Taxpayer's Claim for Refund Survives Government's Motion to Dismiss for Lack of Specificity

(Parker Tax Publishing July 2021)

A district court denied the government's motion to dismiss a taxpayer's claim for a refund after finding that the taxpayer's amended return was a properly executed amended return constituting a claim for refund that satisfied the specificity requirement for a refund claim under Reg. Sec. 301.6402-2(b). The court rejected the government's argument that the taxpayer failed to attach additional documentation in support of all of the elements of its claimed credit under Code Sec. 41 to its Form 6765, Credit for Increasing Research Activities, reasoning that the form does not ask taxpayers to provide any of these details. Premier Tech, Inc. v. U.S., 2021 PTC 219 (D. Utah 2021).

Background

On November 12, 2018, Premier Tech, Inc. sent the IRS a Form 1120X amended tax return for its tax year 2014. The amended return requested a refund of $190,263. On the "Explanation of Changes" form, Premier explained that the amended return included a new tax credit for increasing research activities under Code Sec. 41 and referred to the attached Form 6765, Credit for Increasing Research Activities, for details. On Form 6765, Premier stated it spent $1,950,364 on "wages for qualified services" and $1,850,927 on supplies in tax year 2014. It also showed a base amount of $1,544,803 for qualified research expenses in the three years prior to tax year 2014. After completing the required calculations, the form showed a $315,908 tax credit.

The IRS denied Premier's refund request for being untimely. Premier submitted an appeal letter, arguing the request was timely. The matter was referred to the IRS Office of Appeals for review, and in December 2019 the IRS agreed the amended return was timely. In February 2020, the IRS allegedly told Premier the amended return was under review in an "internal audit." Over the next 11 months, the IRS repeatedly said there were processing delays and the return was still being reviewed. Premier never received the refund or a denial. In December 2020, Premier filed a refund lawsuit in a district court. The government moved to dismiss the case for lack of subject matter jurisdiction and for failure to state a claim.

Courts have subject matter jurisdiction over tax refund claims only when the government has waived its sovereign immunity. Under Code Sec. 7422(a), sovereign immunity is waived over tax refund claims only when "a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof." Reg. Sec. 301.6402-2(b)(1) requires that a refund claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the IRS of the exact basis thereof. Reg. Sec. 301.6402-3(a)(5) generally states that a properly executed amended return constitutes a claim for refund.

In its motion to dismiss, the government argued that Premier's amended return did not satisfy the specificity requirement under Reg. Sec. 301.6402-2(b)(1). The government argued that under Provenzano v. U.S., 123 F.Supp. 2d 554 (S.D. Cal. 2000), and Green v. U.S., 2018 PTC 6 (10th Cir. 2018), the mere statement of a dollar amount is not enough to satisfy the specificity requirement. The government said that Premier should have attached additional documents addressing every element in Code Sec. 41, such as describing the research conducted, explaining how that research worked to develop a business component, providing more information on whose wages and what supplies the money was spent, and proving the amount spent on research in the prior three tax years.

Analysis

The district court denied the government's motion after finding that Premier's amended return was sufficiently specific. The court noted that the amended return stated that the tax credits claimed on line 4 of Form 1120X were for increasing research activities. In addition, the Form 6765 calculated amounts for the increase in research activities and the amount of the credit to be applied. It specified that Premier paid $1,950,364 in wages for qualified services and $1,850,927 for supplies, totaling $3,801,291 in qualified expenses. Premier's Form 6765 also included its qualified research expenses for the prior three tax years, calculated the base amount, and showed the amount of increase in qualified expenses for tax year 2014. In the court's view, the government was not left wondering upon what grounds the claim for refund was based or how the refund was calculated.

The court found the cases cited by the government to be unpersuasive. The court contrasted the taxpayer in Provenzano, who simply submitted a letter demanding a refund of $287.44, with Premier's amended return, and found that Premier had provided much more than a simple dollar amount. The court noted that the Green case involved a taxpayer attempting to make a new argument for a refund on appeal, which the Tenth Circuit barred under the substantial variance doctrine. Premier, the court observed, had not raised new grounds or facts, so Green did not support dismissal.

In the court's view, U.S. v. McFerrin, 492 F.Supp. 2d 695 (S.D. Tex. 2007) was a factually and legally analogous decision that the court found persuasive. In that case, the taxpayers sought a refund for a tax credit for increasing research activities under Code Sec. 41. The taxpayers submitted an amended return that included Form 6765 and said the tax credits were "Credit for Increasing Research Activities." When analyzing the amended return's specificity, the McFerrin court found that the basis for the credit was clear and the taxpayer calculated a specific dollar amount, thus putting the IRS on notice of the nature of claim, the entities claiming the credit, and the legal theory on which the claim was founded. Likewise, the court found that Premier's amended return satisfied the specificity requirement and constituted a refund claim because it was complete and put the IRS on notice about the nature of the claim, the entity claiming the credit, and the legal theory upon which the claim is founded. The court further found that the amended return had sufficient data to calculate the tax and included enough information to allow the IRS to efficiently investigate the requirements of Code Sec. 41 and make an informed determination about the refund.

The court disagreed with the government's assertion that Premier needed to provide documentation with its Form 6765 supporting every single element of Code Sec. 41. The court noted that Form 6765 does not ask taxpayers to provide any of these details. If the IRS wants more information about the research tax credits, the court reasoned, the IRS could require that information on Form 6765. It does not, and in the court's view the IRS could not now say its own forms are not sufficient to constitute claims for refunds. The court said that would lead to absurd and patently unfair results for taxpayers. Furthermore, under the government's position, the court said that no tax return claiming tax credits for increasing research activities could possibly constitute a claim for a refund - a result that would be directly contradicted by Reg. Sec. 301.6402-3(a)(5).

In closing, the court added that it was "disturbed" by the government's gratuitous criticisms of Alliantgroup and Zerbe, Miller, Fingeret, Frank & Jadav (ZMFF&J), Premier's tax consulting firm and attorneys, respectively. In its motion, the government implied that these businesses regularly seek undeserved tax refunds for their clients under Code Sec. 41. The court said that the government's broad criticisms of Premier's representation had no bearing on the merits of the motion or Premier's claim. It was not appropriate, in the court's view, for the government to use the district court to attack or harass Alliantgroup or ZMFF&J, and the court said that it would not tolerate this behavior going forward.

For a discussion of filing a claim for refund or credit of a tax overpayment, see Parker Tax ¶261,110.

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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