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By Robin L. Greenhouse, Esq. and K. Christy Vouri,
McDermott Will & Emery LLP, Washington, DC
On September 9, 2013, the U.S. Court of Appeals for the Second
Circuit issued a decision in AmBase Corp. v. United
States, No. 12-3563 (2d Cir. 2013), affirming that the U.S.
District Court for the District of Connecticut (District Court) had
subject-matter jurisdiction over the taxpayer's case based on the
taxpayer's use of a protective refund claim.
A taxpayer must satisfy a number of hurdles before commencing a
tax refund action against the United States. Even a small
foot fault can deprive the refund forum, such as the district court
with subject-matter jurisdiction. Subject-matter jurisdiction in a
refund forum is premised on two separate filings by the
taxpayer. First the taxpayer must file an administrative
claim for refund with the Internal Revenue Service (IRS). Once that
claim for refund is denied (or six months has passed after the
filing of the claim), then the taxpayer can file a refund suit in
the District Court or the U.S. Court of Federal Claims. Under
§6511, the taxpayer has the later of three years from the time the
tax return was filed or two years from the time the tax was paid to
file the administrative claim. The three-year limitation is
increased to seven years if the claim relates to a bad debt
deduction. Section 6511(d)(1). The taxpayer then has from six
months after the filing of the claim up until two years after the
claim's denial to file the refund suit. Section 6532. Regs.
§301.6402-3 sets forth the formal requirements for filing a refund
claim; however, as the Second Circuit noted, informal refund claims
are also recognized as valid refund claims.
See United States v. Kales, 314 U.S. 186
(1941). Protective claims are a type of informal claim a taxpayer
may file. The Second Circuit cited to CCA 200848045, which explains
"[p]rotective claims are filed to preserve the taxpayer's right to
claim a refund when the taxpayer's right to the refund is
contingent on future events and may not be determinable until after
the statute of limitations expires."
The specific requirements for filing a proper protective refund
claim, are "designed both to prevent surprise and to give adequate
notice to the Service of the nature of the claim and the specific
facts upon which it is predicated, thereby permitting an
administrative investigation and determination." Alexander
Proudfoot Co. v. United States, 454 F.2d 1379, 1383 (Ct. Cl.
1972) (quoting Union Pac. R.R. v. United States, 389 F.2d
437, 442 (Ct. Cl. 1968), cert denied, 395 U.S. 944
As long as the taxpayer timely files the informal protective
refund claim, he or she may then file an amendment that relates
back to "perfect" to the initial claim out of time. The regulations
require that the amendment be based on "one or more of the grounds
set forth in a claim filed before the expiration" of the statute of
limitations. Regs. §301.6402-2(b)(1). See
also St. Joseph Lead Co. v. United States, 299
F.2d 348, 350 (2d Cir. 1962) ("[T]he facts upon which the amendment
is based would necessarily have been ascertained by the
commissioner in determining the merits of the original
AmBase Corp. v. United
States. AmBase Corporation sought a tax refund
for its 1989 tax year based on a net operating loss carryback (NOL
carryback) from its 1992 tax year. The NOL carryback resulted
from an amended calculation of AmBase's affiliate, Carteret Savings
Bank FA's, 1992 bad debt deduction.
Toward the end of 1992, Carteret was seized by the Office of
Thrift Supervision and put into a conservatorship of the Resolution
Trust Corporation (RTC) because it had failed to satisfy capital
requirements under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989. The receivership was transferred to the
Federal Deposit Insurance Company (FDIC) in 1996. AmBase filed its
1992 consolidated federal income tax return on August 30, 1993,
reporting Carteret's tax items up until Carteret's seizure;
however, RTC did not provide AmBase with Carteret's post-seizure
On March 14, 2000, AmBase filed an amended return for the 1992
tax year proposing to increase Carteret's bad debt deduction.
Also on March 14, 2000, AmBase filed an amended return for the 1989
tax year seeking to carry the NOL created on the 1992 tax return
back to 1989 in order to create a refund. The IRS denied the claim
and AmBase filed a complaint in the District Court on April 29,
During the proceedings, the parties agreed that under the
general rules of §6511 AmBase had until March 31, 1998, to file the
administrative claim for refund. AmBase argued that its March 14,
2000, refund claim was still timely because: (1) the bad debt
deduction regulations required an amended return; (2) the March 14,
2000, refund claim related back to four earlier claims (an
attachment to its original 1992 return, a note made in 1995 during
a separate audit, a 1995 protective claim and a 1996 protective
claim filed by the FDIC on Carteret's behalf); and (3) that the
seven-year period applied. The District Court initially dismissed
all of the arguments, but after AmBase produced the 1996 FDIC
protective claim filed on behalf of Carteret, the District Court
found that the protective claim filed by the FDIC effectively
bestowed subject matter jurisdiction on the District Court.
There are three requirements to an informal protective claim:
(1) the informal claim must provide the IRS with notice that the
taxpayer is seeking a refund; (2) the informal claim must describe
the legal and factual basis for the refund; and (3) the informal
claim must have some written element. See New
Eng. Elec. Sys. v. United States, 32 Fed. Cl. 636, 641 (1995)
(citing American Radiator & Standard Sanitary
Corp. v. United States, 318 F.2d 915 (Ct. Cl. 1963)). The
Internal Revenue Manual adds a further requirement that the
informal claim must identify the specific year or years for which
the refund is sought. IRM 184.108.40.206.2.6.5(2) (5/17/04).
The government contended that AmBase's March 14, 2000, refund
claim did not supplement the 1996 FDIC protective claim because the
two claims have different factual bases. The Second Circuit
disagreed. It reviewed the 1996 FDIC protective claim and found
that it met the three necessary requirements of an informal claim
and had put the IRS on notice of a possible future claim. The
Second Circuit explained "[t]he 1996 FDIC claim addressed
Carteret's bad debts and its method of calculating the bad debt
deduction, and it specifically noted potential operating losses and
carrybacks." Importantly, the Second Circuit recognized that an
informal claim is not limited to the written component, instead
"the focus is on the claim as a whole," and under the
circumstances, the facts relating to the March 14, 2000, refund
claim "would have necessarily been ascertained" upon consideration
of the 1996 FDIC protective claim. Therefore the Second Circuit
affirmed the District Court's subject-matter jurisdiction over the
Future of Protective Claims.
Informal protective claims are alive and well. Protective
claims fill an important role in protecting a taxpayer's interest
when the amount of the refund is unknown or may be contingent on
future events. Protective refund claims have been successfully used
to gain jurisdiction for many contingent refunds. Rupert v.
United States, 358 F.Supp. 2d 421 (M.D. Pa. 2004) (taxpayers
sought to establish the estate's right to deduct future payments of
interest on a loan as they were paid and made certain; the validity
of the protective refund was upheld, but the underlying tax refund
was denied); Cooper v. United States, 84 AFTR 2d 99-6222
(W.D.N.C. 1999) (taxpayer's trustee in bankruptcy filed a
protective refund claim due to uncertainty of the outcome of
litigation related to income from a stock sale).
More recently, protective refund claims have been filed by
employers to preserve their ability to obtain refunds for
employment tax paid (by the employer and employee) pending
resolution of the question of whether severance payments made by an
employer to employees whose employment has been involuntarily
terminated because of the closing of the business constitute wages
for the purposes of employment tax. The government is seeking
certiorari following its loss in the U.S. Court of Appeals for the
Sixth Circuit, and Quality Stores opposes it. The bankruptcy court,
the U.S. District Court and the Sixth Circuit all held for the
taxpayer (United States v. Quality Stores Inc., 693 F.3d
605 (6th Cir. 2012), aff'g 424 B.R. 237 (W.D. Mich.
2010)). However, the government won the same issue on appeal
in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir.
2008). In order to preserve refund claims, employers filed
protective claims identifying the issue and claiming refunds for an
amount to be determined on behalf of themselves and the affected
For more information, in the Tax Management Portfolios, see
Peyser, 631 T.M., Refund Litigation, and in Tax
Practice Series, see ¶3890, Refund Claims and Litigation.
© 2013 McDermott Will & Emery
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