Timely Refund Claims


P roper tax practice requires CPAs and clients to file necessary forms within prescribed deadlines. One such deadline is the one in IRC section 6511 for filing refund claims. The Ninth Circuit Court of Appeals recently reversed its own 1994 decision concerning the applicable deadline for filing such claims.

Astrid Omohundro appealed a district court decision that held her refund claim was not timely based on the Ninth Circuit decision in Miller , 38 F3d 473 (1994). The taxpayer argued Miller was incorrect and a refund claim was timely as long as it was filed within three years after the return, regardless of the timeliness of the return itself.

Result. For the taxpayer. Section 6511 requires that taxpayers file refund claims within three years of filing a tax return or two years from the time they pay the tax, whichever is later. A taxpayer who does not file a return must file a refund claim within two years of paying the tax. In Miller , the Ninth Circuit had concluded that if a taxpayer did not file a return within the two-year payment period, the two-year period, not the three-year period, limited refund claims.

In an interesting switch, both the taxpayer and the IRS said the lower court had decided Miller incorrectly, arguing that revenue ruling 76-511 (which was outstanding at the time) was on point and the lower court had not considered it.

In this case the Ninth Circuit decided revenue ruling 76-511 was, in fact, on point and the district court should have considered it. Under this ruling, a refund claim is timely as long as a taxpayer files it within three years after filing a tax returneven if the return is filed more than two years after payment. The Ninth Circuit concluded the revenue ruling was consistent with congressional intent and the lower court should have used it to decide the issue. Under this ruling the taxpayers claim was timely. Therefore, the Ninth Circuit remanded the case to the district court to determine the merits of the taxpayers refund claim.

In deciding to apply the revenue ruling, the Ninth Circuit interpreted the U.S. Supreme Court decision in Mead as requiring courts to apply the so-called Skidmore deference to revenue rulings. (Thus the Ninth Circuit examined the reasonableness of revenue ruling 76-511 in light of congressional intent, the IRS position on the issue and the like.) If other courts interpret Mead in the same way they would have to follow all IRS revenue rulings as long as they are consistent with the statute and reasonable.

However, the Ninth Circuit decision that revenue rulings deserve Skidmore deference is not uniformly accepted. In fact, the Tax Court had previously said revenue rulings were entitled to no deference. In the Omohundro case, it was reasonable for the court to follow the revenue ruling given that all the other courts that had considered itand this same issuehad said the ruling was a correct and reasonable interpretation of the law. When a less certain revenue ruling is at issue, the court should examine the application of deference more closely.

Astrid E.A. Omohundro v. United States (CA-9, 2002)

Prepared by Edward J. Schnee, CPA, PhD, Culverhouse Professor of Accounting and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa.

An IRA Distribution or Not ?
hen a taxpayer takes a cash distribution from a regular individual retirement account (IRA), the entire amount is gross income unless part of the distribution represents a return of his or her nondeductible contributions. Suppose the IRA custodian sends a taxpayer a check payable to a third party, the taxpayer then sends the check to the third party to buy stock in the IRAs name. Has the taxpayer received a distribution? Neither the Internal Revenue Code nor the related regulations provide a definitive answer.

Robert Ancira was the owner of a self-directed IRA. The assets were held by Pershing, the IRAs custodian. The taxpayer asked Pershing to buy $40,000 of stock in S.K., a nonpublicly-traded corporation, using existing IRA assets. Company policy prohibited Pershing from buying non-publicly-traded stock, so it arranged an indirect purchase by sending to Ancira a $40,000 check payable to S.K. The taxpayer then sent the check to S.K. to complete the purchase.

S.K. issued a stock certificate listing the IRA as owner of the shares. At a much later date, S.K. mailed the certificate to Ancira, who delivered it to Pershing. The taxpayer received a 1099-R for 1998 from Pershing in the amount of $40,000; he did not report the amount on his 1998 tax return. The IRS assessed a $17,383 deficiency, which included the 10% penalty tax under IRC section 72(t). Ancira petitioned the Tax Court for relief.

Result. For the taxpayer. The Tax Court concluded no distribution had occurred since the taxpayers only role in the transaction was that of a conduit. It based this finding on the following facts: The check was payable to S.K., it negotiated the check, the IRA was the owner of the stock and the taxpayers only action was to deliver the stock to Pershing.

The court could not find any legal, administrative or judicial authority prohibiting a taxpayer from being a conduit for IRA transactions. Furthermore, the court held the taxpayer was not in constructive receipt of the $40,000 since he was not a holder of the check nor could he negotiate it under state law. The Tax Court also distinguished the facts of this case from those of Lemishaw v. Commissioner, 110 TC 110, which determined that a distribution from an IRA to the taxpayer had occurred. In Lemishaw the taxpayer withdrew money from his IRA, used it to buy stock and then contributed the stock to the IRA. The Tax Court differentiated Lemishaw from this case since Ancira never received any cash.

In addition the court concluded the delay in delivering the stock certificate to Pershing did not constitute a transfer of ownership to the taxpayer since the delay did not change the underlying nature of the transaction. Previously, the court had held that a bookkeeping error by an IRA trustee did not change the nature of an IRA transaction (see Wood v. Commissioner, 93 TC 114). The Tax Court said the rationale of the two situations was similar. Also, the court noted that the 60-day limitation on rollovers of IRA distributions did not apply since there was no distribution to Ancira.

With this case it appears the court has extended the concept in Wood that errors by IRA trustees do not affect the substance of a transaction to mistakes made by third parties.

Robert Ancira v. Commissioner, 119 TC no. 6.

Prepared by Charles J. Reichert, CPA, CIA, professor of accounting at the University of Wisconsin, Superior.

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