Late Filing of Carryback Application to Wrong Year Was Not an Informal Refund Claim

(Parker Tax Publishing April 2018)

A district court held that a corporation that filed a Form 1139, Corporation Application for Tentative Refund, to carry back losses to a year other than the earliest possible year and failed to file the Form 1139 within one year of the close of the relevant loss year, did not make an informal refund claim to stop the running of statute of limitations. The court held that the corporation, which had sophisticated legal and tax representation, could not reasonably rely on inaccurate statements by the IRS because it knew or should have known about the requirements for filing a carryback claim as well as the applicable statute of limitations. UKP Holdings, Inc. v. U.S., 2018 PTC 99 (E.D.N.Y. 2018).

In 2010, UKP Holdings, Inc. filed tax returns for 2007 and 2008 reporting over $11 million in losses for 2008. UKP simultaneously filed a Form 1139, Corporate Application for Tentative Refund, indicating that it sought to carry its 2008 losses back to 2007. In doing so, UKP made two errors. First, it tried to carry back the losses to 2007 but was required under Code Sec. 1212 to carry back to the earliest year, which was 2005. Second, UKP failed to file its Form 1139 within one year of the close of the 2008 tax year as required by Code Sec. 6411.

The IRS responded to UKP's filing by returning the Form 1139, explaining that it could not review the form until UKP's 2007 and 2008 tax returns were processed. The IRS did not identify any error in UKP's tentative carryback request; it did not notify UKP that the request was untimely and reflected a carryback to the wrong year. Rather, the IRS directed UKP to refile its application in four to six weeks. UKP never refiled the Form 1139.

In 2011, UKP's attorney, Linda Galler, engaged in a series of communications with IRS Revenue Officer Michael Martin. According to UKP, Martin informed Galler that the Form 1139 would effectuate the carryback of UKP's 2008 losses, and that UKP need not file amended returns. The IRS disputed that assertion, and the record did not contain any such notation in Martin's file.

In May 2011, Martin submitted UKP's Form 1139 to the IRS for processing. UKP claimed that Martin filed the Form 1139 for the wrong year and, notwithstanding Internal Revenue Manual (IRM) procedure, failed to advise Galler that the Form 1139 was filed after the deadline. Almost two years passed before UKP received a response from the IRS as to the Form 1139.

In the meantime, in February 2013, the IRS sent UKP a notice of its intent to levy taxes owed for 2011. UKP's accountant responded that UKP had not paid its 2011 taxes because it expected a refund from its 2008 losses that it could eventually apply to its 2011 taxes. In response, the IRS notified UKP that its request for a tentative refund for 2007 was denied. The denial was based on the fact that the Form 1139 was filed late and requested a carryback to the wrong year. The IRS told UKP to file amended returns for 2005 through 2008 to protect its interests. UKP never filed any amended returns.

According to UKP, the IRS informed Galler in May 2013 that UKP's 2008 carryback claim had been denied in July 2011. The IRS disputed that and said that as of July 2011, UKP's Form 1139 was being processed. In July 2013, Galler discussed UKP's refund request with an IRS Appeals Settlement Officer (SO). The SO said that UKP's accounts for 2007 and 2008 were closed and put in noncollectible status. The SO advised Galler to contact the IRS Taxpayer Advocate Service to pay UKP's 2011 taxes and file amended returns for all years affected by the refund request. The statute of limitations for UKP's 2005 refund claim, based on its loss carryback from 2008, had long since expired, in September 2012.

In November 2013, the IRS rejected UKP's refund request as untimely. UKP's formal protest was denied in June 2015, although UKP asserted that it was not notified of the denial of its appeal until September 2015.

UKP sued for the refund in a district court. UKP acknowledged that it did not file a timely formal refund claim because it failed to file amended 2005 through 2008 tax returns before the statute of limitations expired in September 2012. UKP also agreed that it never requested a refund for 2005 based on a loss carryback from 2008. UKP argued that its correspondence with the IRS combined with its Form 1139 constituted an informal refund claim.

An informal refund claim stops the running of the statute of limitations if it provides notice to the IRS of a refund claim for a specific year in writing and describes the legal and factual basis for the refund. According to UKP, the IRS was on clear notice that UKP sought to carry back losses from 2008 to 2005. UKP argued that the IRS knew or should have known as a matter of law that UKP's losses had to be carried back to 2005. UKP pointed to the IRS's alleged misstatements and claimed that they formed part of the relevant facts and circumstances that the court should consider in evaluating whether it made an informal refund claim. UKP claimed it was overtly mislead by the IRS into not filing timely amended returns and into erroneously noting the wrong year on its Form 1139. According to UKP, but for the IRS not advising UKP of its mistakes and alerting UKP to the denial of its Form 1139 until after the statutory period expired, UKP would have been able to timely file amended returns.

The district court granted summary judgment in favor of the IRS. The court found that UKP did not file an informal refund claim because its Form 1139 was not a claim for a refund and there was no evidence that UKP communicated to the IRS that it sought to carryback its losses to 2005 or that it sought a refund for its 2005 taxes. According to the court, the law was clear that the mere filing of a Form 1139 did not constitute a formal or informal refund claim. The court also found that UKP's request for a refund for taxes paid in 2007 was simply not a request for a refund of taxes paid in 2005. The court reasoned that no one at the IRS could have known that UKP would seek a refund for a year other than the one it communicated to the IRS. This was particularly true, in the court's view, given that UKP is a large firm represented by sophisticated lawyers and accountants. The court explained that a contrary conclusion would require the IRS to serve an unmanageable function - to perform extensive investigations into the precise reasons and facts supporting every taxpayer's refund claim.

The court characterized UKP's argument regarding the IRS's alleged misstatements as an argument for equitable estoppel, although UKP expressly disclaimed that it was making an estoppel argument. The court held that the IRS was not estopped because UKP could not have reasonably relied on the IRS's alleged misrepresentations and omissions. The court reasoned that UKP knew or should have known the requirements for filing a carryback claim as well as the applicable statute of limitations. It was UKP's responsibility to discover its error in filing Form 1139 after the deadline, to realize that it was required to carry back its 2008 losses first to 2005, and to determine that it was necessary to file amended returns before the statute of limitations expired.

The IRS's disregard for its own rules as set forth in the IRM did not excuse UKP's failure to timely file amended returns. The court explained that IRM provisions do not have the force of law, nor do they bind the IRS or create actionable rights for taxpayers. The court found that the onus was on UKP, not the IRS, to understand the law and file timely amended returns before the statute of limitations expired. The court acknowledged that the IRS's conduct surrounding UKP's carryback and refund request was less than exemplary, but it reasoned that the government cannot expect perfect performance from every employee. The court found that in any event, UKP was cavalier in its reliance on the misstatements and its failure to conduct independent legal due diligence.

For a discussion of reporting carrybacks of corporations, see Parker Tax ¶99,120.

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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