Refund Trap

A taxpayer's year 1 individual income tax return is due on April 15 of year 2. The taxpayer mailed the return on April 15 of year 5. It arrived at the IRS Service Center on April 17 of the same year. Under Sec. 7502(a)'s "mailbox rule," is the taxpayer entitled to a refund of the excess withholding reflected on the return? Two circuit courts are split on the answer.

In Anastassoff, 8/22/00, the Eighth Circuit said "no," relying on its unpublished opinion in Christie (1992). In Christie, it noted that the Code imposes two restrictions on refunds. First, Sec. 6511(a) requires a taxpayer to file a claim within three years of filing a return or two years from the date on which he paid the tax. An original income tax return showing an overpayment of tax may double as a refund claim (an "original return claim"); see Regs. Sec. 301.6402-3. Second, Sec. 6511(b)(2) limits the amount of the refund. Specifically, if Sec. 6511(a)'s three-year period applies, the taxpayer may recover the amount paid within three years preceding the filing of the claim, plus any extension of time for filing the original return (the three-year lookback period). Alternatively, if Sec. 6511's two-year period applies, then the refund cannot exceed the amount paid within the two years preceding the filing of the claim (the "two-year look-back period").

On the assumed facts, Christie held that the refund claim was timely, because it satisfied Sec. 6511(a)'s three-year requirement. Moreover, because the original return is late, the mailbox rule did not apply to it (and, implicitly, to the refund claim). The mailbox rule provides that, if a taxpayer mails a document to the IRS before the statutory deadline that does not arrive until after the deadline, the Service deems the mailing date as the filing date. Under Christie, even if the claim (as opposed to the return) was independently subject to the mailbox rule, the result is the same; the claim would be deemed filed before the return, implicating Sec. 6511(b)(2)'s two-year look-back period.

In Weisbart, 7/28/00, the Second Circuit reached the opposite conclusion. It observed that Treasury regulations seemingly contradict the IRS's position on the mailbox rule. Regs. Sec. 301.7502-1 states that "a return may constitute a claim for refund or credit. In such a case, section 7502 is applicable to the claim for refund or credit if the conditions of such section are met, irrespective of whether the claim is also a return." The court thus concluded that the mailbox rule did apply independently to an original return claim. The court also rejected the notion that Sec. 6511(a), by its terms, necessitated the filing of the tax return before a claim, for the three-year look-back period to apply. In doing so, it pointed out that Rev. Rul. 76-511 held that the three-year look-back period applies to a late income tax return that also constitutes a refund claim.

Analysis

Anastasoff cites Weisbard, decided earlier, but the Eighth Circuit declined to depart from Christie. The result reached in Anastasoff is mirrored in FSA 200021010, which relies on Christie. Weisbard's reasoning on the independent application of the mailbox rule to an original return claim is persuasive, given the regulations. On the other hand, the opinion's conclusion that the three-year look-back period applies even when the claim precedes the return is contrary to precedent; see Allen, 99 TC 475 (1992), aff'd by unpublished opinion, 23 F3d 406 (6th Cir.), in which the Tax Court, interpreting Sec. 6511(a), stated that "the use of the imperative 'shall be filed', in conjunction with the use of the past tense 'was filed' in relation to the return, indicates that in order for the 3-year period of limitations to apply, the return must be filed at or before the time at which the claim for credit or refund is filed or deemed to be filed."

In recent years, the Code's controversial refund provisions have necessitated repeated review by the Supreme Court. In Dalm, 494 US 596 (1990), the Court announced that a taxpayer is not excused from filing a timely refund under Sec. 6511(a) before filing a refund suit. In Lundy, 516 US 325 (1996), it held that a taxpayer who claims an overpayment in Tax Court, but has not filed his tax return at the time he receives a deficiency notice, is subject to the two-year look-back period, rather than the three-year lookback period. (This result was overturned by the Taxpayer Relief Act of 1997.) In Brockcamp, 519 US 347 (1997), the Court declared that refund claim deadlines cannot be equitably tolled. The current split of authority may bode further Supreme Court intervention. In the meantime, taxpayers outside the Second Circuit must take care to steer clear of this refund trap.

From Ronald A. Stein, LL.M., CPA, Chicago, IL