Extension Requests and Other Filings Didn't Constitute an Informal Refund Claim

(Parker Tax Publishing March 2023)

A district court held that it lacked jurisdiction over a couple's action for a refund because they failed to file a timely formal refund claim and neither a letter to the IRS from their CPA nor their Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, qualified as a valid informal refund claim. Libitzky v. U.S, 2023 PTC 44 (N.D. Cal. 2023).

Background

Moses and Susan Libitzky are married taxpayers who file their federal income tax returns jointly. Moses owns and operates Libitzky Properties, a small business engaged in real estate investment and management, with offices in Emeryville, California. Susan is not involved in the business of Libitzky Properties and does not play any role in the preparation of the Libitzkys' personal income tax returns.

The Libitzkys had a historical practice of overpaying their taxes and electing to apply any overpayment credit for the following year. For the 2011 tax year, the Libitzkys had credits totaling $1,185,332 resulting from estimated tax payments. In April 2012, the Libitzkys timely filed a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, seeking to extend the due date for their 2011 October 15, 2012. With the extension request, the Libitzkys made an additional $310,000 payment towards their 2011 taxes, bringing their 2011 total credits to $1,495,332. The Libitzkys also filed a Form 4868 for their 2012 tax return, requesting that the due date be extended to October 15, 2013. The Form 4868 listed an estimate of their total tax liability for 2012 and their total 2012 payments. The difference between the two amounts they gave on the Form 4868 was $694,068.

In 2013, the IRS sent the Libitzkys four separate notices telling them that their 2011 tax return had not been filed. In 2014, the IRS sent the Libitzkys a CP23 discrepancy notice for the 2013 tax year. On February 2, 2015, the Libitzkys' CPA, Mark Albrecht, sent a letter to the IRS stating that he was writing in response to the IRS's CP23 notice regarding the Libitzkys' 2013 tax return. The letter asked the IRS to adjust the Libitzkys' account to reflect their overpayment for 2012 and included as attachments (1) an unsigned copy of the Libitzkys' 2013 return; (2) a signed copy of the Libitzkys' 2012 return; and (3) the CP23 notice.

Albrecht called the IRS on February 5, 2015. The IRS records note that Albrecht's call was regarding the 2013 tax year and that Albrecht referred to credits for 2011 and 2012. After the IRS received Albrecht's February 2 letter, it processed the signed copy of the Libitzkys' 2012 tax return that was attached to the letter, and deemed the 2012 return filed as of February 6, 2015. Line 63 of the 2012 return called for "2012 estimated tax payments and amount applied from 2011 return," and the Libitzkys responded with the amount of $1,147,690.

In March 2015, IRS representative William Reiher sent the Libitzkys an 86C letter advising them that they needed a power of attorney authorizing Albrecht to represent them going forward. Reiher testified that he may have attempted to confirm what portion of the $1,147,690 might have emanated from a 2011 carryforward. On July 7, 2015, Albrecht again called the IRS; by this time, a valid power of attorney form had been sent. The IRS informed Albrecht that there was a delinquency investigation regarding the Libitzkys' 2011 tax year. In August 2015, the IRS issued a notice stating an "intent to seize your assets" for the amount the Libitzkys owed. On September 16, 2015, Albrecht again called the IRS. Albrecht said he would file the 2011 return and that the refund from that return would pay in full the balance due. Moses recalled being informed in September 2015 that the 2011 return still had not been processed. He did not take the necessary steps to ensure that a copy of the return was provided to the IRS.

In January 2016, IRS revenue agent Monica McKenna met with Moses and Albrecht. McKenna asked for a copy of the 2011 return with original signatures by Moses and Susan. Moses later faxed the signed copy of the 2011 return to McKenna and the 2011 return was finally deemed filed as of January 20, 2016. A dispute arose as to whether the Libitzkys could claim an overpayment credit of $692,690 for the 2011 tax year to be applied to the 2012 tax year. The Libitzkys eventually filed an action in a district court seeking a refund and credit of taxes paid for 2011. The IRS responded that the court lacked jurisdiction because the Libitzkys failed to file a timely claim under Code Sec. 6511.

Under Code Sec. 6511(a), a claim for a refund or credit must be made within three years from the time the return was filed or two years from the time the tax was paid, whichever is later. Code Sec. 6511(b)(2)(A), which courts have held to be a jurisdictional requirement, provides that the amount of the credit or refund cannot exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to three years plus the period of any extension of time for filing the return. In U.S. v. Kales, 314 U.S. 186 (S. Ct. 1941), the Supreme Court held that a formally defective claim filed within the statutory period that advises the IRS of the nature of the taxpayer's claim will nevertheless be treated as a claim as long as a valid refund claim is subsequently made after the period has run. In Kales, a taxpayer's protest letter was found to be an adequate informal claim because it left the IRS "in no doubt" that the taxpayer was setting forth her right to a refund.

The Libitzkys argued that they made a timely informal claim to the IRS asking for a credit or refund of the $692,690 they overpaid for 2011. They relied primarily on Albrecht's the February 2, 2015 letter as their informal claim for a refund. They also contended that their 2012 Form 4868, showing their total payments made in 2012, constructively announced their intention to claim $1,149,068 in payments or credits. In addition, the Libitzkys referred to the 86C letter created by Reiher as ostensible evidence of an informal claim. According to the Libitzkys, Reiher's 86C letter, together with either or both Albrecht's 2015 calls to the IRS, was sufficient to constitute an informal claim. The Libitzkys referred to "equitable principles" in support of their claim that they made a valid informal claim for a refund.

Analysis

The district court dismissed the Libitzkys' case after finding that it did not have jurisdiction because the Libitzkys failed to make an adequate and timely refund or credit claim for their $692,690 payment for 2011.

In the court's view, the Libitzkys did not submit to the IRS anything like the protest letter in Kales. While the Libitzkys relied primarily on Albrecht's February 2015 letter to the IRS, the court found that Albrecht's letter made no mention whatsoever of the 2011 tax year, not in the subject line, in the body of the letter, or anywhere else. Rather, the court found that the letter focused almost entirely on the 2013 CP23 notice. The court also noted that the letter attached an unsigned copy of the Libitzkys' 2013 tax return and a signed copy of the Libitzkys' 2012 tax return. However, the letter did not attach a copy of the 2011 return, despite the fact that by this time, the Libitzkys had been mailed multiple notices of its delinquency.

The court also found that the Libitzkys' 2012 return attached to Albrecht's February 2, 2015 letter was insufficient as an informal claim for the 2011 credit. The court noted that line 63 of the 2012 return gave a single figure, $1,147,690, as the "2012 estimated tax payments and amount applied from 2011 return." Without any further breakdown, this total figure did not, in the court's view, fairly advise the IRS that the Libitzkys were claiming $692,690 as the amount to be applied from 2011 or focus the IRS's attention on the merits of any claim for a 2011 credit. The court remarked that the merits of such a claim would have been impossible for the IRS to determine at this stage because, despite the IRS's multiple notices, the Libitzkys had not sent in their 2011 return. The court found that the Libitzkys' Form 4868 for the 2012 tax year did not constitute an informal refund claim for the same reasons discussed for the similar figure on line 63 of the 2012 tax return. The court said that the IRS gave clear and persuasive testimony that Form 4868 extension requests are processed as a matter of course, without any substantive scrutiny which might have enabled the IRS to recognize that the form contained an informal claim.

In the court's view, the Libitzkys' reference to the 86C letter created by Reiher as evidence of an informal claim was "rather puzzling." The court explained that a letter written by Reiher was not a claim made by the Libitzkys, and to the extent they were claiming that Reiher's writing confirmed a claim they had made orally, the court said that there generally must be at least some written element to constitute a valid informal claim. The court added that the Libitzkys' reference to "equitable principles" was not a point in their favor, since none of the court's conclusions were based on weighing equitable factors.

For a discussion of jurisdiction and the timing of refund suits, 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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