Taxpayer's Refund Request on Amended Return Was Untimely, Court Finds

(Parker Tax Publishing February 2024)

A district court dismissed a claim for a refund of over $1.1 million for lack of jurisdiction after finding that a taxpayer's refund request on an amended return was not filed with the IRS within the three year period of limitation under Code Sec. 6511(a). The taxpayer argued that the amended return was meant to clarify an earlier amended return, but the court found that the later amended return provided an entirely new basis for the refund and therefore was a new refund request. American Guardian Holdings, Inc. v. U.S., 2024 PTC 38 (N.D. Ill. 2024).

Background

In 2016, American Guardian Holdings, Inc. (AGH) filed a tax return for 2015 and paid its 2015 taxes in full. In 2019, AGH's accountant discovered an error on AGH's 2015 return that resulted in an overpayment of $1,179,563. AGH's accountant prepared an amended tax return (first amended return) setting this out and claiming a refund in that amount. But, neither the accountant nor AGH sent the amended return to the IRS at that time.

AGH hired a new accountant, who filed an amended return for 2015 on September 15, 2019 (second amended return). The second amended return attached a copy of the earlier, unfiled return. The second amended return was intended to incorporate the first amended return and claimed an additional refund over and above the refund sought in the first amended return. The second amended return said that AGH's tax owed for 2015 was $0. So, in addition to the refund of $1,179,563 claimed by the first amended return, the second amended return sought a further refund of $148,243, the amount that the first amended return had reported as owed and paid. Thus, the total amount of the refund claimed in the second amended return was $1,327,806.

The IRS responded by sending AGH a letter, dated October 17, 2019. The letter stated that the IRS could not process AGH's claim dated September 26, 2019 - which is the date the IRS had stamped "received" on the second and first amended returns because "the figures on Form 1120X do not match our records for the tax period ended December 31, 2015." It advised AGH to correct its figures, but did not provide a specific time frame or deadline for AGH to do so.

On February 4, 2020, AGH's accountant submitted a further amended return (third amended return). An explanatory statement accompanying the third amended return contained twelve numbered statements explaining the changes made from the previously filed second-plus-first amended return, and it said that "[t]he previously-filed amended return for 2015 should be discarded." The explanatory statement also stated that the third amended return was intended to "allow the taxpayer to report on [a form] 1120-PC instead of [a form] 1120" because the "taxpayer had filed for and received permission to account for transactions under the retail method." The third amended return also represented another significant change from the earlier versions: it reported a negative taxable income of ($127,120,882). The third amended Form 1120X sought a refund of the full amount of taxes that AGH had previously paid the IRS for the tax year 2015, that is, $1,327,806.

The refund sought in the third amended return was exactly the same as the refund sought in the second-plus-first amended return: $1,327,806. But the third amended return sought this based on a negative taxable income of more than $127,000,000, which could have implications for future tax years by way of a net operating loss carryforward.

In a notice of disallowance, the IRS denied the refund claim made by AGH in the third amended return. The notice stated that the claim was denied because AGH filed it "more than 3 years after" filing of the 2015 tax return. AGH filed a lawsuit in a district court. The government filed a motion to dismiss for lack of jurisdiction, arguing that both AGH's refund claim and its lawsuit were untimely.

Under Code Sec. 7422(a), a taxpayer cannot sue for a refund in court until a request for the refund has been made with the IRS. Code Sec. 6511(a) generally provides that the refund request must be made within three years from the time the return was filed or two years from the time the tax was paid, whichever period expires later.

In Parker Hannifin Corp. v. U.S., 2006 PTC 39 (Fed. Cl. 2006), the Court of Federal Claims held that an administrative claim may be "clarified or made more specific" by a later amendment. The Court of Federal Claims cited U.S. v. Andrews, 302 U.S. 517 (S. Ct. 1938), for the rule that a post-limitations amendment to a properly filed refund claim is permitted "if the amendment is 'germane' to the original claim and was presented before the original claim is resolved." In Parker Hannifin, though the claimant's revision significantly increased the amount of its claimed refund, it relied on the same principles as the original, timely claim. Thus it was "germane" to the original claim, a requirement that exists to prevent surprise and to give adequate notice to the IRS of the nature of the claim.

In its motion to dismiss, the IRS argued that AGH withdrew or abandoned the timely claim in the second amended return when it filed the third amended return. The government relied on AGH's statement in the third amended return asking the IRS to "discard" the second amended return and the fact that the third amended return sought a refund on a different basis than the earlier version. AGH argued that the second amended return constituted a timely claim AGH reasoned that after the IRS pointed out formal defects and asked for additional information, AGH provided this via the third amended return. AGH contended that under Parker Hannifin, it was permitted to "clarify or make more specific" the earlier claim via the latter one, and it contended that is what it did. Thus, AGH argued that the operative date - the date the claim should be considered to have been filed - was the date it filed the second amended return, which was within three years after the original return was filed and thus timely under Code Sec. 6511(a).

Analysis

The district court dismissed AGH's case for lack of jurisdiction. The court found that AGH's lawsuit was based on the third amended return, and the claim for a refund in that return was not filed within the three-year period mandated by Code Sec. 6511(a).

The court was not persuaded by the government's argument that the third amended return was a new claim because AGH told the IRS to "discard" the second amended return. The court pointed out that the IRS said the earlier return was insufficient and AGH provided a revised version that it considered sufficient, so AGH did not want the government addressing the earlier version. In the court's view, if one looked at the "discard" language standing alone, the government was trying to make it bear more weight than it could stand.

However, the court agreed with the government's contention that the third amended return could not properly be considered as part of the same claim as the second amended return because it had an entirely different basis. In the court's view, this case presented the opposite scenario from the one in Parker Hannifin: AGH's revised claim sought a refund in the same amount as the original claim, but on an entirely different basis - the new accounting method that AGH employed in the third amended return. The court found that on this point, the Supreme Court's decision in Andrews - cited in Parker Hannifin - controlled. Although the amended claim in Andrews was (unlike here) for a different amount than the original claim, it was also (as in this case) premised on a different basis. The Supreme Court focused on the latter point in deciding that the second, untimely, claim could not be considered as an amendment of the first, timely claim: "a claim which demands relief upon one asserted fact situation, and asks an investigation of the elements appropriate to the requested relief, cannot be amended to discard that basis and invoke action requiring examination of other matters not germane to the first claim."

The court found that the principle from Andrews governed here: AGH's third amended claim sought a refund on a basis that was not "germane" to its earlier claim. To put it in the terms of Parker Hannifin, the third amended return did not "clarify" the second amended return or "make it more specific." Rather, it completely changed the basis for the refund claim. The court also noted that the third amended return could fairly be considered responsive to the IRS's October 2019 letter, which sought correction (or clarification) of why figures in AGH's second amended return differed from the corresponding figures in its original return. The court found that the third amended return did not do that but instead sought a refund based on a completely different accounting method, albeit in the same amount that AGH had previously claimed.

The court pointed out that its ruling did not necessarily leave AGH completely high and dry.

The second amended return included a claim for refund that the IRS never actually addressed. AGH's use of the term "discard" in the third amended return, in the court's view, fell short of an actual withdrawal of that claim. The IRS never actually allowed or denied the claim made by the second-plus-first amended return. Thus it is at least possible that AGH could pursue before the IRS the claim for refund in that amended return.

For a discussion of the statute of limitations for refunds or credits of overpayments, see Parker Tax ¶261,180.

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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