In an issue of first impression, the Second Circuit reversed the Tax Court and held that the lookback period in Sec. 6512(b)(3) amounts to three years when no return is filed, removing a "six-month black hole" created by the Tax Court. The Second Circuit thus sided with a taxpayer who overpaid her taxes and later filed for a refund.
Facts: On April 15, 2013, Roberta Borenstein was granted a six-month extension to file her 2012 federal income tax return. By that date, she had made income tax payments for 2012 of $112,000. Borenstein failed to file her return. On June 19, 2015, the IRS sent her a statutory notice of deficiency stating that she owed $1,666,463 in income taxes and $572,577 in penalties for the 2012 tax year. On Aug. 29, 2015, Borenstein filed her late tax return and reported a tax liability of $79,559, resulting in an overpayment of $32,441. On Sept. 16, 2015, Borenstein filed a petition with the Tax Court calling for a redetermination of her 2012 tax deficiency along with a refund of her overpayment. Later, Borenstein and the IRS stipulated that the correct amount of the overpayment was $32,441.
The Tax Court ruled that it lacked jurisdiction. The court determined that under Sec. 6512(b)(3), Borenstein was entitled to a two-year lookback period for any refund, and since the overpayment occurred more than two years prior to the mailing of the statutory notice of deficiency, the court lacked jurisdiction to order a refund. On appeal, Borenstein argued that the Tax Court adopted an interpretation of Sec. 6512(b)(3) that is inconsistent with its plain language and congressional intent.
Issue: The Tax Court has limited jurisdiction under Sec. 6512(b) to order refunds or credits for overpayments. Lookback periods limit how far into the past the Tax Court may reach to remedy overpayments by refund or credit. A taxpayer who files a return and is issued a notice of deficiency within three years after that filing is entitled to a lookback period of at least three years. Prior to an amendment of Sec. 6512(b), a taxpayer who was issued a notice of deficiency before the filing of a return was entitled to a two-year lookback period. Congress sought to extend the lookback period available by providing in Sec. 6152(b)(3) that if a notice of deficiency is mailed "during the third year after the due date (with extensions) for filing the return," and if no return was filed before the notice of deficiency was mailed, the applicable lookback period is three years.
Borenstein argued that "with extensions" extends the third year after the due date by six months, so the notice was mailed during the third year, and, therefore, the applicable lookback period should be three years. The Tax Court ruled that "with extensions" delays the beginning of the "third year after the due date" by six months, meaning that Borenstein's notice of deficiency was mailed prior to the beginning of the third year, allowing for a two-year lookback period. The Tax Court said it lacked jurisdiction to order a refund.
On appeal, Borenstein argued that the Tax Court's interpretation of Sec. 6512(b)(3), which limits its jurisdiction to order refunds or credits of overpayments, is unreasonable and inconsistent with congressional intent.
Holding: The Second Circuit reversed the judgment of the Tax Court and remanded for the entry of judgment for Borenstein. The court stated that it was clear that Congress's intent was to eliminate the distinction between filers and nonfilers in that third year, but the Tax Court created a "black hole" into which the taxpayer loses a right to claim a refund that would have reopened later had the IRS issued the notice of deficiency.
The Second Circuit reasoned that its conclusion was supported by the long-standing canon of construction that where "the words of a tax statute are doubtful, the doubt must be resolved against the government in favor of the taxpayer," citing Exxon Mobil Corp., 689 F.3d 191, 199—200 (2d Cir. 2012) (quoting Merriam, 263 U.S. 179, 188 (1923)).
The Second Circuit concluded that the interpretation adopted was consistent with the language of Sec. 6511(b)(2)(A), which provides for a lookback period equal to three years plus the period of any extension of time for filing the return. In this case, the notice of deficiency, mailed 26 months after the due date, was mailed during the third year, and, therefore, the Tax Court had the jurisdiction to look back three years, which would reach the due date and allow the taxpayer to recover her overpayment.
- Borenstein, No. 17-3900 (2d Cir. 4/2/19)
— By Maria M. Pirrone, CPA, LL.M., associate professor of taxation, St. John's University, Queens, N.Y.