Borenstein, (CA 2 4/2/2019) 123 AFTR 2d ¶2019-581
The Court of Appeals for the Second Circuit has reversed a taxpayer-unfriendly holding by the Tax Court regarding the lookback period for refunds determined by the Tax Court. In arriving at its decision, the Circuit Court held that the relevant statutory language was unclear and looked to what it considered to be the legislative purpose of the language.
Background. The Tax Court can determine the amount of an overpayment but only to the extent that the overpayment was made under one or more of the circumstances described in Code Sec. 6512(b)(3).
Code Sec. 6512(b)(3)(B) includes language that provides that the Tax Court may determine the amount of an overpayment provided that the portion to be refunded was paid within the look-back period which would be applicable under Code Sec. 6511(b)(2) (i.e., the regular period of three years after the return was filed or two years after payment), determined as if a refund claim, stating the grounds upon which the court finds an overpayment, had been filed on the date the deficiency notice was mailed. For purposes of this rule, it doesn’t matter whether such a claim was actually filed.
And, the flush language at the end of Code Sec. 6512(b)(3)(B) (the flush language) provides that “In a case described in subparagraph (B) 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, the applicable period under subsections (a) and (b)(2) of Code Sec. 6511 shall be 3 years.”
Facts. Facts. Roberta Borenstein’s return for the 2012 tax year was originally due on Apr. 15, 2013. She requested and received a 6-month extension of time to file that return. By virtue of that extension, the due date for filing her 2012 return was Oct. 15, 2013.
Borenstein made tax payments for 2012 totaling $112,000. All of these payments were deemed made on Apr. 15, 2013 under Code Sec. 6513. However, she did not file a return for 2012 by Oct. 15, 2013, or during the ensuing 22 months.
On June 19, 2015, IRS issued Borenstein a notice of deficiency for 2012. On Aug. 29, 2015, shortly before filing her Tax Court petition, she submitted a delinquent return for 2012 that reported a tax liability of $79,559. IRS and Borenstein agreed that for 2012 she had a tax liability of $79,559 and an overpayment of $32,441.
Parties’ positions. IRS contended that, under Code Sec. 6511(a) and Code Sec. 6511(b)(2)(B), Borenstein was not entitled to a credit or refund of the overpayment because her tax payments were made outside the applicable lookback period keyed to the date on which the notice of deficiency was mailed.
On the other hand, Borenstein contended that she was eligible for the 3-year lookback period specified in the flush language of Code Sec. 6512(b)(3) and that she was entitled to a refund of $32,441 under that provision.
Tax Court holding. The Tax Court determined that Borenstein was not eligible for the 3-year lookback period specified in the flush language of Code Sec. 6512(b)(3) 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.”
The Court held that, in the flush language, the parenthetical phrase “with extensions” modifies “due date.” Here, the “due date (with extensions) for filing the return of tax” was Oct. 15, 2013, pursuant to the automatic extension Borenstein received to file her 2012 return. The “third year” after that date began on Oct. 15, 2015. But the notice of deficiency was mailed on June 19, 2015. That date was during the second year, not during the third year, “after the due date (with extensions) for filing the return,” as the flush language required. So, the exception set out in the flush language of Code Sec. 6512(b)(3) did not apply, with the result that a refund or credit of her $32,411 overpayment was barred by the 2-year lookback rule generally applicable to non-filers.
The Tax Court acknowledged that the flush language of Code Sec. 6512(b)(3), because of what seemed inartful drafting, had one or more gaps in coverage. However, the Tax Court concluded that courts should not attempt to fill statutory gaps in order to fashion judicial remedies. The text enacted by Congress made syntactic sense and had an unambiguous meaning.
Circuit court reverses. The Circuit Court held that the meaning of the flush language’s “third year after the due date (with extensions)” was not clear, that therefore the Court should consult legislative history and other tools of statutory construction to discern Congress’s meaning, found that Congress intended a different meaning than that found by the Tax Court, and held for the taxpayer.
The court noted that IRS mailed the notice of deficiency on June 19, 2015. Accordingly, if June 19, 2015 “is during the third year after the due date (with extensions) for filing the return,” Borenstein was entitled, under the flush language, to a three-year look-back period, and the Tax Court had jurisdiction to order a refund of the overpayment. If June 19, 2015 was not “during the third year after the due date (with extensions) for filing the return,” Borenstein was entitled to only a two-year look-back period, and the Tax Court would be without jurisdiction to remedy her overpayment. (Code Sec. 6512(b)(3)(B) (incorporating by reference Code Sec. 6511(b)(2)(B))
Borenstein argued to the Tax Court that “third year after the due date (with extensions)” referred in this case to the third year after the return due date, plus a six-month extension period – i.e., Apr. 16, 2015, to Oct. 15, 2016. IRS argued that the statutory language instead referred in this case to the third year after the conclusion of the six-month extension period – i.e., Oct. 16, 2015, to Oct. 15, 2016.
The Court here then noted that the Tax Court had interpreted the flush language by relying heavily on the canon of statutory construction known as the “rule of the last antecedent” to find that “(with extensions)” modifies only “due date.” The rule of the last antecedent provides that a limiting clause or phrase should ordinarily be read as modifying only the noun or phrase that it immediately follows. However, the Court here said, that canon is not an absolute and can be overcome by other indicia of meaning. and, it concluded that the flush language supports more than one interpretation and thus it looked to legislative history and other tools of statutory construction.
The court noted that the ’97 House Report with respect to the flush language took note of a Supreme Court case, Lundy, (S Ct 1996) 77 AFTR 2d 96-406, stating, “The Supreme Court held that the taxpayer could not recover overpayments… because no return was filed and the 2-year lookback rule applied…. By contrast, if the same taxpayer had filed a return on the date the notice of deficiency was issued, and then claimed a refund, the 3-year lookback rule would apply, and the taxpayer could have obtained a refund of the overwithheld amounts.” The House Report then said that, to eliminate such differential treatment of filing and non-filing taxpayers who are otherwise identically situated, the flush language “permits taxpayers who initially fail to file a return, but who receive a notice of deficiency… during the third year after the return due date, to obtain a refund of excessive amounts paid within the 3-year period prior to the date of the deficiency notice.”
The Court here then concluded that the flush language was intended to expand the jurisdiction of the Tax Court to order refunds for taxpayers who failed to file a return prior to the mailing of a notice of deficiency, and thereby eliminate an unwarranted differential in treatment.
In reaching its decision to reverse the Tax Court, the Court here said that the Tax Court’s interpretation of Code Sec. 6512(b)(3) resulted in differential treatment of taxpayers that the statute’s flush language was intended to eliminate: it would have had jurisdiction to grant Borenstein a refund if she had not been granted an extension for the filing of her return, but lacked jurisdiction because she obtained an extension that was not used.
The Court also said that its conclusion was supported by “the longstanding canon of construction that where the words of a tax statute are doubtful, the doubt must be resolved against the government and in favor of the taxpayer.”
References: For limitations on overpayment found by Tax Court, see FTC 2d/FIN ¶ T-7578.1; United States Tax Reporter ¶ 65,124.
