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How Do Section 6511(b)’s Payment Limitations Apply When a Late-Filed Original Return Perfects a Prior Informal Refund Claim?

Posted on Sep. 18, 2018

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.

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.

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