return required, but IRS probably asked for the wrong one. The underlying problem is lack of training by Service Center clerks with unspoken production quotas.
Some of the case law indicates that informal claims should include a statement made under the penalty of perjury, as in the jurat of a tax return. But that requirement does not seem to be strictly enforced. If that’s what IRS had wanted, they could have just asked the claimant to provide one, or to sign an acceptable IRS form with the magic language.
” I can’t tell you how many CP2000 notices I have responded to over the last 15 years providing cost basis for clients that omitted stock sales.”
You have lucky clients. When the return DID include the stock sales, the IRS didn’t issue a CP2000 notice but did alter records internally to allege a mathematical or clerical error (in addition to altering the Form 1099-B for which an IRS data entry clerk was jailed). In Court of Federal Claims a judge wrote a list of all except one form on which I had reported income. I think we can figure out why the judge omitted Schedule D from his list. The withholding that was reported on Form 1099-B came from the gross proceeds that were reported on Schedule D.
Meanwhile the DOJ must have got to the IRS too. The IRS stopped insisting, as it had insisted for 7 years, that the IRS accepted a refiled return which complied 100% with requirements stated by the IRS. I’ve seen lots of statutes that authorize the IRS to accept or reject a tax return; I haven’t seen any statutes that authorize the DOJ to overturn the IRS’s decision.
“But, Kales doesn’t answer the question of what is the limit under section 6511(b) of the amount of the claim when a claim is deemed timely filed under the informal claim doctrine. Section 6511(b) says that if a claim is filed within three years AFTER the filing of the original return”
That part of section 6511(b) looks irrelevant; it doesn’t say what happens if a claim is filed BEFORE the filing of the original return.
“In Kales, whether the lookback period was two years or three years from the filing of the claim, the amount was not limited because the amount of the tax in dispute had been paid on the very day the informal claim was filed.”
Right. Also in the present case, the informal claim was timely and it doesn’t matter how long BEFORE the original return, right?
However, what happens if the informal claim actually was the original return, the IRS created records of timely filing the original return but later having no return on file, and later the IRS deleted records of the timely filing and unfiling of the original return? Even the DOJ admitted that a perfected refiling might be covered by Kales, but courts refuse to take jurisdiction.
“In 2003, I am not sure if he was in the U.S. (probably not, from the court’s finding that he went back to Europe after 2001), but he bought and sold stocks through a (probably U.S-based) Scottrade account.”
In 2003, Scottrade sent me a letter saying they do not accept customers who reside outside the US.
“The IRS later sent a notice of deficiency for 2003 income taxes to the taxpayer at some address (probably in the U.S.) in which the IRS computed his tax based on gross sales proceeds of $77,000 reported on Forms 1099-Bs.”
TIGTA reported that an IRS data entry clerk was jailed for embezzling from Forms 1099-B. How did the IRS ever match this one to the legitimate beneficiary?
Was the taxpayer’s income in 2003 low enough that he didn’t even have to file a return? That could explain why the IRS’s attack wasn’t more-or-less ‘timely’.
“Both of us are inclined to think that, on these facts, the return is deemed filed on the date of the informal claim”
I don’t see any reason for that. The informal claim was filed on the date it was filed (though I wonder what would happen had the IRS decided to unfile it).
Does All-Stacked Up Masonry address and/or clarify any of the questions posed in this article or by commentators?
Mike,
I think you are right that All Stacked Up Masonry, Inc. v. U.S., 150 Fed. Cl. 540 (10/22/20), issued after I did this post, does provide adverse authority on this issue, though it doesn’t cite other cases coming to the same conclusion and doesn’t seem that persuasive to me. Further, I looked at the DOJ reply to the opposition to the motion to dismiss in the case, and that reply cites no on point authority, just mostly what the court cited in its opinion.
For the benefit of other PT readers, I provide the entire relevant passage from the opinion:
All Stacked Up asserts that, despite the statutory look-back period, the informal claim doctrine provides that “the taxpayer has a valid refund claim if the formal claim was preceded by an informal claim made within the statutory period.” (Pl.’s Resp. at 2 (citing to two letters the taxpayer submitted to the IRS on September 18, 2015, and January 11, 2016)). However, as the United States correctly notes, the informal claim doctrine does not apply here.
The informal claim doctrine operates to allow a refund claim that was untimely filed
under I.R.C. § 6511(a), i.e., filed more than two years after payment or more than three years after the return was filed. See United States v. Kales, 314 U.S. 186, 193 (1941). “Courts have long applied the informal claim doctrine in order to exercise jurisdiction over cases in which the taxpayer’s formal administrative claim for refund is untimely filed” with respect to a statute of limitations. Stelco Holding Co. v. United States, 42 Fed. Cl. 101, 109 (1998). In discussing the three-year look-back period, the Supreme Court has explained that it is not a statutory time limitation, but rather a “substantive limitation[] on the amount of recovery[.]” United States v. Brockamp, 519 U.S. 347, 352 (1997); see also Boeri v. United States, 724 F.3d 1367, 1369 (Fed. Cir. 2013). Consequently, the look-back provision is not jurisdictional in nature. Boeri, 724 F.3d at 1369, 1371 (affirming dismissal for failure to state a claim under RCFC 12(b)(6)).
All Stacked Up timely filed its refund claim on October 31, 2017, thus there is no statute
of limitations issue here. The informal claim doctrine does not apply to extend the three-year look-back period, which is a substantive, rather than jurisdictional, limitation on recovery. Consequently, All Stacked Up cannot maintain its claim for a refund of payments made outside of the three-year look-back period for the tax period ending March 31, 2014.