Statute of Limitations on Erroneously Paid Taxes

TAX CASE

RC section 6511(a) generally requires taxpayers to file a refund claim for a tax overpayment within three years from the time the return was filed or within two years from the time the tax was paid, whichever period expires later. If no return was filed, the two-year period applies.

Wachovia Bank was the trustee for the George C. Nunamann Trust, a tax-exempt charitable remainder trust. Wachovia erroneously paid taxes totaling $111,823 for the trust for the years 1997 and 1998. After discovering the error, it attempted to recover the amounts. The IRS denied the requests because they were not filed within the three-year period prescribed in section 6511(a). Wachovia sued in district court, which, after hearing the case, held for Wachovia and the tax refund. The IRS appealed to the 11th Circuit Court of Appeals.

Result. For the IRS. Wachovia’s argument, presented in both the district and appeals courts, was that the statute of limitations does not apply to tax-exempt entities that are not required to file a return. Therefore, the general six-year statute of limitations (outside the tax code) to file suit against the federal government applied. The district court agreed and ordered a tax refund.

In its arguments before the appeals court, the IRS maintained that section 6511(a) must be interpreted in conjunction with IRC section 7422 and regulations section 301.6511(a)-1. Section 7422 requires that before a taxpayer can sue to recover funds “wrongfully collected,” an administrative claim for refund must be filed in accordance with the relevant regulations. If the section 7422 requirements are not met, then a court does not have jurisdiction in the refund claim.

The IRS argued that section 6511(a) and regulations section 301.6511(a)-1 distinguish between refunds payable by return and those payable by stamp. A tax not payable by stamp (which was the case here) falls into the return category. Applications for the refund of overpayments in the return category are subject to the three-year limitation. The district court noted that taxes paid erroneously under section 6401(c) were overpayments. Therefore, these amounts automatically fell under other provisions of the tax code.

The appeals court concluded that because Wachovia did not file its refund claims within the three-year limitation under section 6511(a), the district court, under section 7422, did not have jurisdiction. It said Wachovia erroneously overrelied on 13 words in section 6511(a): “in respect of which tax the taxpayer is required to file a return.” The IRS and appeals court found the meaning of the term taxpayer in this context ambiguous. To resolve this ambiguity, the court considered the term within the context of the applicable code section and the specific situation.

Taxpayers must be careful not to view the tax code or regulations in isolation. It is clear Congress intended them to be considered as an entirety.

Wachovia Bank, N.A. v. United States, 98 AFTR2d 2006-5111.

Prepared by Sharon Burnett, CPA, PhD, associate professor of accounting and Darlene Pulliam, CPA, PhD, professor of accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.