1. © David M. Wooldridge 20071 David M. Wooldridge Sirote & Permutt, P.C. 205.930.5219 dwooldridge@sirote.com Tax Practice and Procedure Chapter 9 Refund Claims & Litigation

2. © David M. Wooldridge 20072 Scope of Unit XII Nature and requirement of claims Full payment rule Informal claims Variance doctrine Review of claims Statute of Limitations/TEFRA/Exam Refund Litigation

3. © David M. Wooldridge 20073 Nature of Refund Claims Refund claims are: –Substantive:informing IRS of request –Procedural:prerequisite to obtain a refund § 6513: No refund authorized without claim –Jurisdictional:prerequisite to filing suit § 7422: No suit unless claim filed § 6532: No suit until six months after claim filed or claim disallowance

4. © David M. Wooldridge 20074 Claim Requirement Refund after S/L on claim runs = erroneous refund, §6514, and Recoverable summarily §7405(a) –within 2 years of payment (4, if fraud) Variance Doctrine limits recovery to grounds stated in claim (infra)

5. © David M. Wooldridge 20075 Overpayment Amounts paid > amount properly due Lewis v. Reynolds – §6501 not a bar to proper computation Equitable recoupment – generally defensive only –But see Bull case, text p. 242 – Payment of asserted deficiency, then claim for refund Not amounts treated as deposit or bond –Rev. Proc. 2005-18; 2004 Act

6. © David M. Wooldridge 20076 Full Payment (Flora) Rule Flora v. U.S. Absent statutory relief, all of tax for the period must be paid before jurisdiction lies for refund suit –Income tax:per TP, per year –FICA & §6672: per employee, per quarter –Any independently taxable item; divisible taxes

7. © David M. Wooldridge 20077 Full Payment Rule Availability of pre-assessment forum –Notice of Deficiency; Tax Court Issue: Staying collection –if pay only for some periods –if dont pay interest & penalties e.g., 6672 refund actions –often voluntary withholding of action pending result

8. © David M. Wooldridge 20078 Full Payment: Section 6166 Jurisdiction over IRC § 6166 deferral issues –1998 Act extended to Federal District Courts and Claims Court, even though payment of the estate tax has not been made in full –Issues such as qualification for deferral, but also valuation disputes, etc. In addition to Tax Court declaratory judgments

9. © David M. Wooldridge 20079 Form of Claim Various Official Forms –Form 843 for generic claims –Forms 1040X, 1120X, etc. for specific taxes –Refund amounts on original returns Most frequent case –Overpayments scheduled on Form 870 Not Form 1139: Tentative Carryback Adjustment under § 6411

10. © David M. Wooldridge 200710 Informal Claims I Use of forms not mandated by statute CONTENTS: ID TP, period, desire for refund Amount and type of tax In detail, EACH GROUND upon which claim is based, and sufficient facts, to apprise IRS of the exact basis of the claim

11. © David M. Wooldridge 200711 Informal Claims II Example of Extent of Leniency: –Oral claim for a refund was sufficient as a claim (to confer court jurisdiction) when supplemented by a letter stating legal and factual basis of claim –Tinari v. U.S. (E.D. Pa. 10/28/98)

12. © David M. Wooldridge 200712 Variance Doctrine Court jurisdiction only grounds stated in claim –basis for refund that varies from bases in claim is PROHIBITED Requirements may be waived by IRS –implicit if basis is litigated Alternative (or inconsistent) claims are OK and common, EVEN ADVISED

13. © David M. Wooldridge 200713 Variance: Ground vs. Theory OK to assert two alternative legal theories of deductibility of a specific economic loss –Claim: business bad debt loss (no citation) –At trial: raised § 165 loss & § 166 bad debt as alternative theories of recovery Court: not a new ground –claim contained enough info about merits for IRS to reasonably deduce the existence of the theory; alerted IRS of legal conclusion asserted

14. © David M. Wooldridge 200714 Protective Claims Claim forms are signed under penalties of perjury –true and correct, best of knowledge Nevertheless, alternative positions and protective claims are appropriate, e.g., –E.g., year of deduction unclear; dispute affects other tax periods; contingent liabilities of estate not claimed on 706; etc.

15. © David M. Wooldridge 200715 Review of Claims Refund claims are treated as an amended return –may be granted upon recent and manual review –may trigger an exam of the amended return –Examinations of amended returns proceed generally on same procedures as examination of initial returns; Appeals review

16. © David M. Wooldridge 200716 Notices of Claim Disallowance IRS required to provide notice explaining why a claim is disallowed. § 6402(j) Statute of limitations on refund suit commences upon mailing of Notice. § 6532 –Or, upon WAIVER. A trap for unwary. May request prompt disallowance –To allow suit earlier

17. © David M. Wooldridge 200717 TEFRA Procedures (RAA) Request for Administrative Adjustment of a TEFRA partnership return –By any partner, not just TMP IRS Options –Accept RAA, make adjustments summarily Which requires partners to adjust consistently –Treat as non-partnership item –Conduct a TEFRA proceeding exam –Suit in all 3 courts allowed, if not allowed

18. © David M. Wooldridge 200718 S/L on Refund Claims No refund unless a timely claim is filed –Section 6511(b)(1) –Refund upon untimely claim = erroneous void § 6514; recoverable in suit per § 7405 § 6511 limits both –time of filing –amount of refund allowable

19. © David M. Wooldridge 200719 No Extension by Agreement Unlike the assessment S/L may not be extended by agreement However, may be extended or suspended or mitigated for other reasons –Bad debts, loss carrybacks –Financial incapacity (infra) –Double inclusion, or disallowance of deduction Can extend period to file suit afterward

20. © David M. Wooldridge 200720 Suspension Suspension – prior discussions ADDITIONAL ITEM – Statute of limitations for filing claims is suspended while a TP is financially disabled. IRC § 6511(h)(2)(B). –Incapable of handling financial affairs –Power of attorney may negate disability –Added in 1998 Act

21. © David M. Wooldridge 200721 Mitigation Relief Provided § 1311 allows TP/IRS to correct an otherwise time-barred erroneous income tax treatment, in limited situations involving inconsistent treatment of tax items § 1314 provides the mechanism: a 1-year reopening of the S/L for the aggrieved party to claim a refund (TP) or seek to assess a tax (IRS -- through NOD)

22. © David M. Wooldridge 200722 Refund Raised in Collection Collection Due Process provisions –1998 additions, §§ 6320, 6330; Administrative appeal of liens & levies –Assertion of refund claim –If TP did not receive NOD, or –If TP did not otherwise have opportunity to contest the tax Also, Offers in Compromise – on Liability

23. © David M. Wooldridge 200723 Refund Actions in Court No suit commenced before –6 months elapsed since claim filed, or –claim disallowed No suit commenced after –2 yrs following Notice of Claim Disallowance –or, Waiver of Notice Trap for unwary

24. © David M. Wooldridge 200724 Available Forums On an original claim for refund – –Court of Federal Claims Original court of jurisdiction –Federal District Court Forum Selection Criteria (prior material)

25. © David M. Wooldridge 200725 Refunds in Tax Court Tax Court has jurisdiction to determine overpayments, if year properly before it –Only years properly petitioned §6512(b) –i.e., IRS mails NOD, claiming deficiency, but Court determines overpayment instead –Amount limitation: amts paid after petition, plus amount recoverable if claim filed on date the NOD was mailed

26. © David M. Wooldridge 200726 Rules of Procedure FRCP in both Court of Federal Claims – some special rules, covering unique differences –E.g., trial in multiple locations Opposing Counsel –DOJ Tax Division Trial Section (Dist. Ct.) –DOJ Court of Federal Claims Section

27. © David M. Wooldridge 200727 Settlement Much More DIFFICULT in Refund Cases Absence of Appeals Office No culture of resolution Review procedures Involvement of Office of Review Joint Committee review Appellate Section handles appeals