In 2017, the U.S. Tax Court decided the case of Borenstein v. Commissioner by applying a technical reading of a statutory rule that produced a gap in its refund jurisdiction. Because this gap may deprive taxpayers of overpayments and is inconsistent with legislative intent, TAS proposed a legislative fix in our 2018 Annual Report to Congress and 2019 Purple Book. Earlier this month, the U.S. Court of Appeals for the Second Circuit reversed the Tax Court’s decision in an opinion that includes significant commentary about principles of statutory interpretation (here). [The Federal Tax Clinic at Harvard Law School (Keith Fogg and Simona Altshuler) and the Philip C. Cook Low Income Taxpayer Clinic in Atlanta, Georgia, (Edward Afield) deserve kudos for submitting amicus briefs.]
At the risk of mild overstatement, the court effectively said, “Tie goes to the taxpayer.” While the Second Circuit’s decision solves the problem for taxpayers within its jurisdiction, the Tax Court does not have to follow the Second Circuit’s decision in cases arising in other circuits under the rule announced in Golsen. For this reason, the Tax Court or the Congress still needs to fix the problem.
What’s the problem?
Assuming a refund claim is timely, the Tax Court’s jurisdiction to order a refund or credit of overpayments is limited by amounts paid within the applicable “look‐back period” provided by Internal Revenue Code (IRC) § 6511(b)(2). If a return is filed before the IRS issues a notice of deficiency, then the lookback period is three years, plus any filing extension. Otherwise, the lookback period is two years. IRC § 6513(b) provides that withholding and other pre-payments are deemed paid on the due date of the return without regard to extensions. Thus, taxpayers who have overpaid on or before the original return filing deadline generally cannot claim a credit or refund more than two years later unless they file a return.
When a taxpayer does not file a return, the IRS sometimes sends a notice of deficiency to assess additional tax. A notice of deficiency gives the taxpayer the right to petition the Tax Court, and if the taxpayer timely does so, then the Tax Court generally has jurisdiction under IRC § 6512(b) to determine whether the taxpayer is due a refund for the taxable year at issue to the same extent the IRS could have considered a claim for refund filed on the date the IRS mailed the notice of deficiency. In the absence of a special rule, the Tax Court would have no jurisdiction to award refunds to non-filers who are issued a notice of deficiency after the two-year lookback period.
IRC § 6512(b)(3)(flush language) provides such a special rule. It extends the limitations and lookback periods if the IRS mails a notice of deficiency before the taxpayer files a return. Specifically, it provides that if the IRS mails the notice of deficiency “during the third year after the due date (with extensions) for filing the return,” then the limitations and lookback periods are three years (not two), even though the taxpayer has not filed a return. Because the Tax Court’s general refund jurisdiction lapses after the second year following the original due date (without regard to extensions) and the special rule does not apply unless the IRS mails the notice after the second year (with regard to extensions), there is a six-month “donut hole” during which the IRS can send a notice of deficiency without triggering the Tax Court’s jurisdiction to consider the taxpayer’s claim for refund.
Ms. Borenstein overpaid her 2012 taxes on the due date of her 2012 return and received a six-month extension of time for filing; however, she failed to file her return for 2012 before the IRS mailed her a notice of deficiency, about 26 months later, on June 19, 2015. The issue in her case was whether the Tax Court had jurisdiction to order a refund.
The IRS argued, and the Tax Court agreed, that the Tax Court had no jurisdiction to award a refund to Ms. Borenstein because the IRS had issued a notice of deficiency to her at just the wrong time. Relying on the “rule of the last antecedent,” the Tax Court concluded that “with extensions” modifies “due date.” Accordingly, if a taxpayer has a six-month extension to file, and receives a notice of deficiency about 26 months after the due date of the return—as was the case for Ms. Borenstein—the two-year lookback period has ended and the notice was mailed too soon to trigger the three-year lookback period provided by the special rule. Under a technical reading of the statute, the Tax Court said that if the IRS had issued the notice earlier or later, the Tax Court would have had jurisdiction. This leaves an unexpected hole in the Tax Court’s jurisdiction.
How did the Second Circuit help?
On appeal, the Second Circuit disagreed with the Tax Court’s interpretation of the special rule. The Second Circuit reasoned that it was just as plausible that “with extensions” modified the “third year after the due date.” In other words, “during the third year after the due date (with extensions)” could mean “during the third year after the due date plus the period of any extensions.” [Emphasis added.] Because the statutory language supported more than one interpretation, the Second Circuit turned to legislative history, which also supported Ms. Borenstein’s interpretation.
When the flush language of IRC § 6512(b)(3) was enacted in 1997, the Conference Report (H.R. Rep. No. 105-220, at 701 (1997) (Conf. Rep.)) explained that the special rule would permit taxpayers
…who initially fail to file a return, but who receive a notice of deficiency and file suit to contest it in Tax Court during the third year after the return due date, to obtain a refund of excessive amounts paid within the 3-year period prior to the date of the deficiency notice.
In addition, the Second Circuit analogized its interpretation of the special rule to language that existed in IRC § 6511(b)(2)(A) at the time it was enacted which provides a lookback period “equal to 3 years plus the period of extension of time for filing the return.” [Emphasis added.] Finally, it cited a cannon of construction that is likely to be repeated in many briefs. It said that its conclusion was supported by
[t]he longstanding canon of construction that where the words [of a tax statute] are doubtful, the doubt must be resolved against the government and in favor of the taxpayer. [Internal citations omitted.]
How Acquiescence by the IRS Could Help
As noted above, the Tax Court does not have to follow the Second Circuit’s decision in cases arising in other circuits, but it could change its position based on the reasoning of appellate courts. An acquiescence by the IRS to follow the Second Circuit’s interpretation would signal to the Tax Court that the IRS accepts the Second Circuit’s reasoning and will follow it in other docketed cases. Thus, it could increase the chances the Tax Court will adopt the Second Circuit’s view. If the Tax Court continues to maintain its original position, however, a legislative fix will be necessary to provide nationwide relief in these cases.