Silipigno v. U.S., (CA2 1/30/2019) 123 AFTR 2d ¶2019-392
The Court of Appeals for the Second Circuit, affirming a district court, has disallowed two separate net operating loss (NOL) carrybacks of a taxpayer. In the case of the first NOL carryback, the taxpayer was deemed to have failed to have filed a refund claim, and, as a result, the district court didn’t have jurisdiction to hear the NOL carryback issue. The other NOL carryback was disallowed because the taxpayer provided insufficient documentation of expenses in both the loss year and the carryback year.
Background. Code Sec. 7422(a) provides that a taxpayer must have first filed a claim for refund or credit with the IRS to maintain a refund suit. Where the taxpayer is seeking a refund of individual income tax, a claim for refund is to be made on a Form 1040X (Amended U.S. Individual Income Tax Return). (Reg § 301.6402-3(a)(1))
However, while a refund claim is typically filed on an official IRS form, an informal claim (e.g., not made on Form 1040X) is sufficient to satisfy the statutory prerequisite of a timely administrative claim found in Code Sec. 7422(a), if the informal claim at least alerts IRS that the taxpayer seeks a refund and indicates the grounds upon which the taxpayer’s claim is based. (U.S. v. Forma, (CA2 1994) 75 AFTR 2d 95-315) An informal claim may be recognized if it: (1) is timely; (2) asserts a right to a refund; (3) describes the tax, tax year, and basis for the claim; and (4) has some written component. (Pala Inc Employees Profit Sharing Plan and Trust Agreement, (CA5 2000) 86 AFTR 2d 2000-7079) The informal claim must put IRS on actual or constructive notice that the taxpayer is currently asserting a right to a refund. (Mobil Corp v. U.S., (Ct Fed Cl 2005) 96 AFTR 2d 2005-6230)
A taxpayer may file an application for a tentative carryback adjustment of the tax for an earlier tax year affected by an NOL carryback under Code Sec. 172(b). (Code Sec. 6411(a)) Individuals, estates and trusts use Form 1045 (Application for Tentative Refund) to claim a tentative refund. (Reg. § 1.6411-1(b)(1)) Within 90 days from the date on which an application for a tentative carryback adjustment is filed, IRS is to make, to the extent it deems practicable in such period, a limited examination of the application. (Code Sec. 6411(b)) Code Sec. 6411(a) provides that Form 1045 “shall not constitute a claim for credit or refund” as required by Code Sec. 7422(a).
Observation: A tentative refund application generally will result in the taxpayer receiving the refund moneys sooner than if he had filed a regular refund claim.
In a tax refund suit, the burden of proof is on the taxpayer to prove an overpayment of tax and the amount he is entitled to recover. Heublein, Inc. v. U.S., (CA2 1993) 72 AFTR 2d 93-5324)
In Lewis v. Reynolds (S Ct 1932), 10 AFTR 773, the Supreme Court concluded that the ultimate question in a refund case is whether the taxpayer has overpaid his tax and that answering that question involves a redetermination of the entire tax liability. While no new assessment can be made after the statute of limitations has run, the taxpayer isn’t entitled to a refund unless he has overpaid his tax. Thus, even when IRS may not collect a deficiency, it may retain payments already received when they do not exceed the amount which would have been properly assessed and demanded were it not for the statute of limitations.
Facts. In February 2008, IRS commenced an audit of the 2005 tax return of the taxpayer, Mr. Silipigno.
In 2009, the United States Attorney’s Office (USAO) initiated a criminal investigation into mortgage, bank, and tax fraud with respect to Silipigno. On June 9, 2009, the USAO, with the assistance of agents from IRS and the Federal Bureau of Investigation, executed a search warrant of Silipigno’s office and the office of Mr. Gilooly, Silipigno’s accountant. The agents seized hundreds of boxes of documents, computers, servers, and other items belonging to Silipigno. On Sept. 8, 2009, IRS suspended the audit to await the completion of the criminal investigation. In 2014, after the USAO declined to prosecute Silipigno, the 2005 IRS audit recommenced.
In October 2010, Silipigno filed his 2007 return claiming an NOL. He also timely filed an Amended U.S. Individual Income Tax Return (Form 1040X) on Oct. 15, 2010, seeking a refund of $509,752 from his 2005 taxes attributable to his 2007 NOL.
Silipigno filed his 2009 return on Oct. 15, 2010, claiming an NOL. He also timely filed an Application for Tentative Refund (Form 1045) on Oct. 15, 2010, seeking a refund of $806,586 from his 2004 taxes attributable to his 2009 NOL. This Form 1045 was the only document submitted by Silipigno to IRS that sought a refund of income taxes for the 2004 tax year.
When IRS didn’t act on his NOL carrybacks, Silipigno brought this refund case. Silipigno filed suit seeking a tax refund of $806,586 (plus statutory interest) for the 2004 tax year, and $509,752 (plus statutory interest) for the 2005 tax year, based on NOL carrybacks from the 2009 and 2007 tax years, respectively.
District court decision. The district court: (1) dismissed the refund claim for the 2004 tax year on the ground that Silipigno’s failure to timely file a proper refund claim with IRS deprived the court of jurisdiction; and (2) granted IRS’s summary judgment motion with respect to the 2005 refund claim on the ground that the NOL carryback claimed for 2005 would be offset by a significant deficiency resulting from Silipigno’s underreporting of his 2005 income taxes. (Silipigno, (DC NY 7/13/2017) 120 AFTR 2d 2017-5161, see NOL carrybacks denied where taxpayer didn’t file proper refund claim or maintain records)
The court rejected Silipigno contention that IRS did not provide “notice and a timely opportunity to file a Form 1040X,” because it did not respond to his Form 1045. The court noted that, under Code Sec. 6411(b), IRS need not make its “limited examination” at all except “to the extent [it] deems practicable” within the 90 days. It was not necessary for Silipigno to await action by IRS on its application for tentative carryback adjustment to file a claim for refund. Such claim could have been filed at any time without regard to action or lack of action on the tentative carryback application.
The district court disallowed the 2007 NOL carryback because Silipigno didn’t substantiate deductions that IRS challenged, on both the 2007 return and 2005 return. The court rejected his argument that he did not bear the burden of proof that the taxes he paid in 2005 and the loss he claimed in 2007 were correct, because IRS could no longer assess previously undiscovered deficiencies against him for his 2005 income taxes due to the expiration of the statute of limitations. The district court found that, under the principles of Lewis v. Reynolds, IRS is permitted to reduce the amount of the taxpayer’s refund by the correct tax for the year, even if IRS can no longer assess the amount of any deficiency it may have determined to be due.
In court, IRS raised two deficiencies with regard to Silipigno’s 2007 and 2005 tax returns: (1) the inclusion of $4,510,050 in expenses for “cost of goods sold” on Silipigno’s 2005 Schedule C for his mortgage consultancy business, and (2) the loss of Silipigno’s $2,129,876 investment in a limited liability company on his 2007 return.
While Silipigno’s record keeping was clearly complicated by the fact that federal investigators seized thousands of records on June 9, 2009, the court noted that equitable considerations will not affect a taxpayer’s burden except in the most extraordinary circumstances. In addition, Silipigno failed to produce records during the initial phase of the IRS audit in 2008, more than a year prior to the raid, when asked for documentation to support these expenses.
Appellate decision. The Second Circuit, affirming the district court, disallowed the taxpayer’s request for a refund based on his two separate NOL carrybacks.
While noting that Congress has broadly consented to suits against the U.S. in the district courts for the refund of any federal taxes alleged to have been erroneously or illegally assessed or collected, the Second Circuit stated that a range of restrictions still applied to qualify a taxpayerʹs right to bring such a refund suit. Specifically, Code Sec. 7422(a) provides that a taxpayer must have first filed a claim for refund or credit with IRS to maintain a refund suit, and Code Sec. 6411(a) provides that a tentative application for refund based on an NOL carryback will not constitute a claim for credit or refund.
The Court rejected Silipigno’s contention that he timely filed a satisfactory informal refund claim for 2004 in the form of his Form 1045 tentative application for refund, which requested a refund based on his claimed NOL carryback from the 2009 tax year. Because Silipigno failed to timely file a refund claim for the 2004 tax year as required by Code Sec. 7422(a), his claim fell outside of the government’s consent to refund suits under 28 U.S.C. § 1346(a)(1), and the district court (as it held) lacked jurisdiction to entertain his claim.
The Second Circuit also found no error with the district court’s conclusion that Silipigno failed to discharge his burden of proving that he was entitled to a refund for the 2005 tax year. The district court had ruled that even if Silipigno was entitled to carry back to 2005 his claimed $1,414,014 NOL from 2007, he failed to submit evidentiary support for $4,510,050 in “cost of goods” expenses that he subtracted from his gross business income on his 2005 return, and that therefore no reasonable jury could find that Silipigno discharged his burden to prove his entitlement to a refund for the 2005 tax year.
The Second Circuit also rejected Silipigno’s argument that the district court’s review of expenses claimed on his 2005 return was improper because the limitations period under Code Sec. 6501(h) for the assessment of a deficiency in his 2005 taxes had expired. In an action brought pursuant to 28 U.S.C. § 1346(a)(1) for a refund of taxes already paid to the government, the district court is required to redetermine the entire tax liability. Although the statute of limitations may have barred the assessment and collection of any additional sum, it did not obliterate the U.S.’s right to retain payments already received when they do not exceed the amount which might have been properly assessed and demanded. (Lewis v. Reynolds (S Ct 1932), 10 AFTR 773)
And while Silipigno argued that the “cost of goods” deduction in his 2005 return was valid, the Second Circuit found that his conclusory assertions did not meaningfully contest the district court’s determination that there was a complete lack of records submitted in support of the expenses claimed on Silipigno’s 2005 return.
The Court also rejected Silipigno’s argument that IRS should be equitably estopped from denying his refund requests, because it allegedly misrepresented to him that his 2004 and 2005 refund claims would be granted, and failed to notify him that they were being disallowed at a time when he could have amended his 2007 and 2009 returns and may have had better access to documentation for his claims. The Second Circuit held that with regard to Silipigno’s 2004 refund claim, equitable considerations did not alter the fact that his claim was not cognizable in district court under the controlling jurisdictional statutes. As for his 2005 refund claim, Silipigno failed to prove that the deduction claimed on his 2005 return was valid. Moreover, the Supreme Court has stated on a number of occasions that the allowance of deductions does not turn upon general equitable considerations. (Crispo, Andrew Gallery Inc v. Com., (1994, CA2) 73 AFTR 2d 94-1201)
References: For refund claims, see FTC 2d/FIN ¶T-5601. For tentative refunds, see FTC 2d/FIN ¶T-6500; United States Tax Reporter ¶64,114.