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Late Filing of Tax Return Precludes Recovery of $32,000 Tax Overpayment

(Parker Tax Publishing September 2017)

In a case of first impression, the Tax Court held that a taxpayer was not entitled to a refund shown on a late-filed tax return because the three-year lookback period specified in Code Sec. 6512(b)(3) did not apply. The court also held that, because the taxpayer did not file her income tax return before the IRS issued a notice of deficiency and did not pay her tax liability within two years of the mailing of the notice of deficiency, the two-year lookback period likewise did not apply. Borenstein v. Comm'r, 149 T.C. No. 10 (2017).

Background

Roberta Borenstein's 2012 tax return was originally due on April 15, 2013. She requested and received a six-month extension of time to file that return. By virtue of that extension, the due date for filing her 2012 return was October 15, 2013. Borenstein made tax payments for 2012 totaling $112,000. Under Code Sec. 6512, all of these payments were deemed made on April 15, 2013. Borenstein did not file a return for 2012 by October 15, 2013, or during the ensuing 22 months.

On June 19, 2015, the IRS issued Borenstein a notice of deficiency for 2012. On August 29, 2015, shortly before filing a petition with the Tax Court, Borenstein filed a delinquent return for 2012 that reported a tax liability of $79,559. Borenstein and the IRS agreed that Borenstein had a deficiency of $79,559 for 2012 and an overpayment of $32,441. Borenstein requested a refund of the $32,441 and, after the IRS rejected her request, she filed a petition with the Tax Court.

Analysis

Under Code Sec. 6512(b)(1), the Tax Court has jurisdiction to determine an overpayment for a year for which the court has also determined a deficiency (or has decided that there is no deficiency). However, Code Sec. 6512(b)(3) places a limit on the amount of credit or refund that may be allowed. That limit is determined by the amount of tax that was paid during one of three "lookback" periods from the date on which the IRS notice of deficiency was mailed.

The question before the Tax Court was whether Borenstein was limited to the two-year lookback period in Code Sec. 6511(a) and Code Sec. 6511(b)(2)(B) or was instead eligible for the three-year lookback period specified in the final sentence of Code Sec. 6512(b)(3). The final sentence of Code Sec. 6512(b)(3) provides that a three-year lookback period applies where "the date of the mailing of the notice of deficiency is during the third year after the due date (with extensions) for filing the return of tax and no return was filed before such date."

According to the IRS, the parenthetical phrase "with extensions" modifies "due date." Thus, the "due date (with extensions) for filing the return of tax" was October 15, 2013, pursuant to the automatic extension Borenstein received to file her 2012 return. The "third year" after that date, the IRS said, began on October 15, 2015, but the notice of deficiency was mailed on June 19, 2015. According to the IRS, that date was during the second year, not during the third year, "after the due date (with extensions) for filing the return." The IRS accordingly argued that the exception set forth in the final sentence of Code Sec. 6512(b)(3) did not apply, with the result that a refund or credit of Borenstein's $32,411 overpayment was barred by the two-year lookback rule generally applicable to nonfilers. Borenstein countered that she was eligible for the three-year lookback period specified in the final sentence of Code Sec. 6512(b)(3) and that she was thus entitled to a refund of $32,441.

Borenstein argued that "with extensions" should be taken instead to modify "the third year," a noun phrase that appears earlier in the sentence. In that event, "the third year" would be determined by reference to the original due date for her return and would be prolonged to include the six-month extension period. Alternatively, Borenstein contended that "with extensions" should be taken to modify "3 years," the last two words in the sentence. In that event, Code Sec. 6512(b)(3) would afford taxpayers a maximum lookback period, not of three years, but of three and one-half years. Under either of these interpretations, Borenstein would get her refund.

The Tax Court held that Borenstein was not eligible for the three-year lookback period because the notice of deficiency was not mailed to her "during the third year after the due date (with extensions) for filing the return of tax." Additionally, the court also held that, because Borenstein did not file her 2012 income tax return before the notice of deficiency was issued and did not pay her tax liability within two years of the mailing of the notice of deficiency, her refund request was outside of the two-year lookback period.

The Tax Court noted that its decision was one of first impression because it was the first time the Tax Court had been called upon to interpret the final sentence of Code Sec. 6512(b)(3) as applied to the fact pattern presented in Borenstein's situation. However, the court noted, statements in prior cases supported (or were at least consistent with) the IRS's position that the parenthetical phrase "with extensions" modifies "due date," the immediately preceding noun. The court also noted that, on two other occasions, it had interpreted the final sentence of Code Sec. 6512(b)(3) as applied to taxpayers who did not secure extensions of time to file and dicta in those cases were consistent with the IRS's position.

For a discussion of the timing of tax refund claims, see Parker Tax ¶261,190.

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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