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By David I. Kempler, Esq., and Elizabeth Carrott Minnigh, Esq.
Buchanan Ingersoll & Rooney PC, Washington, DC
In CCA 201216033, the IRS Chief Counsel's Office concluded that because the taxpayer filed a timely amended income tax return requesting a refund within the prescribed period, a later-filed refund claim filed in response to its disallowance that provided no new grounds for the refund should be viewed as a permissible amendment to the timely amended income tax return, and her refund for tax year 2003 was not time-barred. This Chief Counsel Advice provides important guidance on how and when a request for a refund may be amended.
While the Secretary of the Treasury is authorized under §6402(a), to make refunds when a taxpayer overpays taxes, Regs. §301.6402-2(a)(1) provides "refunds of overpayments may not be allowed or made after the expiration of the statutory period of limitation properly applicable unless, before the expiration of such period, a claim therefor has been filed by the taxpayer." Section 6511(a) provides that a claim for credit or refund of an overpayment of any tax in respect of which the taxpayer is required to file a return must be filed within three years from the time the return was filed or two years from the time the tax was paid, whichever of such periods expires later, or if no return is filed by the taxpayer, within two years from the time the tax was paid. Under §6511(b)(1), no credit or refund is allowed after the expiration of the period of limitation, unless a claim for credit or refund is filed by the taxpayer within such period.
Beginning in 2003 and continuing through sometime in early 2006, Taxpayer invested funds with a businessman. For tax year 2003, Taxpayer received a Form 1099-INT, Interest Income Statement, reporting interest income, and reported that amount on her 2003 Form 1040, U.S. Individual Income Tax Return, filed on April 15, 2004. In early 2006, Taxpayer learned that the businessman had been embezzling funds and the investment was a Ponzi scheme. Taxpayer filed Form 1040X, Amended U.S. Individual Income Tax Return, for 2003, eliminating interest income, as she had never actually received any interest income. As a result of the amended return, Taxpayer timely claimed a refund for 2003. Thereafter, Taxpayer was able to recover a portion of the amount that she had invested.
Taxpayer then claimed the remaining amount invested as a theft loss on Form 1040 for tax year 2006.
The IRS issued a Notice of Claim Disallowance to Taxpayer, disallowing her claim for refund for the 2003 tax year on the following ground:Any loss arising from theft is treated as sustained in the year in which the taxpayer discovers the loss. See IRC Sec. 165(e). The amount of a theft loss is reduced by any recovery. In addition, a taxpayer is not entitled to a theft loss if she has a claim for reimbursement and there is a reasonable prospect of recovery. See Treas. Reg. 1.165-1(d)(2)(i) and (3); 1.165-8(a)(2).
In response, Taxpayer filed Form 843, Claim for Refund and Request for Abatement, for tax year 2003, again requesting a refund for that year on the theory that the interest income originally reported was fictitious and the money Taxpayer actually received was a return of capital. The Form 843 was filed after the period of limitations prescribed in §6511(a). Taxpayer later contacted the IRS to ascertain the status of the Form 843, and was advised that the IRS was still doing research but Taxpayer never heard anything further from the IRS.
The IRS Chief Counsel's Office stated that if the following two requirements were satisfied, a supplemental claim for refund would be considered an amendment to the original claim, rather than an untimely new claim. First, the supplemental claim must not require the investigation of new matters that would not have been disclosed by the investigation of the original claim.1 Second, the supplemental claim must be filed before the IRS took final action on the original claim by either rejecting or allowing the claim in whole or in part, because once the IRS has taken final action on the original claim, there is no longer any claim left to amend.2 Citing Bemis Bros. Bag Co. v. U.S.,3 the IRS noted that the IRS's disallowance of a claim does not constitute final action by the IRS Chief Counsel's Office if the IRS did not fully consider all grounds for the refund and the taxpayer as for a reconsideration of those grounds.
The IRS Chief Counsel's Office concluded that Taxpayer's Form 843 for tax year 2003 did not require investigation of new matters because the Form 843 and the Form 1040X claimed the same basis for a refund; namely, that Taxpayer was claiming zero interest income rather than the interest income amount initially reported on her Form 1040. In addition, the IRS Chief Counsel's Office determined that although the IRS acted on the Form 1040X by issuing a notice of claim disallowance for 2003, that was not a "final action" because the IRS overlooked the grounds stated in the Form 1040X; namely, that Taxpayer was seeking a refund as a result of improperly including a fictitious amount of interest income on her original return rather than seeking to claim the amount of her loss from the investment scheme. Consequently, the IRS Chief Counsel's Office advised that Taxpayer's Form 843 should be viewed as a permissible amendment to the timely filed Form 1040X, and therefore not time-barred.
With a few high profile Ponzi schemes in recent years that affected numerous taxpayers, many tax attorneys and accountants are looking for ways to make their clients whole with respect to both phantom income previously reported and the loss of portions of principal. In CCA 201216033, the IRS Chief Counsel's Office provides clear guidance for how and when refund claims can be amended, which will assist practitioners in achieving the best results for their clients.
For more information, in the Tax Management Portfolios, see Peyser, 627 T.M., Limitations Periods, Interest on Underpayments and Overpayments, and Mitigation, and in Tax Practice Series, see ¶3890, Refund Claims and Litigation.
1 See, e.g., U.S. v. Andrews, 302 U.S. 517, 524-26 (1938); Pink v. U.S., 105 F.2d 183, 187 (2d Cir. 1939).
2 See, e.g., Mondshein v. U.S., 338 F. Supp. 786 (E.D.N.Y. 1971), aff'd, 469 F.2d 1394 (2d Cir. 1973); Edwards v. Malley, 109 F.2d 640 (1st Cir. 1940), aff'g 38-1 USTC ¶9026 (D. Mass. 1937).
3 289 U.S. 28 (1933).
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