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Ninth Circuit Permits Equitable Recoupment for Late Refund Claim.
(Parker Tax Publishing October 8, 2014)

Taxpayer was not prohibited from seeking equitable recoupment due to untimely refund claim; Tax Court's denial of equitable recoupment was found to be erroneous. Revah v. Comm'r, 2014 PTC 488 (9th Cir. 9/17/2014)

In a collections due process hearing relating to an untimely refund claim,Yaaokv Revah argued that the IRS improperly refused to consider the fact that equitable recoupment applied to offset his income tax liabilities. Yaakov had sought to carry back net operating losses to offset income from earlier years and claim the resulting refunds. The IRS found that Yaakov attempted to take the net operating losses in the wrong year, and thus denied the deductions. However, the IRS denied the subsequent refund claims because they were untimely filed.

Yaakov argued that even though the refund claim was time-barred, the IRS Appeals Office should permit equitable recoupment as a defense to collection. The IRS denied Yaakov's equitable recoupment argument on the grounds that equitable recoupment is not a collection alternative and he had previously waived his right to contest the underlying liability. The Tax Court agreed with the IRS, and even though Yaakov asserted he had been unable to exhaust his administrative remedies in a meaningful manner, the court found that equitable recoupment did not apply as there was no inequitable application of inconsistent theories of taxation.

OBSERVATION: The equitable recoupment doctrine allows a taxpayer to avoid the bar of an expired statutory limitation period and prevents an inequitable windfall to a taxpayer or to the government that would otherwise result from the inconsistent tax treatment of a single transaction, item, or event affecting the same taxpayer or a sufficiently related taxpayer.

In Estate of Branson v. Comm'r, 264 F.3d 904 (9th Cir. 2001), the court held that in order for a taxpayer to obtain equitable recoupment, he or she must show (1) the same transaction, item, or taxable event is subject to two taxes; (2) the taxes are inconsistent in that the Tax Code authorizes only a single tax; (3) the tax sought to be recouped is time barred; (4) there is an identity of interest between the parties paying the duplicative tax; and (5) the court in which the recoupment claim is brought must independently have jurisdiction to adjudicate the claim.

The Tax Court held that Yaakov's inability to use net operating losses to reduce tax liabilities was the result of his failure to make his refund claims within the proper time period, rather than the result of inconsistent theories of taxation.

The Ninth Circuit reversed the Tax Court's decision, holding that the lower court's denial of equitable recoupment was erroneous. The court relied on U.S. v. Bowcut, 287 F.2d 654 (9th Cir. 1961), in which the Ninth Circuit held that equitable recoupment should be permitted notwithstanding that the cause for relief sought was created by the taxpayer's untimely refund claim. Thus, the circuit court held that although Yaakov did not file his refund claim within the statutory period, the mistake was not grounds to prohibit him from applying for equitable recoupment. The Ninth Circuit remanded the case back to the Tax Court for further proceedings.

For a discussion of the equitable recoupment doctrine see Parker Tax ¶261,180. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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