Casework: Beating the Clock on Refunds

Three court cases provide guidance on when to claim tax refunds, according to the Journal of Accountancy

Most taxpayers know when to file their annual tax return. But they may be less sure of how much time they have to claim a refund. Three decisions last year may help clarify the rules.

In the first, Wachovia Bank (Wachovia Bank v. U.S., 98 AFTR2d 2006-5111 (CA-11)) was trustee for the George C. Nunamann Trust, which was created in 1984 and became a charitable trust in 1991. Although Wachovia was then no longer obligated to file returns or pay taxes, it mistakenly continued to do so through 2001. In 2003, Wachovia realized its error and filed for refunds for 1997 and 1998 totaling more than $111,000. Citing the three-year statute of limitations in IRC section 6511(a), the IRS denied the claims. A district court granted summary judgment for Wachovia. The IRS appealed (see “Tax Matters,” JofA, December 2006).

In the second case, home-products company Electrolux (Electrolux Holdings, Inc. v. U.S., 97 AFTR2d 2006-3123) claimed a special exception to section 6511(a) in subsection (d)(2)(A), which allows refunds arising from a net capital loss carryback that are claimed within three years from the time for filing a return for the tax year in which the loss occurred. Electrolux’s former parent company, White Consolidated Industries Inc. (WCI), had sustained a $53.8 million capital loss in 1994. WCI carried the loss back to 1993 and forward through 1998. In 1999, the IRS allowed refunds stemming from all the years except 1995, saying that WCI’s Dec. 31, 1999, amended return was too late by 31/2 months. Electrolux, as successor-in-interest to WCI, sought a refund of more than $1.45 million for 1995 and filed a complaint in the U.S. Court of Federal Claims.

In the third case, Richard Stevens (Richard O. Stevens v. U.S., 98 AFTR2d 2006-5184) was named executor of the Gloria S. Keesey Stevens estate. In November 1998, he filed a request for an extension of time to file a return and included a payment of $162,109. He was given until May 16, 1999. Before the extended due date and several times after it, Stevens called the IRS and requested further extensions, noting that the estate was entitled to a significant refund. He was told he could extend the due date. On July 30, 2002, he filed the return, requesting a refund of $65,481. The refund was denied as being past the due date. Stevens filed an action in the U.S. District Court for Northern California.

Against Wachovia and Electrolux but for Stevens.
Wachovia argued that it came under the general six-year statute of limitations for civil actions against the United States in 28 U.S.C. § 2401, outside the tax code. The Eleventh Circuit Court of Appeals said the three-year limit of section 6511(a) applied instead, interpreting “in respect of which tax the taxpayer is required to file a return” to mean a tax return generally.

In Electrolux, the court held that the special rule applied only to the carryback years, not a carryforward one. In Stevens, the court held that Stevens’ telephone conversations were informal but valid requests and he was entitled to the refund.

These cases underscore that refund claims filed beyond the prescribed deadlines will be narrowly construed. The one exception is informal extension requests, although taxpayers must be able to prove they made them.

You may like these other stories...

Legislation coming out of Washington just might reduce homeowners' burden for disaster insurance. It's a topic very much on everyone's minds since the mudslide in Oso, Washington. The loss of human life was...
Divorce is hard, and the IRS isn't going to make it any easier. The IRS generally says "no" to tax deductions that might ease the pain of divorce. In certain circumstances, however, you might be able to salvage...
IRS chief: New rule on the way for tax-exempt groupsIRS Commissioner John Koskinen told the USA Today on Monday that the agency will likely rewrite a proposed rule regulating the political activities of nonprofit groups to...

Upcoming CPE Webinars

Apr 22
Is everyone at your organization meeting your client service expectations? Let client service expert, Kristen Rampe, CPA help you establish a reputation of top-tier service in every facet of your firm during this one hour webinar.
Apr 24
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
Apr 25
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.
Apr 30
During the second session of a four-part series on Individual Leadership, the focus will be on time management- a critical success factor for effective leadership. Each person has 24 hours of time to spend each day; the key is making wise investments and knowing what investments yield the greatest return.