Ninth Circuit Overturns Earlier Holding on Refund Limits

In Omohundro, 300 F3d 1065 (9th Cir. 2002), the Ninth Circuit ruled that a refund claim made within three years of a non-timely filed return was valid. In so doing, it overruled its own highly criticized decision in Miller, 38 F3d 473 (1994).

Background

Sec. 6511(a) limits the period in which taxpayers can claim a credit or refund for overpaid taxes. Taxpayers must file a refund claim within three years from the time they filed the return or within two years from the time they paid the tax, whichever period expires later. If taxpayers filed no return, they must file a refund claim within two years from the time they paid the tax or the tax was deemed paid.

Controversy surrounds how these rules apply to taxpayers who file delinquent returns and then claim a refund between two and three years after they paid the tax. According to Rev. Rul. 76-511, Sec. 6511(a) provides that taxpayers must file a claim within three years from the time they filed a return, regardless of when the latter occurred. Thus, for Sec. 6511(a) purposes, it does not matter whether taxpayers filed a return three or six years after the due date. Of course, a refund claim would be barred under Sec. 6511(b) if it were made more than three years after the taxes were paid. Thus, according to Rev. Rul. 76-511, even if there is no timely filed return, taxpayers still have three years from the time they paid the tax or the tax was deemed paid (typically, on the returns due date) to file a valid refund claim.

The Ninth Circuits 1994 decision in Miller was contrary to the IRSs interpretation. In Miller, the court held that a taxpayer had to have a timely filed return to satisfy the three-year deadline for a refund. Accordingly, taxpayers would be required to file a return or refund claim within two years of paying taxes to recover a refund or credit.

Miller Overturned

In Omohundro, the taxpayer filed her 1993 return on Oct. 14, 1997. She filed a claim for credit on that return; thus, she filed the claim within three years of filing a delinquent return. A district court relied on Miller and ruled that the taxpayer was not entitled to a refund, because she did not timely file the refund claim. On appeal, the taxpayer contended that Miller was incorrectly decided and urged the Ninth Circuit to overturn it.

The Ninth Circuit concluded that the taxpayers refund claim was timely filed and overturned Miller. It acknowledged that the case was contrary to long-standing IRS reasoning and although Rev. Rul. 76-511 was not binding on the courts, it is worthy of deference. The court also noted that Miller had not considered the ruling, even though it was on point.

Conclusion

The Miller court had found that its holding was necessary to prevent taxpayers from forum shopping between the district court and the Tax Court. However, this concern was rendered moot by subsequent legislation. The Taxpayer Relief Act of 1997 (TRA 97) eliminated any disparity in deadlines between these two courts. It amended Sec. 6512(b)(3) to allow a three-year lookback period for a refund claim filed in Tax Court when no return was filed and the mailing date of the deficiency notice occurred in the third year after the returns due date. In addition, if the claim is not filed within the three-year period, the claim or refund will not exceed the portion of the tax paid during the two years immediately preceding the claims filing. The position in Miller had actually created a disparity in deadlines between the two courts that the TRA 97 intended to eliminate.

Every other appellate court that ruled on this issue has concurred with the IRSs position. For example, in Weisbart, 222 F3d 93 (2000), the Second Circuit held that a taxpayer had three years from the date that he actually filed a return to file a claim for refund or credit. The Tenth Circuit reached a similar holding in Richards, 37 F3d 587 (1994).

For further discussion of the two- and three-year refund rules, see Grooms, Tax Practice Management, SOL on Tax Refunds, TTA, March 2003.

From Brian Kelleher, CPA, New York, NY