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By Kathleen Ford Bay, Esq.
Richards Rodriguez & Skeith LLP, Austin, TX
There is a rather strict rule for claiming refunds which in set forth in §6511: the claim for refund must be filed within three years from the filing of a tax return, or two years from the payment of the tax, whichever is later. The Fifth Circuit, in Davis v. U.S. , No. 12-60011 (5th Cir. 6/28/12), recently emphasized that the statute of limitations in this rule will be enforced and will not be tolled or forgiven; it is what it is.
In Davis, the time line was as follows: (1) February 2003, estate's income tax return filed reporting, in part, taxes from the sale of a fee simple ownership in Wyatt Farm - total tax liability about $493,000; (2) April 2003, taxes plus interest and penalties paid in full; (3) BUT April 2002, before income tax return filed, father of decedent filed suit seeking reformation of the deed to Mr. Smith alleging scrivener's error and that he was supposed to have a reserved life estate; (4) November 2003, mutual mistake held and deed ordered reformed; appeal denied August 2005, Mississippi Supreme Court in March 2006 denied certiorari - do you see a pattern here yet? March 2006 is one month more than when the return was filed and more than two years after the last taxes were paid; (5) November 2008, the claim for refund is filed stating that more than $215,000 in taxes were paid that should not have been, and the statute of limitations has run out; (6) February 2009, refund claim denied by the IRS, not surprisingly, on the ground that it had not been timely filed; (7) February 2011, executor files refund suit in federal district court; (8) government files motion based on lack of subject-matter jurisdiction: the failure to file a timely refund claim with the IRS divested the district court of jurisdiction over the suit - see §7422(a) which states "[n]o suit … shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously … assessed or collected … until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard") and Duffie v. U.S., 600 F.3d 362, 384 (5th Cir. 2010): "A taxpayer's failure to file a timely refund claim with the IRS deprives the district court of subject-matter jurisdiction"; (9) December 2011, district court grants government's motion; (10) taxpayer appeals, this time within time limits for an appeal; (11) June 2012, taxpayer loses appeal.
The Fifth Circuit reviewed the issue of subject matter jurisdiction by evaluating three factors: "(1) the complaint alone; (2) the complaint supplemented by undisputed facts evidenced in the record; or [and] (3) the complaint supplemented by undisputed facts plus the court's resolution of disputed facts." Ramming v. U.S., 281 F.3d 158, 161 (5th Cir. 2001) (citing Barrera-Montenegro v. U.S., 74 F.3d 657, 659 (5th Cir. 1996)). The taxpayer urged "equitable tolling" based on the position that he could not have known until March 2006 and the Mississippi Supreme Court's denial of certiorari that he had overpaid taxes. The Fifth Circuit said, no, citing and discussing U.S. v. Brockamp , 519 U.S. 347 (1997): courts cannot "toll, for nonstatutory equitable reasons, the statutory time (and related amount) limitations for filing tax refund claims set forth in §6511 of the Internal Revenue Code of 1986[.]" The opinion notes as well that over 90 million refund claims are filed per year and chaos would ensue if equitable tolling of the limitations period in §6511 existed.
Taxpayer also argued that his due process rights under the Fifth Amendment would be violated if he is denied a forum in which to prosecute his claim for refund. The Fifth Circuit's response: "Statutes of limitations necessarily have this effect, however, and they have long been upheld as constitutional. SeeAtchafalaya Land Co. v. F.B. Williams Cypress Co., 258 U.S. 190, 197 (1922) (upholding statute of limitations against due process challenge); see alsoU.S. v. Soriano, 352 U.S. 270, 273-77 (1957) (upholding statute of limitations for suits against United States; refusing to equitably toll statute for war)."
Then, the Fifth Circuit had a teaching moment, noting that when the father filed a claim for reformation of the deed in April 2002, and certainly when his claim was granted in November 2003, the executor could have filed a protective claim for refund following the procedures set forth in Rev. Proc. 2002-52, 2002-31 I.R.B. 242. The Fifth Circuit even cited two cases, one of which is Swietlik v. U.S., 779 F.2d 1306, 1307 (7th Cir. 1985), where the Seventh Circuit stated: "If a claim for refund is contingent or uncertain in amount or, as here, both, the proper procedure is to file a conditional claim before the statute of limitations runs out; if you fail to do that the statute of limitations will bar the refund."
Moral: Remember to file a protective claim for refund of taxes in situations like this, even if you believe you will win in state court on the merits. Filing that protective claim for refund provides a buffer and insurance just in case.
Why is the Fifth Circuit not going to publish this case? Answer: The Fifth Circuit does not consider its decision in this case to add anything that is not already well settled. Rule 47.5.1 of the Fifth Circuit's Rules states, in part: "47.5.4 Criteria for Publication. The publication of opinions that merely decide particular cases on the basis of well-settled principles of law imposes needless expense on the public and burdens on the legal profession." When this Rule was amended in 2006, citation to unpublished cases became acceptable in some situations: Unpublished opinions issued on or after January 1, 1996, are not precedent, except under the doctrine of res judicata, collateral estoppel or law of the case (or similarly to show double jeopardy, notice, sanctionable conduct, entitlement to attorney's fees, or the like). An unpublished opinion may be cited pursuant to FED. R. APP. P. 32.1(a). The party citing to an unpublished judicial disposition should provide a citation to the disposition in a publicly accessible electronic database. If the disposition is not available in an electronic database, a copy of any unpublished opinion cited in any document being submitted to the court must be attached to each copy of the document, as required by FED. R. APP. P. 32.1(b). The first page of each unpublished opinion bears the following legend:Pursuant to 5TH CIRCUIT RULE 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIRCUIT RULE 47.5.4."
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 ¶3860, Statute of Limitations.
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