Wednesday, April 24, 2019

Of Black-Holes, Tax Refunds and Statutory Construction


Recently, it was reported that astronomers captured the first ever images of a black hole – an abyss they say that is so deep that not even light can escape it.  Tax law has its own “black-hole.”  It has to do with tax refund claims.  But, an appellate court has found light coming from this tax “black- hole.”  In addition, the manner in which the appellate court decided the case may shed light on how courts could construe unclear statutory provisions of the Tax Cuts and Jobs Act (TCJA).

Refund claims and statutory construction – these are the topics of today’s post.

Refund Claims

The Tax Court has jurisdiction to determine the amount of any overpayment of tax if the taxpayer paid the amount to be refunded within a “look-back” period.  I.R.C. §6512(b)(3)(B)That “look-back” period is specified as three years after the return was filed or two years after payment.  I.R.C. §6511(b)(2). Wait too long to file or pay and it may be too late.  In addition, the flush language (language not accompanied by a number or letter and is flush against the margin) at the end of I.R.C. §6512(b)(3)(B) says that, “In a case described in subparagraph (B) where the date of the mailing of the notice of deficiency is during the third year after the due date (with extensions) for filing the return of the tax and no return was filed before such date, the applicable period under subsections (a) and (b)(2) of [I.R.C. §6511] shall be 3 years.”

Confused?  Let’s take a look at how this provision was applied in a recent case.

Recent Case

In Borenstein v. Comr., No. 17-3900, 2019 U.S. App. LEXIS 9650 (2d Cir. Apr. 2, 2019), rev’g., 149 T.C. 263 (2017), the taxpayer’s return for 2012 was due on April 15, 2013.  At the taxpayer’s request, she received a six-month extension of time to file the return.  That made the due date October 15, 2013.  But, she still had to pay.  When an extension of time to file is granted, that doesn’t extend the time to pay.  Thus, she made several tax payments for 2012 totaling $112,000 that were all deemed to be made on April 15, 2013 in accordance with I.R.C. §6513.  However, she didn’t file the return by October 15, 2013.  In fact, she didn’t file a return for the next 22 months.  That got the attention of the IRS.  IRS then sent the taxpayer a statutory notice of deficiency (SNOD) on June 19, 2015, for her 2012 return.  She then filed her 2012 return on August 29, 2015.  On that return, she reported a tax liability of $79,559.  The IRS agreed that the $79,559 was the taxpayer’s correct tax liability and that she had overpaid by $32,441.   But, the kindler, gentler IRS said it was so sorry that it couldn’t issue her a credit or refund of the $32,441 because she made the overpayment outside the applicable look-back period tied to the SNOD.  According to the IRS, the parenthetical phrase "with extensions" contained in the statute modified "due date." That meant, according to the IRS, the "due date (with extensions) for filing the return of tax" was October 15, 2013, pursuant to the automatic extension that the taxpayer received to file her 2012 return. Thus, the "third year" after that date, the IRS said, began on October 15, 2015.  However, the IRS mailed the SNOD on June 19, 2015 – during the second year and not the third year "after the due date (with extensions) for filing the return." In addition, the IRS claimed, the last sentence of I.R.C. §6512(b)(3) did not apply.  In essence, the parties were arguing over what “with extensions” means in I.R.C. §6512(b)(3) in terms of whether the Tax Court had jurisdiction to authorize a refund to the taxpayer. 

The Tax Court, agreeing with the IRS, trotted out the statutory language of I.R.C. §6512(b)(3), which says the Tax Court has jurisdiction to order a refund of overpayments made during the three years immediately preceding the mailing of the notice of deficiency (i.e., a three‐year look‐back period) if the taxpayer failed to file a return before the mailing of the notice of deficiency and “the date of the mailing of the notice of deficiency is during the third year after the due date (with extensions) for filing the return of tax.” The Tax Court held that “(with extensions)” was unambiguous and modified only “due date” and had the effect of delaying by six months the beginning of the “third year after the due date.”  The flush language and it’s three-year look-back period didn’t apply.  That meant that there were only two years remaining from the date the SNOD was issued.  Thus, the taxpayer’s overpayment was outside the two-year look-back by two months and the Tax Court determined it didn’t have jurisdiction to order the refund.  Remember, there was no question the taxpayer was entitled to the refund.  The IRS was taking the position that the Tax Court couldn’t order the IRS to issue the refund and the Tax Court agreed. The tax black-hole!

On appeal, the U.S. Court of Appeals for the Second Circuit reversed.  The appellate court held that “with extensions” in I.R.C. §6512(b)(3) extended by six months the “third year after the due date.”  Thus, the look-back period was three years rather than two and the Tax Court had jurisdiction to order the refund.  Importantly, the appellate court said that I.R.C. §6512(b)(3) was unclear and, as a result, legislative history should be examined.  That history, the appellate court determined, was in the taxpayer’s favor and that uncertain statutory language should be resolved against the government.  The flush language, the appellate court noted, was intended to increase the Tax Court’s jurisdiction to order refunds to taxpayers that didn’t file a return before the mailing of the SNOD.  No more black-hole. 

Application to the TCJA?

Does Borenstein have any application to the tax provisions contained in the TCJA.  It could.  As noted, the appellate court said that uncertain tax provisions are to be construed against the government.  There are more than a few unclear provisions in the TCJA.  Even the IRS is struggling to come up with consistent interpretations of various TCJA provisions.  In addition, there is very little legislative history concerning the bulk of the TCJA provisions.  That could ultimately work in taxpayers’ favor if future courts construing TCJA provisions take the same position on statutory construction as did the appellate court in Borenstein. 


The refund black-hole issue has been the subject of a couple of cases decided in recent months.  At least in the Second Circuit the black-hole has disappeared.  That’s Connecticut, New York and Vermont.  The Borenstein decision is persuasive authority, but not binding, on the IRS outside the Second Circuit.

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