Procedure Grab Bag

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Or an interesting limitations case and a limiting interest TAM.

The last SumOp got a little lengthy, so I pulled out two items to trim it down.  The first I also thought deserved slightly more explanation, as the facts were complicated and the IRS somewhat reversed course on a position.  The second case deals with an untimely refund in a quirky situation.

  • The first tax procedure item is TAM 201548019, which highlights one way that  overpayment and underpayment interest can be complicated.  The issues and conclusion were as follows:

ISSUES:

I. Under Section 6611, does interest accrue on a general adjustment overassessment when the Service has simultaneously determined that there is an increase in tax due to adjustments to carrybacks from subsequent years, where the net effect of these increases and decreases is an overassessment?

II. If interest is allowed pursuant to Section 6611 on the general adjustment overassessment, to what date does such interest accrual run?

CONCLUSIONS:

I & II. Yes. Overpayment interest is allowable on the portion of the overpayment used to satisfy the underpayment from the date of said overpayment to the due date of the loss year return.

The applicable facts are that taxpayer filed a return for tax year 1, and timely paid the tax due.  In a subsequent year the taxpayer filed a tentative refund based on a net operating loss carry back from a future year 2.  The Service issued a refund based on the claim.  Later, on audit, the NOL was largely disallowed from year 2, causing a potentially increased assessment for year 1, which was less than the original refund amount.  The IRS also adjusted the original return for tax year 1 for other reasons, resulting in an original net overassessment and refund even after the reduced NOL.

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The taxpayer took the position that interest was due on the full overpayment amount until the tentative refund was issued based on the NOL (no interest was paid when the refund was generated by the NOL).  The IRS rejected this position somewhat.  It was willing to pay interest on the full amount, but not until the erroneous refund date.  The TAM states the IRS position is that interest on the total overpayment amount from year 1 runs until the due date of the loss year return, when the incorrect credit was generated and deemed applied.  The TAM states this is because Section 6611(b) only allows interest on an overpayment when there is a refund or an amount is credited.   Here, the Service determined the amount of refund in question was not “refunded” following the audit, and was instead applied against an outstanding underpayment from the erroneous refund generated by the incorrect NOL carryback.  The date the NOL was generated, the credit date, is the date used by the Service, instead of the actual refund date arising from the incorrect NOL carryback.  The TAM points out that neither refund nor credit are defined in the statute, and walks through the Service’s analysis of why the payment here is a credit.  The Service also stated that its prior similar TAM (201123029) was not binding and that the analysis was incorrect; specifically that an overpayment that was not in fact refunded could be considered refunded.   It will be interesting to see if something percolates through the courts with this fact pattern.

  • The second item is a tax procedure case out of the Middle District of Florida.  US v. Bates is as interesting as crippled valet, John Bates, but with tax procedure and not scheming servants. The taxpayer was a pilot who worked for an airline that went bankrupt.  Pursuant to the bankruptcy, the airline ceased paying retirement payments.  Prior to the order ceasing the retirement payments, the airline had prepaid FICA taxes on a portion of the amount that was going to be paid to the taxpayer, but the underlying income was never paid.    The taxpayer sought a refund of the withheld taxes, which was granted by Appeals.  The Service later sought to recoup what it deemed an erroneous refund, as it believed the refund request was outside the statute of limitations.

The payment was made in January of 2004.  Mr. Bates filed his refund claim on January 28, 2008.  He was denied, and went to Appeals.  While that was occurring, in May of 2009, another pilot filed suit in the Federal Claims Court seeking a refund of the FICA taxes, and claiming to represent himself and other pilots, including Bates (he was not a lawyer).  The Court tossed the claim for all plaintiffs except Kooperman, because he couldn’t represent others before the court.  In April of 2010, Appeals ok’d the entire refund to Bates.  In May of 2010, the Court order was vacated, and all claims were stayed to allow the non-Kooperman plaintiffs to get a lawyer instead of a pilot.  Bates, having a refund, did not pursue the claim.   In January 2011, the Service requested the refund back, stating the refund was erroneous because it was untimely, but also because Bates was a plaintiff at the time in the Kooperman case.  The United States in June of 2012 then sought to remove Bates from the Kooperman case because he had already received the refund.  Sticking it to him on both ends. That motion was opposed by Bates and is still pending.

Both parties agreed the refund was made, and the erroneous refund claim was timely, so the only question was whether the refund was erroneous.  Bates (having lawyered up) argued the request was timely, he was not a plaintiff, and even if he was, the government can’t recoup a refund issued by Appeals in settlement of an issue.  On the last issue, the Court relied on Johnson v. United States, 54 Fed. Cl. 187 (Fed. Cl. 2002), which held Appeals cannot issue refunds on untimely claims.

As to the timing, both parties agreed that the original refund request was outside of the stated time period in Section 6511(a).  Bates argued, however, that there was no basis for a refund until after the bankruptcy court held that Bates would not receive retirement payments under the plan.  Apparently, Bates did not have sufficient statutory grounds for this position, as the court stated it was essentially an argument for equitable tolling.   I really should have pulled the briefs, as I would assume there would be some Code or Bankruptcy Code argument to be made that the statute was suspended until all facts were available (even if it was a losing one).

The Court apparently has not been following Carl Smith’s various strong posts on equitable tolling.  The Court held that the results were unusual for Bates and harsh, but that it lacked authority to apply equitable tolling and cited to Vintilla v. United States, 931 F.2d 1444 (11th Cir. 1991).  The Court also noted it lacked the authority to grant interest abatement on the erroneous refund, as the taxpayer requested, even though Appeals had mistakenly issued the refund, and that authority was vested with the Department of Treasury, which can only be reviewed by the Tax Court. See Section 6404(h).

 

 

 

Stephen Olsen About Stephen Olsen

Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.

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Comments

  1. Carl Smith says

    I am surprised that the district court cited the 1991 11th Cir. opinion in Vintilla for its holding that the 6511(a) time periods to file refund claims are not subject to equitable tolling. I would have cited the 1997 opinion of the Supreme Court in U.S. v. Brockamp, instead.

    While I have made arguments that certain other time periods in the Code are not jurisdictional and are subject to equitable tolling, I don’t ever plan to ask the Supreme Court to revisit Brockamp (even though part of its rationale is demonstrably wrong).

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